TiVo stock in fast-forward mode

Success in courts trumps DVR pioneer's sub losses

TiVo's legal team has been busy, and investors are profiting from its efforts.

The DVR company won yet another victory a couple of weeks ago, this time to the tune of $206 million, as part of its ongoing battle with EchoStar, and it sued Verizon and AT&T for similar patent infringements the week before that.

TiVo filed suit against the telcos Aug. 26, the same day it revealed mixed quarterly financial results, so the stock didn't get the bump it otherwise might have received had news of those legal filings come on a different day.

The stock has been on a tear, though, up 8% since Sept. 4, when it was learned a judge decreed that EchoStar should pay TiVo $206 million on top of the $103 million he ruled in June that it must pay TiVo. That's on top of the $105 million EchoStar already has paid the DVR pioneer.

Most significant about the $206 million is that it translates to $2.25 per Dish Network DVR subscriber per month, up a dollar since the judge's previous ruling. Judge David Folsom increased it, he said, to emphasize that EchoStar's procrastination doesn't come without costs.

After 51⁄2 years, EchoStar is still knee-deep in appeals, and it could drag out payment of the $103 million -- and the additional $206 million -- for another 18 months as it mulls whether it should strike a licensing arrangement with TiVo and end the legal wranglings or keep fighting.

Or, EchoStar actually could prevail on appeal, an event that would sink TiVo shares in dramatic fashion.

Investors will have slightly more clarity after a hearing scheduled for November, but make no mistake about it, the outcome of the EchoStar matter is everything to TiVo investors. That's because it's hard to see TiVo beating AT&T and Verizon if EchoStar suddenly scores a come-from-behind victory, and TiVo hasn't got much else going for it if it can't protect its patents.

Its subscriber ranks, in fact, have been shrinking, down from a peak of 4.4 million in January 2007 to 3.1 million in July. Such shrinkage would have decimated the stock had it not been for the EchoStar lawsuit.

Instead, TiVo shares have advanced 99% during that span, better than all other stocks making up The Hollywood Reporter Showbiz 50 index except three: Imax (up 131%), Apple (116%) and Netflix (105%).

Without lawsuit money pouring in from EchoStar -- and maybe, someday, from Verizon and AT&T -- TiVo has only Comcast, Cox, DirecTV and tiny cablers like RCN to lean on, and those deals haven't been nearly productive enough to prop up its stock.

Plus, as analyst David Miller of Caris & Co. notes, TiVo is finding it more difficult to convince consumers it is the only DVR brand that matters.

"Other DVR-service providers have begun to raise the bar in terms of technology and innovation, a reputation that for the better part of the past seven years has been reserved for TiVo," Miller says.

Verizon's FiOS touts its "hub TV," whereby a customer can watch a recorded program in multiple rooms with a single DVR. Cablevision is readying its "network DVR" that would negate entirely the need for a home-based box.

Those lawsuits definitely are the TiVo stock's most powerful catalyst -- so powerful that most analysts are telling clients to keep buying shares even as the stock challenges its 52-week high and subscribers keep ditching the service.

Miller has a near-term $13.50 target on the stock, which closed Wednesday at $10.62. Tony Wible of Janney recently upped by 50 cents his "fair value" target on TiVo to $17. Under his most bearish scenario, TiVo continues to trade at about $11; under his most bullish scenario, it shoots to $26.

Miller's bullishness is more temperate.

"We continue to espouse the view that TiVo is a company that is strategically pinched unless it makes headway on the legal front," he says.

TiVo CEO Tom Rogers addressed many of the analysts' questions, concerns and theories a few weeks ago during an investors conference, saying, "We've got a long way to go before the legal status of the network DVR has been fully decided."

Of the decision to sue Verizon and AT&T before the case with EchoStar concludes, Rogers said analysts are correct in assuming it stems from "a great deal of confidence" in a victory against EchoStar.
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