nCUBE Prevails In VOD-Patent Dispute

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Video-on-demand vendor nCUBE Corp. last week tallied a victory in its patent-infringement suit against SeaChange International Inc..

A U.S. District Court jury in Delaware awarded nCUBE $2 million in damages and a 7 percent royalty fee on any sales of infringing SeaChange products after Feb. 1, 2002. nCUBE sued SeaChange on Jan. 8, 2001, claiming SeaChange's ITV system violated nCUBE's patent related to communication between a server and a set-top box, filed in 1998.

"We believed all along in the validity of our patent and are pleased that the jury agreed," nCUBE CEO Michael Pohl said in a press release last week. "Now, it's back to business."

The company's VOD solution continues to build up its share of the U.S. VOD market, said Pohl, who noted that its rollout in New York and in other locales is "a fact that speaks for itself."

SeaChange's key customers for VOD and ad-insertion gear include Comcast Corp., Cablevision Systems Corp., Time Warner Cable and Adelphia Communications Corp. Video-server provider nCUBE's customers include AT&T Broadband, Comcast, Time Warner, Adelphia and Charter Communications Inc.

U.S. patent No. 5,805,804 was issued to nCUBE on Sept. 8, 1998. The company sought about $2 million in damages.

The plaintiff claimed its patent "contains a unique video-server architecture specially suited for VOD delivery." In a news release, it said the architecture covered by the patent allows the "video server to provide scalable video services to all service providers, while requiring only minimal changes to the video server in order to make it compatible with the existing systems of these providers."

It also said technology covered by the patent "is critical to providing cost-effective VOD services."

On May 29, SeaChange's stock price fell by 15 percent. It closed at $10.39, down $1.18 from the prior close on the NASDAQ exchange. Early last Thursday afternoon, SeaChange traded at $8.99, down $1.40 (13 percent). nCUBE is privately held.

The jury's May 29 decision came just hours before SeaChange's planned earnings call.

SeaChange executives went ahead with the call, but postponed the release of detailed earnings, focusing instead on the lawsuit.

APPEAL LIKELY

SeaChange chairman and CEO Bill Styslinger said the company would appeal the ruling, saying "there is good reason for this finding to be set aside."

Styslinger also said SeaChange is developing a "workaround" so its VOD system wouldn't infringe on nCUBE's patent. He said the changes could be implemented in 90 days.

The workaround would entail the set-up of a different communication system between the server and set-top box, Styslinger said.

U.S. District Court Judge Joseph J. Farnan, who presided over the trial (Case No. 01-011-JJF), will review the jury's decision, Styslinger said.

That same judge also is hearing a separate patent infringement suit that SeaChange filed against nCUBE, Styslinger said. That trial is ongoing, he said.

SeaChange said its quarterly revenue reached $33.7 million, above its guidance of $30 million to $33 million, while VOD revenue was $16.1 million.

Because SeaChange bundles its hardware and software, the 7 percent figure could apply to all VOD revenue associated with SeaChange's sales after Feb. 1, 2002, Styslinger said. "The effect on earnings could be substantial," he said.

If the judge determines the 7-percent royalty applies to the full $16.1 million in revenue, SeaChange could be out another $1.1 million.

In a research note on May 30, Morgan Keegan & Co. analyst Murray Arenson cited the partial quarterly financial data, the jury's finding and the debt trouble at Adelphia, a major SeaChange customer. Taking those developments into account, Arenson reduced his estimate of SeaChange's 2003 earnings to 15 cents per share from the prior 40 cents.

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