TiVo experienced a bit of agony and ecstasy with the two major satellite-TV operators.
The good news for the company that popularized digital video recorders: Three years after DirecTV stopped offering TiVo DVRs, the satellite operator struck a new deal with TiVo to develop a high-definition DVR as a high-end option for subscribers slated to launch in the second half of 2009.
The bad: A federal judge failed to issue a decision on TiVo's request to find Dish Network in contempt of a court order related to TiVo's patent-infringement victory against the satellite company — causing TiVo shares to plunge 16.5% on Sept. 4, as investors had hoped for an immediate ruling in its favor.
TiVo had asked the U.S. District Court for the Eastern District of Texas to find Dish Network in contempt for not disabling its DVR functionality as previously ordered under the court's permanent injunction.
U.S. District Judge David Folsom did not reach a decision before adjourning the contempt-of-court hearing last Thursday. He said he would try to rule by Oct. 1, but indicated a decision could come as late as November, Reuters reported.
The hearing stemmed from the April 2006 verdict by a federal jury in Texas that found some of Dish Network's DVRs infringed on TiVo's “Time Warp” patent. The damages awarded are now about $94 million, with interest factored in. TiVo claimed in court that Dish Network should pay $220 million in royalties and lost profits for the 18 months that the verdict was stayed to allow Dish to appeal.
TiVo said in a statement, “The court is considering the arguments that it heard today and we remain confident in the outcome.”
In research note, Citigroup analyst Tony Wible said the selloff in TiVo shares “is likely driven by event-driven investors interpreting the absence of a decision as incrementally more favorable for Dish.” The uncertain timing of a decision is “leading to more frustration and selling pressure.”
Dish Network has asserted that it designed a workaround for the TiVo patent by creating new software and downloading it to all its DVRs.
“We believe we complied with the injunction,” Dish CEO Charlie Ergen told analysts on the operator's earnings call last month, though he added that he thought TiVo and Dish Network could work together in the future.
In a June 3 research report, Sanford Bernstein senior analyst Craig Moffett estimated that if Dish Network were found in contempt and had to immediately disable its DVRs, it would cost the satellite operator about $1.6 billion. In addition, he said, Dish Network may have to potentially engage in a bidding war for the right to continue offering DVRs.
Dish and TiVo have two other pending legal matters. The satellite broadcaster filed an appeal with the U.S. Supreme Court over a January decision by a federal appeals court upholding the Texas jury's judgment. And in May, Dish asked the Delaware federal district court to rule that its new DVR software does not infringe TiVo's patents.
Meanwhile, TiVo managed to maneuver into a much warmer embrace with DirecTV.
The two companies will work together to develop a broadband-enabled HD DVR service. Financial terms of the nonexclusive pact weren't disclosed. The agreement, effective until at least February 2015, included the extension of mutual intellectual property arrangements.
DirecTV said it will continue to develop and offer its own set-top boxes as primary offerings to both new and existing customers, and that the new TiVo box will be offered as “an alternative choice” to customers.
DirecTV president and CEO Chase Carey said in a statement that the new deal will extend the satellite operator's “longstanding reputation for developing innovative, advanced products and services.”
“We will continue to work with TiVo and make this new product available to all new and existing DirecTV customers who may want to add TiVo on top of our industry-leading experience,” Carey said.
The new HD DVR will be marketed and sold by DirecTV nationally to its entire customer base. Consumer pricing and packaging has yet to be announced.
The updated agreement between DirecTV and TiVo extends the expiration date from Feb. 15, 2010, to Feb. 15, 2015, with DirecTV having the right to extend further until Feb. 15, 2018, according to a TiVo 8-K filing with the Securities and Exchange Commission.
For TiVo, selling DVR boxes and service through cable and satellite operators is a key survival strategy.
Tom Rogers, TiVo's CEO and president, said the DirecTV deal “demonstrates our continued embrace of mass distribution opportunities in cooperation with major multichannel operators who recognize the value of giving their customers a choice of compelling user experiences.”
The DVR pioneer also has distribution deals with Comcast and Cox Communications, which are beginning to offer its interface as a high-end option in addition to their regular DVRs.
Comcast has been slowly rolling out TiVo-based services to customers in its New England division, more than a year later than originally projected. This month the operator expects to launch a marketing campaign touting the TiVo-based service, which is $2.95 per month more than Comcast's regular DVRs.
DirecTV first launched a TiVo-based DVR in 2000, but five years later said it would market its own DVR developed by NDS Group instead.
As a result, the number of DirecTV customers that still have a TiVo DVR has steadily dropped. TiVo, for the quarter ended July 31, reported a net decline in MSOs/broadcaster subscriptions during the period, dropping to 1.9 million from 2.5 million a year ago.
TiVo said in its 8-K filing that DirecTV will pay “a substantially higher monthly fee” for households using the new HD DVRs with TiVo than the fees for the satellite operator's previously deployed TiVo-based DVRs.
DirecTV also is entitled to “most favored customer” terms compared with other U.S. multichannel video distributors to whom TiVo grants a license to distribute certain TiVo technology in the future, according to TiVo's 8-K filing.