News of Rovi losing yet another EPG patent case on its home ground in the US has pushed its stock down around 6% over a three day period. But the case does not fundamentally weaken its revenue base in our view ‘ that’s already happened . This week it lost out in an initial determination by a single Judge at the International Trade Commission and there is some discussion about whether this was the right organization to take action through in the first place.
The ITC is all about preventing improper imports while Netflix and Roku, who the case was against, argued that a court was the right place, because it was not a feature of any imported hardware, but sever side software, that was at stake.
This is really about Rovi trying to find out if it has any patent relevance in the OTT world. We’re pretty sure that anyone selling CE equipment inside the US would have successfully challenged by the EPG patents that Rovi inherited from Gemstar. But given that Netflix uses a VoD menuing catalog, reduced down using recommendations, it seems unlikely that anyone can truly interpret this as anything other than obvious, apart from the algorithms it uses in its recommendation system. Roku has its own UI and when it hosts Netflix, just reflects those same server side software decisions.
While Rovi has lost this case for now, it still has right of appeal to a full bench of judges and it says that this will call for this. In that case a final decision should be delivered by early October. From what we understand about this case we cannot imagine this will change the outcome. We also don’t think that the District Court case it has brought in parallel, but which will take a lot longer to schedule, will have any other outcome either. If Rovi wants to be relevant in the online world of OTT, it needs to go out and buy ActiveVideo, because not only are its patents not helpful here, it’s product line isn’t much better.
What IS at stake are the existing revenues for patents, including its famous EPG patent, outside the US, where multiple court cases have gone against it, one against Virgin Media in the UK, which may now infect its new parent, Liberty Global, and the Liberty Global cable rival in the Netherlands, Ziggo. In both cases its patents appear to be invalid in those countries by local laws, and much of this is to do with the US going out on a limb in software patents ‘ where it is different from any other country.
In its last quarter Rovi made a $25 million loss on revenues down 10% to $154.3 million. However most of that was down to its online movie entertainment service, the Rovi Entertainment Store, which is now being treated as a discontinued service, which lost it tons of cashflow.
Rovi said in January that it plans to sell Rovi Entertainment Store, which includes the software and aggregation rights to all major movies that it acquired from CinemaNow as well as those acquired by BlockBuster from Movielink. Sonic bought CinemaNow from investors who had picked it up from Lion’s Gate Studios, while Blockbuster bought MovieLink, which had been run by a collection of Hollywood studios. The infrastructure for these were both then merged. These services were to Movies what Hulu is to TV, and were always being run at a disadvantage. No buyers have come forward as far as we know, but we imagine that the Blockbuster parent, Dish Networks, won’t be too far from the action if this is ever sold. The issue is that this was targeted at PCs, and has no tablet version nor one using adaptive bit rate streaming.
Since then Sonic and then Rovi (which acquired Sonic in December 2010) have partnered with some of the major retailers to provide this as a white label service, including Best Buy, Sears and also the Sears Kmart stores.
The Rovi Entertainment Store contains films from 20th Century Fox, Disney, DreamWorks, MGM, Miramax, NBC Universal, Sony, Warner Brothers and Lions Gate Entertainment which is pretty much ALL of the major US film studios which make up Hollywood, with the exception of Viacom’s Paramount. The service was probably doing fine until the online services at Netflix, Hulu and Amazon really began to take hold and the likelihood of a buyer coming forward now is low, unless it is someone cash rich. It would probably be easier to start from scratch than to buy this system.
Rovi last year had budgeted greater sales of the EPG patent, and says its shortfall is both in Europe and in the US where TV Everywhere operators don’t see why they should extend their EPG royalties to tablets and other devices, many of which they don’t even own and also which often do not use an EPG. This was the sweet spot that Rovi was after with this legal action, and if it continues to go against it, it will be hard pressed to work out where its future patent revenue growth is coming from in an OTT world.
TV Everywhere services only have EPGs, where they have one at all, as a fall back to search tools, online catalogs and recommendation engines. We have always said that if Rovi pushes this area too hard, pay TV companies will just design it out.
The continuing Rovi strategy has really begun to hinge on its Totalguide search and discovery platform. Here it has far weaker patents (if any at all) and poor penetration outside the US.
For the past three quarters Rovi has been falling about $20 million a quarter behind its prior year and it has usually blamed licensing delays, but that excuse cannot wash any longer.
In its last quarter it put its revenue fall down to DivX revenues dropping 44% compared to the prior year, due to a change in DivX licensing policy and warned the same thing many happen again next quarter.
Rovi stock crashed last July as investors realized all of this, dropping from $17.5 down to $10.28 with a dead cat bounce almost to $11 and a market capitalization of just $1.12 billion. But prior to the news this week, Rovi had recovered to around $26, climbing on support for its legal actions and promises to get out of certain businesses. In our view this should be the stock in the basement, instead of the TiVo stock that was forced there last week, after winning only $490 million in legal awards from Cisco, Motorola and Time Warner Cable.
The failure of the patent case has still not brought the Rovi stock back into line. Netflix was found innocent of infringing four patents with one of them being found to be invalid. Rovi immediately issues a statement saying that it was really happy with the outcome, because it had kept three of the patents alive, it’s just that neither Netflix nor Ruku had infringed on them.
A statement read, ‘While we are disappointed in the initial determination of no infringement and expect to exercise our right to petition the full Commission of the ITC for a review of this decision, we are pleased that the majority of the patents involved were confirmed valid.’
Initially Rovi sued LG Electronics and Mitsubishi Electronics as well, but they decided to settle, while Netflix and Roku decided to fight Rovi’s claims.
By contrast Netflix stock has risen 242% in the past year, as it has recovered from its PR disaster of virtually doubling its prices. It announced this week that it will exclusively bring The Killing, season 3 straight of the US TV screens to Europe just a day later. This strategy will clearly see it head off piracy at the pass, since most of the reasons for piracy of TV series is that they are shown in the US and the social buzz attracts overseas viewers. This week the finale of season 3 of the Game of Thrones has broken all piracy records. Pretty soon studios will want to make some money out of that and companies like Netflix can come to the rescue.
Meanwhile this week Roku said that it will put Redbox Instant onto the Roku streaming platform this summer, which will put it head to head with Netflix, on one of its most popular devices.