As we reached rather gloatingly to write up the TiVo win at Dish and EchoStar, a settlement of $500 million in current and future licensing fees, we wondered if US investors had seen the error of their ways and gone out and bought a ton of TiVo shares. No such thing has happened.
Instead the share price slid slightly ‘ almost as if interested investors were saying, ‘Yeah we knew that,’ and yawned and plowed into other stocks. There were, of course, warning signs that such a settlement may happen. TiVo already had a spike in late April, when it added 20% to its share price on the news that a court had confirmed at least part of its patent infringement cash haul, along with the conclusion that Dish had infringed its Time Warp patent. The other half of the equation ‘ did the subsequent Dish workaround still infringe? – well that would have to go to trial again. But this hike didn’t put TiVo’s value anywhere near that it once enjoyed, back when it was thought that TiVo was only going to get $200 million and before the ‘en banc’ review of the trial was ordered, and yet TiVo is at least $300 million richer today. Go figure.
That was almost exactly a year ago and TiVo stock traded at over $18, compared to today’s $11, which would give it a value of around $2 billion, compared to its $1.1 billion today. Instead all the money went into giving Dish Network a 20% share hike, adding $1.8 billion to the value of Dish Networks, more than three times the entire settlement cost. This we will deal with in another article, because it is made up from good results, the settlement with TiVo, the purchase of Blockbuster and the appearance of a strategy that incorporates the UHF and MSS spectrum it owns or is pursuing.
Charlie Ergen, Dish CEO, joked that he wasn’t sure which would happen first ‘ US forces finding Osama Bin Laden or TiVo settling its suit with Dish Networks and EchoStar. It is true that the TiVo ‘Dish battle HAS made headlines in the pay TV industry for around 7 years, almost, but not quite, as long as the chase for Bin Laden.
This is one subject where Faultline has always felt strongly that the outcome had to be a win for TiVo, and although Ergen painted the Appeal court decision that its DVR workaround software would need to be considered in an extra trial, as his own kind of victory, this was no doubt a big day for TiVo ‘ except, it turns out, with investors.
At Faultline we have been consistent on the subject of TiVo since 2004 when it first filed suit with EchoStar and Dish. Back then the suit was more than a little ‘convenient’ in that it targeted a direct rival to DirecTV, the company that first took the TiVo concept to market as a pay TV operator, and which for a few years back then provided TiVo with close to 75% of its revenue.
But the question the suit posed always intrigued us at Faultline ‘ does anyone own the patents for the invention of the DVR? ‘ with the corollary ‘ if it’s TiVo then why isn’t everyone from Broadcom (who builds DVR chips) to AT&T, to Samsung, paying royalties to the company, and if it’s not TiVo then who the hell is it? Or did it somehow just invent itself?
The Time Warp patent has been to hell and back during that time and before it. It was first challenged (and countered) by Replay TV in an inconclusive suit which was withdrawn by both parties. Then TiVo licensed several Consumer Electronics manufacturers who promptly refused to actually make or sell any DVRs, forcing TiVo into the hardware business in order to prove the concept. Once TiVo got the idea off the ground, it ran headlong into copies made by other suppliers, some licensed, some not. It has always tried to pursue the approach of suing pay TV operators for using DVRs, and not get into a fight with equipment vendors like NDS, because most pay TV operators don’t have their own patents to fight back with. At one stage NDS copied the DVR design and tried to replace that 75% of TiVo revenues at DirecTV with a cheaper replica. It was seen as curtains for TiVo and DirecTV was tipped to acquire it, and perhaps make a present of it to NDS. Somehow it has not only avoided that fate, but also managed to get back in at DirecTV. Also in 2004 TiVo picked its litigation target in Dish, and went for the jugular.
Since then subsequent TiVo suits against AT&T and Verizon have met with nuisance counter suits from their suppliers, Microsoft and Motorola, and the process seems set to repeat itself. But now it would be a patently obvious waste of legal expense (excuse the pun) for AT&T and Verizon to go down that route, especially when you look in detail at the Dish settlement.
Dish and its supplier company EchoStar, which Charlie Ergen also runs, agreed to pay TiVo between them $500 million, made up of an initial payment of $300 million, with the remaining $200 million distributed in six equal annual installments between 2012 and 2017. That comes to just $33 million a year for six years and this is to license some 4 million existing DVRs plus all existing Dish customers at Dish Mexico or elsewhere. That could be up to 10 million further US devices and millions more overseas.
But that settlement has been made under duress. Surely a deal for ten years at AT&T or Verizon would be far cheaper, where they have just 7 million pay TV customers between them (not counting Dish and DirecTV resale customers). This number will grow far slower than those at Dish. Dish already has 14 million customers it could upgrade to DVR, AT&T and Verizon have to go out and find new customers. So surely a license could be signed for something like $7 million to $8 million a year each, rising with the number of DVRs they each have installed. The legal expenses fighting this for the next few years would be more than that and also their suppliers would be forced to take on at least half of that burden.
Additionally in the settlement TiVo, DISH Network and EchoStar agreed to dismiss all pending litigation between the companies and to dissolve all injunctions against Dish Network and EchoStar. They also agreed to swap patents.
TiVo granted Dish a license to its Time Warp patent and certain related patents, for the remaining life of those patents. TiVo granted EchoStar a license under the same patents to design and make DVR-enabled products solely for Dish. We figure EchoStar could make more DVRs for other people, but only if those operators already have a TiVo license.
In return EchoStar granted TiVo a license to certain DVR-related patents for TiVo-branded, co-branded and ingredient-branded products. What patents could these be? We wonder if perhaps TiVo can now add Sling capabilities to its product line using these patents. We read through the Dish results Q&A discussion, but no-one had the sense to ask about these patents in detail. We don’t really know that EchoStar HAS any other patents than the Sling patents and we strongly suspect that three key things will happen here soon.
Firstly TiVo and Dish will begin talking to one another with Dish trying to get a better DVR than rivals out of the discussions. This in turn may lead to a deal whereby Dish sells what TiVo calls TiVo service ‘ a system that includes data and metadata to deliver ALL the benefits of TiVo DVRs including things like cloud based search services for online content. Finally if TiVo was to make a box for Dish it would have to include Sling capabilities, which would imply that TiVo might make sling devices for others too. If this happened first, it could be free for TiVo or it could result in operators paying royalties to EchoStar, either way it could tie a bond between the two companies because it would at least push the concept.
We have long said that a company which owned the intellectual property of both DVRs and Sling, could easily control the same royalty footprint as say someone like Rovi (another company with four letters and three of them the same as TiVo ‘ coincidence? Surely not). Actually the Gemstar part of the Rovi business is not quite so powerful a set of patents as those owned by TiVo in DVR and the (as yet unproven patents) held by the Sling Media part of EchoStar.
Rovi just lost a patent cast in the UK with Virgin Media relating to its EPG patents, primarily because UK and most of European patent laws (as yet not unified) only recognize ‘technical’ inventions, not software or business process inventions, and they each have different tests for ‘obviousness.’ So while Rovi has its fair share of patent licenses in Europe, the technical aspects of the Time Warp patent and the Sling patents for that matter, are more defensible there.
All this may take a year or two because as Ergen was keen to point out, the disagreement between the two companies was intellectual not emotional and he has always respected the management of TiVo ‘ all of which serves to cover up just how emotional the battle was and that respect will only grow from here on in, and it will take time before the two can find ways to trust one another.
Ergen said in his results Q&A, ‘The lines of communication are open with TiVo. Tom already owes me dinner. He owes me about a $600 million dinner. That’s before the tip.’
He went on to praise the TiVo operating system, its viewer management and advertising models and added, ‘I think that it’s up to their management, our management to come up with innovative ways to work together.’ Given the poor reception that Google TV has had with all US consumers, including those at Dish where it has been tightly integrated with the EPG, Dish could shift to using TiVo boxes for internet content viewing.
Our preferred outcome (and this could still end up being the case), was if TiVo acquired the Sling Media portion of EchoStar or perhaps all of the EchoStar set top business. That way the patents would be married and could be licensed collectively ‘ with Sling (which has never been through a patent legal proving process) hiding behind the general DVR patents of TiVo. With that, TiVo could sweep across Europe and the Far East and create a stronger intellectual property business than Rovi.
The DVR is no longer just a single invention ‘ it has become a series of related services ‘ it takes in EPG search, internet video delivery and search, video offload to portable devices, push VoD and additionally multiple advertising insertion types such as adverts on the screen while fast forwarding takes place, voluntary viewed advertising from the hard drive with interactive links and demographically addressable advertising delivery. And TiVo is the only company that has patents in all of these areas, both in the US and abroad.
TiVo revenues reached a height of $272 million in 2008, and today are the lowest they have been for 5 years, down to just $219 million and the company has only filed a profit once in the past five years and that was due to litigation proceeds in 2009.
By comparison the great bulk of Rovi revenues ‘ over $540 million, comes from two kinds of license, the EPG intellectual property and Metadata licenses onto DVRs, set tops and TVs, for both operators and equipment vendors ‘ and content protection licensing from the Macrovision side of the business. This last part only amounts to around $57 million a year right now, so that makes this almost a $500 million intellectual property business with the exact same business footprint as TiVo. And we would venture that it has weaker intellectual property because of its European problems and its essential nature is less certain ‘ other companies have created EPGs that don’t use the flat box system developed by Rovi and so don’t need to pay.
That would turn TiVo, over time, into a company double the size on IP revenues alone, and when you add its new allegiances in Europe, coming nicely to the boil, we see plenty of reasons for TiVo’s value in the future to outshine that of Rovi, today valued at $5 billion or five times that of TiVo.
‘The compensation from this settlement, including the resulting reduction in legal expenditures, puts TiVo in an enviable financial and strategic position,’ said TiVo president and CEO Tom Rogers, ”and demonstrates the significant return afforded to our shareholders by diligent enforcement of TiVo’s intellectual property rights. Those efforts will aggressively continue with other parties.’
Finally the two companies have said that TiVo will play a role in helping Dish promote the Blockbuster digital video service, although it already does this, supporting it alongside Netflix as an option on its new devices.
Looking at the TiVo and EchoStar product lines, what might come next is a generic tablet system for viewing TiVoToGo content and for placeshifting content from a TiVo to a tablet. TiVo is long overdue to replace its remote control and could do this with a touch screen viewing tablet in our view, which may also contain a placeshifted client. We know that Dish already does this with devices from Archos, which it part owns, but these are generally seen as too expensive and the day of the TV tablet is just around the corner.