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Dish Shares Rise Most Since 2008 After Settling TiVo Lawsuit

Dish Network
Hector Moreno installs a Dish Network satellite dish at a home in Chicag. Photographer: Scott Olson/Getty Images

Dish Network Corp., the second-largest U.S. satellite-TV provider, rose the most since 2008 after a patent settlement with TiVo Inc. that helps ensure Dish’s ability to keep offering video-recording services.

Dish and partner EchoStar Corp. will pay TiVo $500 million, including an initial payment of $300 million, as part of an agreement to dismiss all pending litigation, the three companies said in a statement today. The settlement gives Dish and EchoStar rights to use certain TiVo patents for video recording.

Investors had been hesitant to buy Dish before today because of questions raised in the litigation, said Craig Moffett, an analyst for Sanford C. Bernstein & Co. in New York. There were concerns Dish would have to pay two or three times as much to settle, and if Dish had been forced to disable its DVR service, the result could have led to “potentially catastrophic” customers defections, he said.

“It removes a very significant overhang that has been clouding the picture at Dish for years,” said Moffett, who has a “market perform” rating on the company.

Dish rose $4.75, or 19 percent, to $29.79 at 4 p.m. New York time on the Nasdaq Stock Market, its biggest one-day increase since Oct. 13, 2008. TiVo, which added 29 cents, or 3 percent, to $9.86.

“We are pleased to put this litigation behind us and move forward,” Dish Chief Executive Officer Charlie Ergen said in the statement. “Our agreement with TiVo provides us a competitive advantage as one of the few multichannel operators with rights to operate under TiVo’s Time Warp patent, which ultimately will allow us to enhance the performance” of the company’s digital video recorders.

AT&T and Verizon

TiVo, a pioneer in the market for home DVRs, had been trying to shut down Dish’s DVR service since winning cases before a jury four years ago and before an appeals court in 2008 and 2010. With the amount that Dish has already paid TiVo, it brings the total to more than $600 million, said CEO Tom Rogers.

“It resolves the uncertainty of whether we are going to get fees for our intellectual property,” Rogers said in an interview. “It establishes the precedent that our intellectual property is quite valuable.”

TiVo first filed its patent-infringement lawsuit in 2004 against Englewood, Colorado-based Dish and EchoStar when they were a single satellite-TV and equipment company called EchoStar Communications Inc. The business split in two in 2008.

The settlement will let TiVo focus on its patent lawsuits against AT&T Inc. and Verizon Communications Inc., Rogers said.

“Both companies built their business off the proposition they have a DVR service better than what the cable industry offers,” Rogers said. “We’ve always been open to settlement.”

Blockbuster Plans

Dish also reported first-quarter profit today that topped analysts’ estimates. Net income reached $1.22 a share, the company said in a separate statement. Analysts projected 68 cents, the average of estimates compiled by Bloomberg.

Ergen, also the chairman of EchoStar, which makes set-top boxes for Dish, has bought assets including Blockbuster Inc.’s movie-rental business this year to reposition Dish against rivals such as DirecTV, the largest U.S. satellite-TV company.

Dish will keep some Blockbuster stores as long as movie studios want them, Ergen said on a conference call. Keeping a per-movie DVD-rental business may give studios a way to make more money than streaming content on Netflix Inc., Ergen said.

“I don’t see Blockbuster being a competitor to Netflix, directly, in terms of streaming, because Netflix has a formidable lead, and probably insurmountable,” Ergen said.

Dish said today Michael Kelly will become president of Blockbuster. Kelly had been Dish’s executive vice president of commercial services. He joined Dish in 2000 after his company, Kelly Broadcasting Systems, which distributed international radio and TV programming in the U.S., was acquired by Ergen.

‘Seinfeld’ Strategy

Last month, Dish agreed to buy nearly all of Blockbuster’s assets for $320 million out of bankruptcy. In February, it agreed to acquire DBSD North America Inc., a provider of voice and data services over satellite, for $1.4 billion.

EchoStar, which today posted a 76 percent drop in first-quarter net income to $17 million, agreed to buy Hughes Communications for about $1.32 billion in February, giving Dish the ability to offer broadband services. In January, EchoStar bought Move Networks Inc., which makes technology for streaming video online.

EchoStar fell $2.09, or 5.6 percent, to $34.99. Shares are up 40 percent this year.

Ergen said there is a plan to tie together his recent acquisitions, although he wouldn’t give details, referring to the TV show “Seinfeld,” in which the various story lines often merge in the “last couple minutes” of an episode.

Churn Fears

“Everything we do has a purpose, and we feel like it ultimately fits together,” Ergen said. “You’ll have to just wait and see where it all comes together. It’s a little hard to explain it this early in the show, so to speak.”

Dish gained about 58,000 users in the first quarter, after losing 156,000 customers in the fourth quarter.

Analysts on average estimated a loss of 50,000 to 100,000 subscribers, according to Moffett. The quarterly gain was a surprise, said Moffett, because Dish increased subscriber costs by $5 to all customers in February, the equivalent of a three-year price increase in one installment. Churn was 1.47 percent, lower than the 1.75 percent consensus forecast among analysts, according to Ryan Vineyard, an analyst at RBC Capital Markets in New York.

“There were fears churn would elevate, but that doesn’t seem to be the case,” Moffett said. “Reports of Dish’s demise were greatly exaggerated.”

Ergen said the price increase has gone “remarkably smoothly,” although there may be more cancellations related to the additional subscription cost in the second quarter than in the first quarter.

Dish net income rose to $549 million from $231 million. Sales climbed 5.5 percent to $3.22 billion, compared with the $3.23 billion average analyst estimate. Shares have climbed 52 percent this year.

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