Dishing Out Mixed News

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EchoStar Communications trumpeted good news last week on patent-infringement litigation involving two vendors, TiVo and Forgent Networks, just as it was reporting its second-quarter earnings.

The nation's No. 2 satellite provider disclosed last Friday that it had won a favorable decision from the U.S. Patent and Trademark Office, which rejected several patent-infringement claims TiVo had made against the satellite provider at a trial. A jury at that trial ruled in favor of the digital video recorder maker against EchoStar, a verdict that's being appealed.

And last Thursday, in a separate patent-infringement case, a U.S. District Court judge in Texas reaffirmed a jury verdict, handed down in May, that found EchoStar had not violated one of Forgent's patents. The judge denied a motion by Forgent, an Austin, Texas-based scheduling and asset management software provider, for a new trial and awarded EchoStar $90,000 in court costs.

DirecTV and a number of cable companies had settled with Forgent for $28 million before trial, according to EchoStar.

News of the cases emerged as EchoStar reported second-quarter earnings. The satellite provider gained 170,000 subscribers in the second quarter, down from 195,000 subscribers in the year-ago quarter. EchoStar now has 13.9 million subscribers, moving ahead of Time Warner Cable to become the third largest pay-TV provider, behind Comcast and DirecTV.

In a conference call with analysts, EchoStar CEO Charlie Ergen cited the more-competitive environment — with cable's successful triple play, the telco's video plays, and the housing slowdown — as helping to put a crunch on subscriber gains.

With respect to the TiVo case, back in April 2006 a Texas jury found that some of EchoStar's digital video recorders had infringed on a patent held by TiVo. EchoStar, parent of Dish Network, has set aside $94 million to cover that judgment and interest. An appeals court stayed that verdict in October, permitting EchoStar to continue to provide DVR service while it appeals the jury verdict.

In a 10-Q filed last week, EchoStar said that on July 30 the Patent and Trademark Office issued a “final office action” that “rejected as invalid all of the hardware claims that TiVo asserted against us at trial and which the jury found we had infringed.”

According to the securities filing, the patent office didn't reject the hardware-related infringement claims TiVo had made against EchoStar at trial. TiVo can appeal the “final action” by the patent office, EchoStar said.

During the conference call, analysts asked Ergen about DirecTV's coming HDTV expansion, which will translate to 70 channels by the end of the third quarter and 100 HD channels by the end of the year.

Ergen said he didn't think it's so important to have a lot of HD channels — although he noted that Dish Network has 50 — so much as having something that people want to watch.

“There's not 100 channels of HD that I would watch,” he said. But at one point, he conceded that 100 HD offerings “is a good round number to get people excited.”

In a report last week, Sanford C. Bernstein analyst Craig Moffett described EchoStar as “squeezed.”

Moffett wrote, “With a collapsing housing market draining the organic growth from the pay TV market, subscriber growth in the second quarter was a zero-sum game. Cable held its own, losing roughly the same number of subscribers as last year. DirecTV took its expected share. And EchoStar got squeezed.”

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