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TiVo Shares Pounded by a Patent Showdown with DISH
By: Leo Sun
Shares of TiVo (TIVO: Charts, News, Offers), the founding father of DVRs which have reshaped home entertainment, plunged on Wednesday due to ongoing litigation with the Dish Network (DISH: Charts, News, Offers) concerning patented technology. Analysts believe that TiVo will prevail, which will send its shares into overdrive, with some claiming it would double instantly once it clears this painful hurdle. Is it time to wager on TiVo’s victory, or to be wary of its defeat and continued decline?
TiVo is best known for its DVR technology, which allows movies and television shows to be recorded from a broadcast source to a hard drive to be viewed from a computer-like directory from a television at a later time. Its technology is also licensed to television service providers. The company’s revenue comes from three segments – consumer subscription service, licensing agreements and media services. Its distribution partners include ComCast (CMCSA: Charts, News, Offers), Cox, DirecTV (DTV: Charts, News, Offers) and other international cable companies.
In the past, TiVo claimed that Dish Network’s Echostar (SATS: Charts, News, Offers) set-top boxes infringed on its patented “time warp” technology, which allows viewing of one show while recording another. In 2006, the district court panel of three judges ruled in TiVo’s favor, and Echostar spent $2 million dollars and 8,000 man hours tweaking their technology in set-top boxes to avoid further infringements. In addition, it paid $104 million to TiVo in damages. On appeal, the court upheld the original ruling in favor of TiVo despite the new technology, but Dish continued using the modified Echostar technology. As a result, TiVo and Dish have entered the courtroom for the second round in their tangled, confusing battle. On November 9, the two companies faced an en banc (full panel of judges) hearing, and a ruling will possibly be released by the end of the year. Dish will either be found in contempt or a new trial will be ordered.
There are four possible outcomes:
* TiVo wins and its stock will rise as shorts scramble to cover, and longs jump back in.
* Dish wins and TiVo’s stock plummets.
* TiVo and Dish settle prior to a final decision, which will be a relief to stockholders of both companies.
* Dish pulls out the big guns and attempts a hostile takeover of TiVo, a very real possibility considering the former’s 8.97 billion market cap easily outweighs the latter’s 1.13 billion.
Of these, the the first and third outcomes seem the most likely. Dish has too many things going against it at the moment; after all, it lost the first patent case and did little to alter its disputed technology. A hostile takeover would be costly and time-consuming and ultimately damage Dish’s business far more than a lawsuit.
On other fronts, TiVo faces increasing doubts that its DVR technology can remain relevant and ahead of the competition. Google TV, in particular, offers digital and web based content on one platform, which can be played on demand. This technology, seen in websites such as Hulu, could pose a threat to TiVo, as it offers a higher degree of convenience than scheduled recordings. Netflix’s (NFLX: Charts, News, Offers) move towards streaming media can also change the game plan significantly, as the Internet becomes a viable replacement for traditional broadcasts. Apple’s (AAPL: Charts, News, Offers) long dormant Apple TV could also become a threat in this regard. Cable companies like Comcast, and satellite providers such as Dish Network all have their targets set on creating the digital TV hybrid successor to TiVo. Cheaper DVRs from non-TiVo licensed electronics manufacturers such as RCA and Panasonic (PC: Charts, News, Offers) have also become alternatives for users who dislike TiVo’s subscription fees. TiVo currently has a steadily shrinking 8% of the DVR market.
This last point illustrates how much is at stake for TiVo in its battle with Dish Network. If Dish prevails, then its victory will open up huge loopholes for DVR manufacturers itching to escape TiVo’s licensing grip. If TiVo wins, it maintains its stable of licensed DVR manufacturers and stays at the head of the DVR business, for now. If TiVo’s relevance declines in the market, it is a tempting takeover candidate for many large corporations such as Google (GOOG: Charts, News, Offers) and Apple, to fuel their Internet hybrid television units with mined technology.
The technicals on the stock are bearish. Net margins have declined significantly, down to -29.59% last quarter. The company has been consistently unprofitable, and expectations are next to nil for the company this quarter. TiVo is set to report its 3Q earnings on November 23.
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