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How the Courts Came Up With Verizon's $2.74 FiOS TV Tax

8:00 AM -- A couple of numbers stick out of the appeals court ruling late last week that upheld the millions in damages Verizon Communications Inc. (NYSE: VZ) is due to pay ActiveVideo (See Verizon Avoids FiOS TV Injunction and ActiveVideo: Verizon Owes Us $260M.)

There's the combined $260 million that Verizon owes ActiveVideo so far when all damages, including interest, are factored in, according to the vendor's calculations. That also includes another number -- the court-determined $2.74 per month, per video subscriber royalty payment that Verizon has to fork over ... at least until we know if its patent work-around works.

In court documents Verizon claims that ActiveVideo's marquee customer Cablevision Systems Corp. (NYSE: CVC) only pays $0.17 (before costs) per sub. The $2.74 royalty the court ordered is lower than the $3.40 that ActiveVideo sought, but you'd be hard-pressed to find anyone who thinks the court gave Verizon some sort of a screaming deal here.

The district court that set the monthly sunset royalty payment obviously didn't just split the difference, but it did explain how it arrived at $2.74.

First, it got there post-verdict, concluding that ActiveVideo would be in a much better bargaining position with Verizon than the vendor was three-plus years ago when it was sweating out its original Cablevision deal. The court also accepted ActiveVideo's testimony that Verizon received an incremental profit of $6.86 per FiOS TV subscriber, finding it "reasonable" that Verizon would receive 60 percent of the profits, with ActiveVideo receiving the balance –- hence, $2.74 per month.

But the district court did do a reality check, acknowledging that it was unlikely that Verizon would have agreed to $2.74 prior to the litigation. But there it is. We'll have to see how long it lasts. The district court's now tasked with taking a closer look at the Verizon's work-around to determine if it's good enough to put it outside the attack radius of ActiveVideo's intellectual property.

But Verizon apparently had plenty of chances to make a deal before the lawsuits started flying. ActiveVideo CEO Jeff Miller testified that his company had tried to get Verizon on board as a customer since 2004.

So, hindsight being 20/20 and all that, Verizon probably would've been a lot better off negotiating a license. But I'm guessing Verizon would've laughed at the suggestion that it might come out on the short end of this thing.

ActiveVideo (formerly ICTV), after all, would not seem to stand much of a chance against a behemouth like Verizon. But this is the crazy world of patent litigation, where the potency of one's power isn't always obvious.

Plus, as we've documented, ActiveVideo may appear small, but it's been a resilient little sucker during its 20-plus year history. From my experience, the only thing capable of taking down its execs -- and that for a short spell -- is some bad grub on the Vegas strip. (See It... Lives! , ActiveVideo Meets Its Match and ActiveVideo's Year of Reckoning .)

— Jeff Baumgartner, Site Editor, Light Reading Cable

AESerm 12/5/2012 | 5:22:30 PM
re: How the Courts Came Up With Verizon's $2.74 FiOS TV Tax

It used to be said that the program guide was the most valuable property on a channel lineup. Granted, in this case, it's more of a navigational tool/guide supplement. If it's the case that Active Vid drove $6.86 in incremental rev (wonder how that number was derived) it would be even more valuable than ESPN. But at 40%, only about half has pricey as sports. 

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