Dish Network may be forced to disable as many as 8 million of its DVRs within a month, after the satellite TV operator lost an appeals court decision Thursday in its years-long battle with TiVo. Moreover, Dish could even lose the ability to offer a DVR altogether, according to Sanford Bernstein analyst Craig Moffett.
The U.S. Court of Appeals for the Federal Circuit upheld a lower court's contempt ruling against Dish and EchoStar, under which the companies would pay at least $300 million to TiVo.
Following the announcement of the ruling shortly before 12 noon (ET), TiVo's stock price soared more than 50% to around $15.82 per share while Dish shares dropped 6%, to around $20.41 per share. At the close of trading Thursday, TiVo shares were up 62% to $16.53 -- its highest share price in nearly 10 years -- and Dish had declined 5%, to $20.59.
Dish said it plans to appeal the decision with the full Federal Circuit and said DVR subscribers are currently not affected by the court ruling. The operator also said it will propose a new workaround that does not infringe TiVo's "Time Warp" patent.
The implications of the appeals court ruling for Dish Network "are enormous, and go far, far beyond the retrospective licensing fees and damages that will now be payable to TiVo," Moffett wrote in a research note. "What is at stake is nothing less than their ability to continue to offer DVRs. And without DVRs... well, you can fill in the blank here, but it wouldn't be pretty."
TiVo now has tremendous leverage to negotiate a settlement with Dish, which will likely be even higher than previous proposed licensing fees of up to $2.25 per month per subscriber, according to Moffett. Each $1 per subscriber per month would cut Dish's earnings before interest, taxes, depreciation and amortization by $96 million per year, he estimated.
In the worst-case scenario, Dish's loss in the case could give TiVo an opening to negotiate an exclusive distribution deal with DirecTV in the satellite space. In 2008, TiVo struck a new deal with DirecTV under which the DVR maker is developing an HD DVR as an option for DirecTV subscribers.
"[I]f one assumed that Dish Network would no longer be a viable competitor without a DVR offering -- not an entirely unreasonable proposition -- then DirecTV's gain from exclusivity would be nothing less than all current and future satellite subscribers," Moffett said. "Alternatively, DirecTV could merely threaten such an outcome... and thereby radically increase the urgency of settlement for Dish Network, forcing Dish to pay significantly more for any settlement. Higher licensing fees for Dish would create a significant price umbrella for DirecTV."
In any case, Dish's delays in the case appear to have run their course, Moffett said, noting that "given the five-year history of Dish losses in the case, one can assume that Judge Folsom's patience has long since worn thin," referring to the judge presiding over the case in the U.S District Court for the Eastern District of Texas.