Shares of Dish Network shed 91 cents, or 3%, to close at $34.37 Tuesday after Sanford Bernstein cable and satellite analyst Craig Moffett issued a report warning that litigation risks stemming from its ongoing patent fight with TiVo could translate into huge costs and larger than expected subscriber losses for the No. 2 satellite TV company.
In a research report Tuesday, Moffett wrote that investors have paid little attention to the TiVo lawsuits, adding that most followers of the stock believe that, at worst, Dish would have to pay TiVo $1 per month per subscriber (about $75 million per year) if its litigation efforts fail.
That $1 per month is about what cable operator Comcast and DirecTV pay TiVo as part of a licensing agreement to use TiVo’s digital video recorder technology.
But Moffett warned that recent developments—on May 16 TiVo asked a Texas court to find Dish in contempt for not disabling its DVR functionality as previously ordered—could be the knockout blow for Dish.
“If Dish loses a current round of contempt litigation related to their alleged ‘work around,’ then the costs to Dish of disabling DVRs, settling with TiVo, or—worst of all—potentially engaging in a bidding war for the right to continue offering DVRs at all, could be in a worst case scenario in the billions… far higher than currently contemplated,” Moffett wrote. “Even the option of settling the case for just $1 per month per subscriber may well have passed.”
A hearing on the contempt matter is scheduled for Sept. 4.
Dish Network is in the midst of appealing a $74 million verdict that TiVo obtained against it in April 2006, in which a Texas jury found that some of Dish Network’s DVRs infringed on TiVo’s patents. That award is now in the area of $94 million, with interest added in.
In late January, a federal appeals court upheld the judgment against Dish Network. Then in April, the U.S. Court of Appeals for the Federal Circuit refused the satellite provider’s request for a rehearing, a ruling that Dish said it would appeal to the U.S. Supreme Court.
And on May 30 Dish filed suit in Delaware state court asking a judge to rule that its new DVR software does not infringe on TiVo’s patents.
While Moffett did not make any attempt to predict the outcome of the litigation, he noted the market has been “significantly” underestimating the risk to Dish Network.
Moffett estimated that if Dish were found in contempt and had to immediately disable its DVRs, it would cost the satellite giant about $1.6 billion. That is not to mention how much it would cost to license the technology from TiVo or if the DVR maker would license the technology to them at all.
Moffett also rethought his previous optimism surrounding Dish Network’s reseller arrangement with AT&T. Although Dish appeared to prevail against DirecTV in December when AT&T announced it would stop selling DirecTV service in the first quarter—it will continue to sell Dish service until at least the end of this year—Moffett now believes that Dish enters into the AT&T relationship at a point of weakness.
The analyst noted that Dish is losing share to DirecTV—its first quarter subscriber additions were its lowest ever and its share of gross additions were its lowest in three years.
Couple that with normal seasonality in the second quarter and high churn rates and Dish could lose as many as 90,000 customers in the period Moffett wrote—a first for a U.S. satellite TV service provider.