TiVo Shares Zoom 53% After Dish Ruling

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Shares of TiVo shot up 53% Wednesday - hitting a five-year high - after a federal judge ordered Dish Network to pay the DVR company an additional $103 million plus interest for violating an order to stop using TiVo's Time Warp patent.

TiVo's shares closed at $10.70 Wednesday, hitting an intraday peak of $10.82. Its closing price the previous day was $6.98.

On Tuesday, Judge David Folsom of the U.S District Court for the Eastern District of Texas ruled that Dish's supposed "workaround" DVR technology infringed TiVo's intellectual property, and ordered Dish to disable the DVR functionality of the approximately 4 million set-tops originally covered under the injunction within 30 days.

Dish, in a statement Tuesday, said existing customers with DVRs are not immediately affected by the ruling. The company said it would appeal the decision and Wednesday filed a motion in the U.S. Court of Appeals for the D.C. Circuit to stay the order.

"We are pleased that the Federal Appeals Court in Washington temporarily stayed the district court's order in the Tivo litigation," the DBS operator said in a statement Wednesday afternoon.  "Dish Network customers can continue using their DVRs. We believe that we have strong grounds for appeal." 

Janney Montgomery Scott analyst Tony Wible wrote in a research note issued Wednesday morning that the decision was "a major victory" for TiVo. The analyst, who rates TiVo a "buy," raised the target for the company's stock to $13.50 from $9.75.

Wible also said the ruling "should reinforce the value" in TiVo's intellectual property and highlighted the difficulty any cable operator will have "trying to circumvent TiVo's patent with generic offerings." He predicted the court ruling against Dish will generate new MSO deals for TiVo and help the DVR company secure more favorable licensing terms.

In addition, Wible wrote, "The ruling makes TiVo much more appealing as an M&A [mergers and acquisitions] target, as players may jockey to buy TiVo to control the DVR patent out of fear or greed."

Sanford Bernstein senior analyst Craig Moffett, in a note to investors, said the court's ruling against Dish "was indistinguishable from a worst-case scenario." He noted that additional punitive damages could put the amount Dish is ordered to pay TiVo even higher, and "could potentially even include the disgorgement of profits earned during the period of April 2008 to the present."

Moffett and other analysts have concluded that Dish Network will be forced to reach a licensing agreement with TiVo on the patent in question.

"Dish Network would now appear to have little choice but to settle," Moffett wrote. "But at what rate? TiVo would now appear to hold all the cards. A settlement would likely be far above the licensing rates agreed to by DirecTV and Comcast a few years ago, leaving Dish Network at a decided competitive disadvantage."

In his order finding Dish in contempt, Folsom wrote, "By not disabling DVR functionality in adjudged receivers that had been placed with end-users, EchoStar failed to comply with the plain language of the Court's order."

The Texas court had previously ruled that EchoStar infringed TiVo's "Time Warp" patent for DVR controls, and awarded TiVo $104.6 million in damages, including the initial $74 million in jury-awarded damages, supplemental damages accrued through Sept. 8, 2006, and interest. EchoStar paid the damages last October after the U.S. Supreme Court declined to review the case.

The $103 million the court awarded Tuesday covers damages from Sept. 8, 2006, to April 18, 2008, not inclusive of interest. The court deferred ruling on potential monetary sanctions against EchoStar for contempt of the permanent injunction as well as certain other damages.

In the original 2006 decision that found EchoStar infringed on the TiVo patent, the jury awarded TiVo a royalty rate of $1.25 per EchoStar DVR subscriber per month. That was the rate Folsom settled on in his ruling Tuesday to yield the $103 million figure, surmising that the two companies would have settled on the $1.25 figure for the 20-month period the ruling was stayed.

Janney's Wible wrote that he expects TiVo to be able to extract $1.75 per DVR subscriber fee from Dish because "TiVo now has considerable leverage over Dish."