It was in 2005, when TiVo bought out a bundle of IBM DVR patents, that Faultline began consistently seeing TiVo had a massive upside due to its intellectual property ‘ should its own patents prove defensible in court. And with the (almost) resolved patent case against Dish Networks that has now proved the case.
Investors recently noticed virtually on the day that Dish was ordered to pay a further $103 million to TiVo in a contempt of court action, and the Dish set tops ordered to be switched off, that TiVo was worth an awful lot more than they had previously thought. This action has now been stayed pending appeal and although we cannot guess at the thought processes of an appeal court, it is clear that a major force has been unleashed in the TV market.
TiVo’s control over DVR patents will be almost without challenge. We know that initially (some 7 or 8 years ago) that Replay TV and TiVo called a truce in a legal action over the patents involved in simple time shifting. Since then companies like Cisco’s Scientific Atlanta bought patent rights from Replay and NOT from TiVo. But TiVo has extended those patents considerably ‘ season pass, TVToGo, stored advertising, advertising which is persistent through fast forwarding etc’ are just some small examples of how TiVo has made this space its own. In almost every case TiVo has been noticeably first in bringing these new features to DVRs, with no Replay TV in sight. Consequently TiVo would now appear to have every right to go after companies like Cisco.
Some operators including Comcast and DirecTV, have paid for rights from TiVo, and by association other equipment companies, such as Motorola and NDS may feel they have rights to these patents ‘ since they are implemented in software on their hardware designs, as part of TiVo contracts. But that doesn’t give them global rights, and TiVo may now have leverage over companies which previously appeared to be partners.
The US press has just realized all of this (we have reminded subscribers every year since 2005 that this would happen) and realize that TiVo may become a frequent visitor to the patent infringement courts now that it has this victory, following up with every equipment company, and most operators around the world.
What TiVo has said to anyone that has asked, is that its preferred route is to use this leverage to get operators to sell TiVo service ‘ a combination of software on the device and service data ‘ which makes some of its more advanced features work, and make DVR viewing even more simple for consumers.
TiVo would hope to entice as many Pay TV operators as possible to sign up $12.95 a month customers to this service, initially in the US, and then perhaps gradually further afield. What’s wrong with this view of the world is that TiVo service, while it makes the DVR experience better, it means that the TiVo management are not looking at where its true value is ‘ as a research facility for global TV.
In our view it should separate its TiVo service from its patent hoard, and go forward as two unrelated companies ‘ further inventing additional DVR technologies, and charging accordingly. We believe that the cellular world is waiting for someone who can combine timeshifting and placeshifting into a single homogenous license, and who will chase down Nokia and Samsung next. TiVo needs the chance to work with the mobile element of the video equation that should be emerging.
All of this is leading to speculation that Dish might buy TiVo at some point, to take away the pain of court humiliation at its hands. We’ve indirectly put that question to Dish management, which said, through a go-between, that it would do that over its dead body. A year ago you could have got good money that Dish would outlast TiVo, but now you may get even money ‘ since TiVo is significantly stronger after its case, and Dish so much weaker now that it has lost AT&T as an ally, to its core rival DirecTV.
Okay, say investors ‘ then suddenly little TiVo is worth much more than it was before ‘ so it would be a great time to look for suitors. The share value of TiVo has virtually quadrupled ‘ so why anyone buy it now, when before the legal action was resolved, it might have been picked up for peanuts. The management holds a significant, but not dominant share of the stock at TiVo and these would fight against acquisition tooth and claw, and they showed that when the reverse situation was true back in 2004, when control of DirecTV had just been acquired by News Corp. DirecTV said that it would stop buying DVRs from TiVo, and analysts at the time said that this was to force TiVo into a sale of the company to News Corp or allies close to it, like NDS.
TiVo chose instead to court Comcast and found a way out of the cash hole this created, especially since it took NDS a lot longer to solve the technical issues surrounding HD DVRs than it had anticipated, giving TiVo an extra 18 months or so of working with DirecTV selling TiVo service.
So if it is going to fight a sale or merger, and is going to be inundated with legal actions if it goes the route of using its patents to get Pay TV operators to sell TiVo service, then what else is available to TiVo. Well it can go after straight forward licenses to DVR technology, without TiVo service, but we think that’s tough.
TiVo began life with that in mind, and it never wanted to build a DVR of its own and licensed companies like Sony and RCA with the patents. They paid a flat rate and then proceeded to NOT make any equipment and sat and waited. Even when Sony did make a DVR of its own, it proved a weak product and was discontinued. In the end TiVo got the contract at DirecTV and went on make its own devices and the rest is history. Perhaps now it has a legal precedent in the patent courts and a history of more success, TiVo can make this work, but consumer electronics companies are not who TiVo has to convince. It needs the operators they supply ‘ and it must go after all TV broadcasters ‘ pay TV and free to air TV ‘ in the same way that Gemstar has (the EPG inventor) and include in the license the rights for their suppliers to make such devices.
DVRs on their own are rarely any good. They need unimpaired access to the EPG being supplied on any given service. On Pay TV this EPG is encrypted and only equipment suppliers which have the key and are operating on terms approved by that operator and can make a DVR for the service, which can record with more than one tuner and which can see what’s playing in the coming weeks.
To our way of thinking, and the reason that Faultline suggested a year ago that Dish buys TiVo, is because the combination of Placeshifting (which Dish bought from Sling Media) with time shifting, is compelling for all manner of devices and even for internet driven services. Placeshifting and Timeshifting patents do seem to belong together.
So how can this happen if Dish won’t buy TiVo?
Well we have seen very little evidence that Sling Media has continued to progress since it became part of the Dish ‘ EchoStar empire. It has launched a cable modem which doubles as a placeshifting device and it has recently followed up with an IPTV HD DVR launched in Europe, but there have been no major orders announced for either.
Our conclusion is mostly just fantasy. We know that Dish management will hang on grimly to its satellite service and device business which includes Sling, now trading as EchoStar. But today it is worth just $1.27 billion, against TiVo’s $1.9 billion. By merging the two, it could allow the TiVo management to take over and not push it out and run it autocratically the way is has to date. That means that Charlie Ergen would have to walk away from day to day management, and we know he won’t do that. But maybe he hasn’t thought about that idea, so perhaps it’s best if someone suggests it. A minority shareholding in a combined TiVo/Sling would be worth a lot more over time, than 100% of just Sling.
The TiVo management might even attract back the founders of Sling who have moved away after their earn out.
If such a deal happened there would still be the potential of two businesses ‘ TiVo service, which includes placeshifting, which uses the processing power of existing devices, and a licensing business, and the remnants of a device division, which could ebb as the licensing business took off.
We all play these games of seeing opportunities where we believe that existing management is blind, but it would have some significant advantages ‘ TiVo would already have negotiations with almost all the companies which might buy Sling capability, and there would be less need to prove the patents of Sling. Also the animosity of dealing with Dish as a rival would not be stopping cable and DirecTV from buying into the Sling technology.
Of course EchoStar has many separate satellite skills that would not be needed within such a combined entity and these could be pushed back into Dish, unravelling much of the process that created two separate companies, and in one move all payments and licensing to TiVo could be wrapped up in the negotiation.
For Dish the problem of a permanent license to both technologies could be part and parcel of the deal, and all of its current problems disappear, and it could slowly liquidate its holdings in a fresh new technology business which has a rising share price, turning it into a cash mountain to help Dish through its own tough times.
This does not prevent TiVo from pursuing its own plan of selling TiVo service to the rest of pay TV in the US, but it would have a more compelling offering.
It would also have a global license offering to all the major Japanese, Chinese and Korean consumer electronics companies and enough momentum, as well as Sling’s contacts and customers, to address pushing the concepts to mobile.
Add recent deals with companies like Netflix for streaming TV service over the internet and you have an exceptional global technology leader.
US press reports have already said that Time Warner Cable is in talks to sell TiVo service ‘ so perhaps it doesn’t need the problem of a merger right now, and we can see how its management team will be feeling confident right now after 5 years of having their backs against the wall. But they might ask the question, and companies like Time Warner Cable might have even more to talk about with TiVo, after a merger with Sling.