The Lawsuit Route Proves Lucrative for TiVo

Anyone who has a TiVo box atop the TV probably doesn't know it, but that little black thing has become a courtroom piggy bank. Few companies are as litigious these days as TiVo (TIVO), the Alviso (Calif.)-based creator of the time-shifting machine that allows folks to record television shows and fast-forward through commercials.

On Sept. 4, when a federal judge in Marshall, Tex., awarded the company approximately $200 million in damages from Dish Network (DISH), it brought to $304 million the amount that courts have ordered the satellite company to pay in the long-running patent case. And TiVo hardly seems to be finished hitting the courts. On Aug. 26, it filed lawsuits in the same Texas court against telephone operators AT&T (T) and Verizon Communications (VZ) for what TiVo alleges is a violation of three of its patents for time-shifting and other aspects of its digital videorecorder.

In fact, TiVo is proving that litigation can be a profit center and a lure for Wall Street to boot. It's been a hot stock ever since the company received $104.6 million in damages from EchoStar (SATS), Dish's parent company, in late 2008. Since then, it has outperformed both the Nasdaq and the Standard & Poor's 500-stock index, and analysts have widely speculated that the company is a likely takeover target in part because of the cash bulging on its balance sheet. Indeed, the company is scrambling to reinvent itself as the number of users of its boxes has fallen over the past three years, from 3 million subscriptions to 1.6 million as of April, while folks have signed up in droves for cut-rate DVRs offered by their cable and satellite service providers. In its most recent earnings statement, TiVo reported a $2.9 million loss for the second quarter on $57.4 million in revenues.

Licensing Deals with Comcast, Cox But its key assets are its patents, and it has been leaning heavily on them. TiVo has 146 patents, according to its financial filings, including its key "time warp" patent that allows the box to play one show while recording another. That patent is key to making any DVR operate, and it's one of the three on which TiVo has based its lawsuits.

To boost its growth, TiVo has signed several deals to license its intellectual property to the likes of cable giants Comcast (CMCSA) and Cox Communications and to satellite operator DirecTV (DTV). Those deals provide far less revenue to TiVo—it gets roughly 93¢ a month per subscriber from companies that license its technology and an average of $7.65 from its own subscribers, who first have to buy a machine that can cost $149 to $599, depending on the model. But the licensing deals provide larger margins, and they're expected to start becoming a larger part of TiVo's revenues down the road. Comcast has only now started rolling out its TiVo-powered DVRs, and Cox is expected to do so soon. Currently, service providers make up just under half of TiVo's total of nearly 3.2 million subscribers.

The company has hustled to expand its lines of business and currently is offering ratings services to advertisers and broadcasters, as well as a deal with Netflix (NFLX) to stream movies to Netflix subscribers who also own a TiVo. But thank goodness for Dish Network, whose violation of TiVo's patents has helped the company build a cash hoard of $150 million. TiVo had asked for as much as $1 billion in the latest case against Dish, arguing that the satellite company had intentionally tried to sidestep the earlier court decision by devising a new way to deliver DVR services that still violated the patents. The judge ruled that Dish was still violating the patents but declined to find that the "contempt has been willful." Dish and EchoStar, which have separated into two companies since the case was first filed, said in a joint statement that they ultimately will prevail on appeal.

TiVo-Dish: A Future Settlement? Dish CEO Charlie Ergen can take some small comfort in the Texas court finding that his company didn't willfully violate TiVo's patents. "Our engineers spent close to a year designing around TiVo's patents and removed the very features that TiVo said infringed at trial," Dish Network said in a statement earlier this year. Ergen, no lightweight when it comes to litigation fisticuffs, has also launched his own offensive, asking the U.S. Patent & Trademark Office to invalidate TiVo's time-warp patent. It is unclear when the office will rule on that request.

But TiVo's litigation offensive raises some interesting questions. Is it filing suit against the two phone companies to drive them to the bargaining table, now that it has shown in a Texas court that it can successfully bring a large player like Dish to its knees? Almost certainly. And does the second victory in as many tries mean that TiVo and Dish will ultimately settle?

A settlement would allow the satellite company to pay a licensing fee that almost certainly is lower than the $2.25 in monthly penalties per subscriber that the judge assessed in the most recent case. You'd have to be brain-dead not to consider settling if you were Dish and Ergen. But Ergen is known as a tough character, who has used the courts many times to force business opponents to his way of thinking. Then again, it doesn't seem to be working with TiVo, which seems to understand the litigation game very well itself.

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