Double Dose of Pain for EchoStar

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EchoStar Communications Corp. suffered several stinging setbacks in court last week, creating circumstances one Wall Street analyst claimed could potentially “expose as much as 20% of its subscriber base” to higher churn.

First, a Texas judge issued an injunction, sought by TiVo Inc., ordering the nation’s second-largest satellite provider to stop selling digital video recorders that infringe on a TiVo patent to new customers — and also, within 30 days, to deactivate boxes currently deployed to EchoStar’s Dish Network customers.

EchoStar succeeded in getting a temporary stay of the injunction on Friday.

Dish has an estimated 3 million to 4 million DVRs deployed that would be affected by the injunction, Craig Moffett, an analyst with Sanford C. Bernstein & Co., said in a report Friday.

The court order stemmed from a patent-infringement suit TiVo filed in 2004 against the satellite provider.

Moffett wrote that while EchoStar’s stay could “buy time” to reach a settlement with TiVo, “EchoStar will now be negotiating with a gun to their heads; even if they are able to settle, costs could be much higher than previously anticipated.”

The judge who issued the injunction relating to the DVRs — U.S. District Court Judge David Folsom in Texas — also affirmed a $74 million award a jury said EchoStar has to pay TiVo. Folsom also ordered EchoStar to pay $5.6 million in interest and pay $10.3 million in supplemental damages for infringement through July 31.

Although the Texas court ordered EchoStar to stop selling DVRs to customers, the satellite company said the stay will allow it to continue to do so.

“We continue to believe the Texas decision was wrong, and should be reversed on appeal,” EchoStar said in a statement. “We also continue to work on modifications to our new DVRs, and to our DVRs in the field, intended to avoid future alleged infringement.”

Moffett cited a “second negative court ruling” last week for EchoStar. In Miami, Fla., a judge refused a request by both the satellite provider and broadcasters to stay a distant-signal ruling.

As a result of a May federal appeals court decision, EchoStar now faces an injunction that would deny it the right to provide distant-network signals “to anyone in the United States,” Moffett wrote.

“A court order to begin shutting down local signals — to an estimated 800,000 subscribers — could now be imminent,” the analyst said.

The court rulings last week “could, potentially, expose as much as 20% of [EchoStar’s] subscriber base to significantly higher churn,” Moffett wrote.

The rulings in Texas and Miami could benefit the company’s cable and satellite-TV rivals, in Moffett’s view.

“In the TiVo case, if a deactivation of EchoStar DVRs does follow, then both cable operators and DirecTV could be beneficiaries of increased EchoStar churn,” Moffett wrote.

“While difficult to estimate, the impact could be considerable. In the distant-signal case, DirecTV would clearly benefit the most, since the 'distant locals’ subscribers are overwhelmingly in rural markets, where direct-broadcast satellite is often the only option.”

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