Dish May Have to Disable Millions of DVRs

In what may prove to be the final blow in a long-running DVR patent bout between Dish Network LLC (Nasdaq: DISH) and TiVo Inc. (Nasdaq: TIVO), an appeals court on Wednesday upheld a lower court's decision that Dish must disable DVRs that were infringing on TiVo's "Time Warping" patent. (See Dish's DVR Boat Anchors.)

But the en banc panel's opinion (PDF) was really a split decision, as it vacated the contempt ruling on Dish's software design-around, but, perhaps more importantly, upheld Dish's contempt of the disablement provision.

Dish was originally found to be in contempt because it declined to disable its DVRs when the lower court ordered it to, claiming that it had developed a software workaround to the TiVo patent. But that same court claimed the workaround was "no more than colorably different" than the previous version -- a view that the en banc panel upheld today.

In response, Dish hopes to obtain a stay of the injunction as it seeks a Supreme Court review of the disablement portion of today's ruling.

TiVo shares were up 29.87 percent (US$2.50) to $10.87 each in late afternoon trading, while Dish was down 1.38 percent, to $23.53 each.

Why this matters
If Dish's next legal maneuver is unsuccessful, today's ruling may finally put an end to a legal battle that's been going on for about seven years.

And this latest turn could prove very costly for Dish, as some analysts believe the looming DVR disablement threat could saddle Dish with costs that well exceed the $100 million-plus it's already paid to TiVo.

"Faced with an imminent shut-down of millions of DVRs (the precise number has never been disclosed), we believe Dish will be faced with a gun-to-the-head settlement requirement," Sanford C. Bernstein & Co. Inc. Analyst Craig Moffett said in a research note issued today.

Moffett, who anticipates an "expedient end to this case," previously estimated that the total costs of disabling and replacing Dish's infringing DVRs could run as high as $3 billion with replacement boxes, truckrolls and customer churn factored in. The number of DVRs subject to the disablement provision is believed to be in the range of 4 million to 8 million, he said.

Since it's unlikely that Dish has the ability to change-out its infringing DVRs virtually overnight, Moffett wonders if Dish will attempt to sidestep that scenario and try to reach a licensing settlement that "would presumably be on TiVo's terms" and fall in the neighborhood of $3 per month per subscriber.

Dish, meanwhile, downplayed the number of DVRs that may have to be disabled, noting that the ruling applies only to older generation MPEG-2 DVRs, and that it has already upgraded "many of these customers" to new versions that aren't subject to the ruling.

For more
In case you missed a twist or turn along the way, check out:

— Jeff Baumgartner, Site Editor, Light Reading Cable

Jeff Baumgartner 12/5/2012 | 5:07:01 PM
re: Dish May Have to Disable Millions of DVRs

Vijay Jayant w/Citadel Securities also issued comments on this today and what to expect regarding the 8 DVR models that Dish may have to disable.  He thinks Dish will accelerate its upgrade process and believes that Dish has about 2.5M DVRs ready to be shipped to customers.  His model also assumes an annual royalty expense of $300M to $350M at $2.25/sub/month for 10 million Dish customers through TiVo's patent period. 

So in this view the situation looks less like the death sentence for  Dish that Moffett feared a while back, but it's still an expensive distraction at the very least.



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