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TiVo Zaps Dish on Patent

3/11/2010 6:49 AM Eastern

Fresh from its court
win over Charlie Ergen’s Dish
Network, TiVo may be looking
around for other scores to settle.

Time Warner Cable, Verizon
Communications and AT&T each
face the increased likelihood that
they will need to do business with
TiVo, following the digital video
recorder company’s victory last
week in the six-year patent battle
with Dish Network and EchoStar,
analysts said.

The U.S. Court of Appeals for
the Federal Circuit, in a 2-1 decision
last week, denied Dish
Network’s request to overturn a
lower-court ruling finding the satellite
operator in contempt of an
order to disable DVRs that were
found to infringe a key TiVo patent.
Th e TiVo “Time Warp” patent
describes a system for simultaneously
recording and playing back
TV programming.

At the close of trading last
Th ursday (March 4) TiVo shares
were up 62% to $16.53 — a nearly
10-year high for the stock — and
Dish had declined 5%, to $20.59.

“This strengthens TiVo’s hand
tremendously,” said Jimmy
Schaeffler, chairman of consulting
firm The Carmel Group, noting
that the legal win gives the company
greater leverage in negotiating
with other pay TV providers.

TiVo in August 2009 filed lawsuits
against Verizon Communications
and AT&T, alleging they
violated three patents, including
the Time Warp patent. TiVo has
said it has engaged in discussions
with TWC; to date, TiVo has not
sued the operator.

The DVR pioneer, which separately
rolled out its next-generation
Premiere boxes last week,
has various distribution deals
with other U.S. pay TV players
including Comcast, DirecTV, Cox
Communications and RCN.

Now, one way or another, TiVo
will extract more money from
Dish.

TiVo stands to get at least $300
million from Dish and EchoStar
in damages and contempt sanctions
through July 1, 2009 — and
potentially even more. “We will
also seek further damages and
contempt sanctions for the period
of continued infringement thereafter,”
TiVo said in a statement.

Dish and EchoStar, in a joint
statement, said they would seek
review of the decision by the full
Federal Circuit. Th e companies
said DVR customers are currently
not affected and said they plan
to propose a new workaround design
to the Texas federal district
court, which issued the injunction,
for approval.

But Dish may be forced to disable
as many as 8 million of its DVRs
within a month and could even lose
the ability to offer a DVR altogether,
according to Sanford Bernstein senior
analyst Craig Moffett.

The implications of the appeals
court ruling for Dish Network “are
enormous, and go far, far beyond
the retrospective licensing fees and
damages that will now be payable
to TiVo,” Moffett wrote in a research
note. “What is at stake is nothing
less than their ability to continue to
offer DVRs. ”

Any settlement between TiVo
and Dish will likely be even higher
than previously proposed licensing
fees of up to $2.25 per month
per subscriber, according to Moffett.
Each $1 per subscriber per
month would cut Dish’s earnings
before interest, taxes, depreciation
and amortization (EBITDA) by $96
million per year, he estimated.
In the worst-case scenario, Dish’s
loss in the case could give TiVo an
opening to negotiate an exclusive
distribution deal with DirecTV in
the satellite space. In 2008, TiVo
struck a new deal with DirecTV under
which the DVR maker is developing
an HD DVR as an option for
DirecTV subscribers.

“[I]f one assumed that Dish Network
would no longer be a viable
competitor without a DVR offering
— not an entirely unreasonable
proposition — then DirecTV’s
gain from exclusivity would be
nothing less than all current and
future satellite subscribers,” Moffett
said.

Other Wall Street analysts were
less dire about Dish’s situation.

Wells Fargo analyst Marci Ryvicker
said she expected Dish CEO Ergen
to settle for between $1.75 and
$3 per subscriber per month, which
would amount to $126 million to
$216 million in EBITDA — a range
that is “reasonable” and is likely
“already expected by the market,”
Ryvicker said.

PATENT REWIND
Recapping the TiVo v. EchoStar litigation:
January 2004: TiVo sues EchoStar Communications for infringing “Time Warp” patent.

April 2006: Federal jury finds in TiVo's favor, awards $74 million.
August 2006: U.S District Court in Texas orders Dish to disable infringing DVRs.
October 2008: Dish/EchoStar pay TiVo $104.6 million in initial damages plus those accrued through Sept. 8, 2006, with interest after U.S. Supreme Court declines to review the case.
June 2009: Texas court finds Dish/EchoStar in contempt for violating the injunction; awards TiVo additional $103 million plus interest.
September 2009: Texas court orders Dish and EchoStar to pay about $200 million in additional damages and contempt sanctions.
March 2010: U.S. Court of Appeals for the Federal Circuit upholds contempt ruling against Dish/EchoStar.
SOURCE: Multichannel News research

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