Dish Network is cockahoop and pleased with itself over a small success in claiming some of the 2001 TiVo patents at the heart its long standing dispute, have been rejected by the US Patent & Trademark Office in a preliminary finding.
Before we completely trash this idea, we just thought we’d remind all investors that this was thrown up just prior to the Dish Network results, in order to distract from the growing question about how Dish remains viable, or at least gets through the next few years.
The truth was pointed out rapidly by TiVo, that the US Patent office almost always rejects a patent on the first run through, because it has not had a chance to ask the patent owner some key questions. It is quite common, and in fact it has happened before with TiVo on these Timewarp patents, for the Patent Office to start off with a rejection and later fully endorse a patent.
TiVo has won the patent case, and has a court order, currently stayed, which will stop Dish from using its DVR or putting up any work around that is not supervised by the court. It’s appeal to this finding is all that is keeping Dish in the game, and it looks unlikely to gain any real mileage.
It is perhaps a few months from being forced to cut a licensing deal with TiVo to save it from switching off 4 million DVR customers, something the business would not survive.
Dish announced revenue this week for the quarter ended June 30 of $2.9 billion down 0.4%, with net income collapsing from $336 million to $63 million, but managed to add, not lose, just 26,000 net new subscribers during the quarter ending on 13.6 million subscribers. For the first two quarters this still represents a fall of 68,000 customers and the digital switchover is clearly the reason behind the upswing, with a number of US homes unsure of how to cope with the switch from analog to digital, deciding to opt for entry level pay TV services, Dish included. Another effect has been through Dish tightening up its security, as well as new sales and marketing initiatives.
Dish also says that it has accelerated the rate at which it replaces devices capable of receiving MPEG 4 content, and increased the rate at which it is upgrading subscribers to HD and to DVRs. In effect it is using cash to look after customers better and slow down churn. But if (or rather when) that TiVo DVR decision goes against it, this just further adds to its penalties.
In its management discussion, Dish notes what we have mentioned in this week’s lead article, that content prices may go up, yet another hurdle for it to overcome as it attempts to recover from the immense loss of AT&T’s marketing support.
But the big issue to Dish is its loss of viability as a company to offer cash to. Losing subscribers for all of last year and half of this, the loss of the original TiVo case and a further damage award of $103 million plus further damages to be set if it loses its contempt of court hearing, all make investment in the company less interesting, so that any capital it raises will be on unfavorable terms. And yet this week Dish came out and announced that its subsidiary, DISH DBS Corporation, plans to offer $1 billion in debt securities. So it needs the money, even though it knows it will be expensive.
An interesting point is that both EchoStar and Dish are defendants in the Tivo lawsuit, but under the terms of their separation, Dish must indemnify EchoStar except for a small contribution of $5 million that EchoStar will make under the separation agreement. This represents yet another potential cash drain on the company.
Meanwhile cable operator RCN said that it now plans to offer TiVo DVR capability next year with TiVo function being built into the RCN’s set-top boxes. However RCN is very small and only has about 368,000 video subscribers so this won’t affect TiVo much.
Our own view on Dish is that it will eventually become clear that it belongs in the same ownership hands as DirecTV, as US satellite TV operations consolidate, but it needs to bide its time until DirecTV is no longer blessed by AT&T, when, in a few short years AT&T has its U-verse IPTV platform everywhere in its US footprint.