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TiVo Rises on Patent Bets

TiVo Inc. (Nasdaq: TIVO) shares have surged more than 24 percent in recent weeks, driven by speculation that the digital video recording (DVR) pioneer could win its protracted patent row with EchoStar Satellite LLC

TiVo stock wallowed after the firm reported a wider-than-expected second quarter loss of $17.7 million. It's risen sharply since then on the possibility of a nine-digit windfall from the EchoStar case. Oral arguments in the EchoStar appeal began yesterday.

TiVo shares were up 29 cents (4.1%) to $7.38 each in mid-day trading Friday.

Citi Investment Research analyst Tony Wible reportedly believes a TiVo victory, coupled with subsequent licensing deals with EchoStar and others, could send those shares beyond the $10 mark.

But Brian Coyne, an analyst with Friedman Billings Ramsey & Co. Inc. , speculated in a research note that TiVo's "patent opportunity" is limited to the trial with EchoStar, which makes its own DVR software and is considering a spinoff of its technology division. (See EchoStar Mulls Spinoff.)

"We firmly believe a TiVo victory here will not lead to new settlements or payments from other operators or vendors," Coyne wrote. He maintained a Market Perform rating and $6 target on TiVo shares.

A TiVo win, Coyne estimates, could fetch $90 million in damages from the results of the original 2006 judgment tied to TiVo's "time warp" patent, plus about $100 million from royalties on about 3 million deployed EchoStar DVRs subject to the alleged infringement. The royalty figure is based on an assumption of 50 cents per DVR, per month, and a 5x enterprise value multiple.

Coyne also estimates that the appeals court decision could be six months away, which could cause investor interest in the case to wane.

He pointed to other "more constructive" long-term prospects for TiVo, including international distribution deals, its TiVo-To-Go services, and multi-room features for its high-def boxes. Last month, Cablevision S.A. de C.V. of Mexico launched a Spanish-language version of the TiVo standalone standard-def DVR. (See TiVo Goes South (of the Border) .)

It appears that at least three other big operators -- DirecTV Group Inc. (NYSE: DTV), Comcast Corp. (Nasdaq: CMCSA, CMCSK), and Cox Communications Inc. -- should be fairly insulated from future litigation with TiVo, as they all have DVR licensing deals in place.

Among that group, Comcast is nearing a New England deployment of Motorola Inc. (NYSE: MOT) set-tops outfitted with TiVo software, and is in the process of porting TiVo to the Scientific Atlanta set-top platform. (See Comcast Funds TiVo App Expansion.)

— Jeff Baumgartner, Site Editor, Cable Digital News

delphi 12/5/2012 | 3:01:14 PM
re: TiVo Rises on Patent Bets TiVo may win a small case against EchoStar. They went after EchoStar as EchoStar does not have a patent portfolio in PVR/DVR. The big boys all have extensive patent portfolios which many have crossed licensed.

If TiVo does win it will be a minor win that will have no impact on the rest of the industry. Echo Star has in the past pushed the boundaries to see who responds. They will pay a moderate fine, license someone's IP and move on.

This will not enhance TiVo's market position.
turing 12/5/2012 | 3:01:13 PM
re: TiVo Rises on Patent Bets What I don't get is how they don't make a profit. If they license their patents to so many cable ops, it's like free money. Even counting sales, support and development for the licensees. If their own boxes are in the red, then they should stop making and selling their own boxes. They're not going to gain marketshare with their own boxes over the incumbents.
Jeff Baumgartner 12/5/2012 | 3:00:58 PM
re: TiVo Rises on Patent Bets As for the cable play, I think the licenses might not pay off for some time still, since Comcast hasn't even launched those boxes commercially yet, with Cox still on deck. And we don't know yet if consumers will pick the TiVo-powered offering over the operator's more "generic" DVR. But it's interesting to see a report that TiVo chief views his company's relationship with DirecTV as "thawed," though it's still hard to say what that will really mean for TiVo in the longer term due to DirecTV's DVR software relationship with corporate cousin NDS.
turing 12/5/2012 | 3:00:48 PM
re: TiVo Rises on Patent Bets I didn't realize their licenses to the cable guys were such that the cable guys could sell their DVRs with own DVR software for less than Tivo software. I don't think mom and pop are going to pay more per month just to use Tivo software. Tivo should figure out how to get indirect revenue. For example by getting networks to pay for tie-ins, such as "If you like this program, then you'll also like this..." Or maybe even sell real-estate on the guide screen for ads.

I'm also surprised none of these guys have done integrated advertisement interaction, where you can press a button during a commercial to have more info emailed or snail-mailed to you, or for real-time voting buttons for American-Idol type shows. They could charge the advertisers/networks for such things I would think.
rjmcmahon 12/5/2012 | 3:00:45 PM
re: TiVo Rises on Patent Bets Tivo should figure out how to get indirect revenue.

I always thought Tivo's end game was too spew ads. Then I read up a bit on the history of television and asked the question why the local TV affiliate lost to the New York originated ones which are now commonly referred to as the Networks. The local TV affiliate could spew ads "better" because they would be more in touch with their communities than any programmer from New York.

The thing that came up was the shortage of quality content. The NYC programmers negotiated the national rights to it and used copyright enforcement to protect their interstitial ads effectively shutting the locals out. I suspect Tivo has the same problem of the affiliates of yesteryear.

Google on the other hand is going after content which has weak to no copyright enforcement. Compare them to Yahoo and you see that the goal in this game, at least right now, is to position oneself as the "programmer" for media with loose or no copyright enforcements. Tivo has not been successful at this either as it's connected to a network for copyright material exclusively.

Finally, Tivo is purchased by the consumer with a a primary expectation of being able to skip ads. This puts Tivo in direct conflict with the business model of their suppliers.

Nice product. No viable business model that I can perceive.
opticalwatcher 12/5/2012 | 3:00:44 PM
re: TiVo Rises on Patent Bets TiVo made a profit the previous quarter.

One problem is that they subsidize their hardware sales. As they get out of the hardware business, which they appear to be doing, then it should be easier for them to be profitable. They can just sell their software--similar to the Microsoft model. They have a well known brand-name, which should be attractive to the media distribution (cable/satellite) companies.

DirectTV moved from TiVo to their home-grown NDS, and had a lot of customer problems because of this.

rjmcmahon 12/5/2012 | 3:00:37 PM
re: TiVo Rises on Patent Bets Tera,

I'm not sure one quarter of profitability over the lifetime of the company is an indicator of success or is it a predictor of future success. Also, I don't think TIVO has the market power of MSFT. Switching to pure sw sales doesn't give them more pricing power as their few customers will squeeze their margins regardless.

Market power - The degree to which a firm exercises influence over the price and output in a particular market. Under prefect competition, all firms are assumed to have zero market power. Where market power exists, the producer affects the market price, and so price is not equivalent to marginal costs.

The test with this company was will consumers buy their product at a price high enough that they could earn a profit. Consumers have not done so despite the attractiveness of their technology and the strength of their brand name. Compare this with AAPL's ipod.
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