Legal Win A Game Changer For TiVo

By Eugene Bukoveczky | March 09, 2010 AAA

The last couple of years have been a relatively unrewarding up-and-down roller coaster ride for investors in digital-video pioneer TiVo (Nasdaq:TIVO), but last week's announcement that the company had finally won a long-standing patent infringement case sent the shares soaring more than 80%.

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For years now, the company has been involved in a bitter lawsuit against rivals Dish Network (Nasdaq:DISH) and its affiliated company EchoStar (Nasdaq:SATS), claiming that both companies had violated TiVo's patent rights by making and selling set-top digital video recorders, or DVRs, that included TiVo's proprietary technology. Finally, a federal appeals court found both companies to be in contempt and awarded TiVo $300 million in damages. TiVo was not satisfied with this amount, and indicated that it would seek further damages compensation. Dish and EchoStar's response is a proposed redesign of their products to comply with the court ruling.

Legal Win Sets TiVo Up for Windfall
In addition to the immediate cash payoff, the legal win opens up major new market and licensing opportunities for TiVo. DVRs are now staple items in American homes, and are favored for their ability to record shows, pause live TV and skip commercials. Some analysts are now suggesting that TiVo could potentially be in line to score a $3 per month fee for each DVR out there that incorporates its technology. That could not only include the DVRs made by Dish and EchoStar but also those that have been distributed by cable giants such as Verizon (NYSE:VZ) and AT&T (NYSE:T), against whom TiVo has also filed a lawsuit. By 2015, potential fee revenue just from these sources could total $478 million, more than double the $228 million the company realized over the past 12 months.

TiVo Still a Money Loser
Realizing such potential wins hasn't come without a cost. High legal and research and development costs pushed up the company's recent quarterly loss to $10.2 million, almost triple the year-ago loss of $3.6 million. For the current quarter, the company expects its losses to get even worse, coming in at between $19 million to $21 million.

If it hadn't been for the legal win, it's likely with these numbers that Wall Street would be predicting a quick demise for TiVo as its own DVR products have so far failed to gain traction against rivals like Dish and DirectTV (Nasdaq:DTV), which have seen impressive subscriber growth of late. DirecTV's has even fueled speculation that it could be a target for takeover by a big phone company like AT&T or Verizon.

Google Entry Could Be a Game Changer
And the whole competitive landscape for the entire DTV market could now be poised for a major change. Internet search giant Google (Nasdaq:GOOG) just announced that it is partnering with Dish to roll out a new DVR service that will blend internet and conventional TV content. Earlier this month, TiVo announced that it would be launching a premiere DVR box that would also have the ability to search for video content from the internet as well as online video vendors like Netflix (Nasdaq:NFLX). Google's entry into this market could take a major slice of it away from TiVo and disrupt things for the other players as well.

The Bottom Line
After such a huge run-up, TiVo's shares are likely to mark time until further developments are forthcoming regarding its lawsuit against Verizon and AT&T. A positive outcome on this front is probably what underlies the price target of $23 that some analysts have set for the stock. With a solid win now in hand against Dish and EchoStar, the odds have just gotten a lot better that TiVo can win against the cable giants as well. (To learn more, check out Technology Sector Funds.)

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