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TiVo aims high following US federal patent ruling

“It is certainly possible that we will find ourselves unable, in certain cases, to establish a commercial relationship. In those cases, will we consider litigation? Obviously, but that’s not our preferred approach.” — Tom Rogers, chief executive officer of TiVo

TiVo Inc, armed with a federal court ruling backing the company’s digital-recording patent, plans to elbow its way onto every US pay-TV system to attract millions of new subscribers.

The Alviso, California-based DVR pioneer is in talks with pay-TV providers to sell its recording and playback service to more of the industry’s 103 million US customers or license its technology, according to two people with knowledge of the plans.

“They will leverage this to become a much bigger player,” said Anthony Shaw, a partner and intellectual property litigator at Dewey & LeBoeuf LLP in Washington. “They don’t want to be a patent-holding company.”

The June 2 ruling against Dish Network Corp, the second-largest satellite TV service, gives TiVo a chance to boost revenue by adding to its 3.2 million subscribers. The company, which has struggled to make money, may also become a buyout target for Dish or the larger DirecTV Group Inc as the satellite companies seek an advantage over each other, said Chris Marangi, an analyst with Gabelli & Co in Rye, New York.

For US$12.95 a month, TiVo subscribers can record, pause and replay shows in progress, and access thousands of movie rentals online.

TiVo is in talks to provide service through Time Warner Cable Inc, Landel Hobbs, the New York-based pay-TV service’s chief operating officer, said in a June 11 conference call. TiVo already has deals with Comcast Corp and DirecTV, the largest US pay-TV companies.

A federal judge in Texas ruled that Dish and satellite equipment provider EchoStar Corp, both controlled by Charles Ergen, violated TiVo’s patent on technology that allows viewers to record and play back video at the same time.

The court ordered Dish to disable offending players and provide notice before attempting a workaround. Dish and EchoStar were ordered to pay US$103 million to cover royalties while they continued to provide their DVR product. Both are appealing and have told the court they are developing a DVR that won’t use TiVo technology.

TiVo leapt 53 percent after the ruling. The shares rose US$0.14 cents to US$11.05 on Friday in NASDAQ stock market trading, giving the company a market value of US$1.16 billion. DirecTV, based in El Segundo, California, rose US$97 to US$23.68 on the New York Stock Exchange. Dish rose US$0.09 to US$15.18.

The legal victories haven’t yet translated into sustainable profit. With about US$250 million in annual sales, TiVo lacks the heft of larger pay-TV providers. The company spent more building and marketing its digital-recording devices last year than it received in hardware sales.

TiVo reported its first annual profit of US$104 million in March, the result of damages paid earlier by Dish and EchoStar. Last month, the company recorded a fiscal first-quarter loss of US$4.13 million as sales slid 9.7 percent to US$54.9 million. Subscribers fell 16 percent.

TiVo wants pay-TV companies to let subscribers choose between DVR services, said sources, who declined to be named because the company’s deliberations are private. Alternatively, TiVo may seek licensing or other revenue, they said.

Other pay-TV operators may also be infringing, chief executive officer Tom Rogers said on a May 28 conference call.

“It is certainly possible that we will find ourselves unable, in certain cases, to establish a commercial relationship,” Rogers said. “In those cases, will we consider litigation? Obviously, but that’s not our preferred approach.”

DirecTV plans to offer high-definition TiVo next year. The company has more than 18 million US subscribers and could gain an edge over Dish with an exclusive accord with TiVo, Craig Moffett, an analyst at Sanford C. Bernstein & Co, wrote in a June 3 report.

Dish would probably have to pay more than DirecTV or Comcast in a settlement with TiVo, said Marangi. Gabelli held 56,000 TiVo shares as of March 31, data compiled by Bloomberg showed. Philadelphia-based Comcast, with 24.1 million cable subscribers, offers DVRs with TiVo in the Boston area and is expanding the service to Chicago.

“TiVo is putting a war chest together in case they have to go after other providers in court,” Shaw said. “They probably expect some other providers will put up a fight, too.”
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