[mythtv-users] TiVo's Future May Hinge on Patent Case

Wylie Swanson wylie.swanson at gmail.com
Wed Apr 5 18:36:16 UTC 2006


Source: http://news.yahoo.com/s/zd/20060404/tc_zd/175015

LOS ANGELES - In an east Texas courthouse,
TiVo Inc. and EchoStar Communications have been battling over a key
patent that makes digital video recorders work. A TiVo victory—which
experts deem likely—would not only resurrect the fledgling company but
also encourage a shift in DVR strategies at the major pay TV
providers.

Some industry observers have put TiVo's chance of victory at 70% or
more and see EchoStar paying TiVo damages of $95 million-$300 million.
Possibly more important for TiVo, a ruling instantly would strengthen
its hand in negotiating what have been very elusive licensing deals
with cable TV companies that have been selling their own
less-expensive DVRs and cutting TiVo out of the loop.

That TiVo sued EchoStar in tiny Marshall, Texas, was no accident, said
Bradford Lyerla, intellectual property attorney and partner with
Marshall, Gerstein & Borun, a specialty firm in Chicago. Juries there,
Lyerla said, find in favor of the plaintiffs in patent trials about
80% of the time.

TiVo is suing EchoStar, the parent of the Dish satellite TV service,
claiming it stole TiVo's technology that allows users to digitally
record one show while watching another.

"TiVo has a great jury story," Lyerla said. "If TiVo loses, it could
be the end of them. That creates greater sympathy on the part of the
jury."

Terence Clark, national co-chair of the intellectual property practice
at Greenberg Traurig in Los Angeles, agrees.

"TiVo put a lot of time and effort into DVRs. You'd like to see those
kinds of companies succeed," he said. "And the industry succeeds when
the system works. A TiVo win would be an example of the system
working."

The trial, which started Wednesday, has been a long time coming, and
investors seemingly have been placing their bets on TiVo. Shares
briefly set a 52-week high Thursday while trading at four times their
average volume. The stock has rocketed 42% so far this year.

TiVo attorney Morgan Chu has been arguing in court that TiVo's
inability to turn a profit, despite the popularity of its product, is
partially because of EchoStar's infringing on its patent. TiVo
co-founder Michael Ramsay testified that he showed EchoStar executives
the TiVo product and pursued a licensing deal with them, but that a
deal was never struck even though EchoStar began selling its own DVRs
that used technology very similar to TiVo's.

TiVo's other co-founder, Jim Barton, told the jury that he left a
prototype of a TiVo box with EchoStar executives, and that he doesn't
recall ever seeing that prototype again.

DVRs allow users to pause and rewind live TV, skip commercials and
organize dozens of hours of TV shows recorded onto a set-top box hard
drive. That just about every cable and satellite TV provider has been
pushing their own versions of a DVR, mostly without TiVo's
participation, makes the outcome of the Texas trial critical for TiVo.

"The damages could be huge, but more importantly, TiVo could solidify
its position in the marketplace," Clark said. "Cable and equipment
companies would have to fall in line and recognize TiVo's patents."

DVRs took longer than many predicted to capture the attention of
consumers, though their growth has been staggering of late. Consulting
firm the Carmel Group, in its recent "DVRs: Time in a Magical Box"
study estimates that at the end of February DVRs were in 15.6 million
U.S. homes, or about 14% of all households. By the end of 2008, DVRs
will be in 37% of U.S. homes, and by the end of 2010 they'll be in
just shy of half.

At the end of TiVo's most recent quarter it had 4.4 million
subscribers, mostly by way of a partnership with DirecTV that ends
early next year. TiVo also struck a deal with Comcast Corp., though
the giant cabler won't begin offering its customers the TiVo service
until later this year.

EchoStar attorney Harold McElhinny has been telling the Texas jury
that EchoStar invented a DVR that uses technology different from that
of TiVo. But it is an uphill battle, Clark said, in part because of
the legal rule known as the "doctrine of equivalents."

The rule protects patent-holders from those who would use slightly
different technology in order to build a device with substantially the
same functionality as a product that already has been patented. The
rule could be particularly relevant in this case because TiVo
introduced DVRs to the public and its name has become synonymous with
the technology.

So strong is the doctrine of equivalents, it could conceivably be used
to protect TiVo from those who offer its functionality even without a
set-top box, like Cablevision has said it will do by storing
programming on servers.

"Since there is so much at stake, Cablevision's attempt to design
around the TiVo patents will undoubtedly be subjected to close
scrutiny," Clark predicted.

If TiVo wins against EchoStar, a judge and jury would then decide on
damages that would be roughly equal to what EchoStar might have paid
TiVo for licensing its technology six years ago, which could be about
$100 million. If it's determined that EchoStar willfully infringed on
TiVo's patent, the amount could be tripled.

EchoStar likely would appeal to a federal court, where about 40% of
patent cases are reversed, Lyerla said. Still, EchoStar would probably
be forced to post a hefty bond if it intended to continue offering
customers its DVR service without paying royalties to TiVo.

"TiVo doesn't want an injunction," Lyerla said. "They want a licensing
fee. They want to turn EchoStar into a customer."

Armed with an EchoStar victory, TiVo undoubtedly would pay further
visits to cable TV companies that have so far shunned TiVo DVRs.

"TiVo wouldn't have the EchoStar money in hand, so it would be in
their best interest to negotiate with others from a position of
strength and not to sue them," Clark said. "There's something to be
said for not having a litigious reputation."

TiVo filed its lawsuit against EchoStar in January 2004. Four months
later, EchoStar countersued, though that case won't be heard until
next year.

As for Wall Street, there is no consensus on what a victory would mean
for TiVo. One analyst predicted its shares would go to $15 within a
year of a favorable victory, while a prominent hedge fund manager
predicted north of $30. Others, though, say a victory would be
essentially meaningless.

Susquehanna Financial Group analyst Michael Kelman said two weeks ago
that if TiVo wins the suit its stock would rise 7% to the mid-$7
range. Because shares are so near that target, he sees little upside.
If TiVo loses, though, he predicts shares will drop to the mid-$5
range.

Likewise, Friedman, Billings, Ramsey & Co. analyst Steven Frankel said
that while the patent trial "should be a catalyst for sentiment," he
remains "skeptical as to the fundamental benefit of victory."

The analyst has an "underperform" rating and $4 price target on TiVo
shares. They closed Monday at $7.28.


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