Will history record a win for TiVo?

Wall Street leans toward DVR pioneer in run-up to appeal

A couple of legal titans are set to do battle Thursday in front of a panel of judges whose decision could upset the DVR landscape.

On one side is satellite TV giant EchoStar Communications, represented by Donald Dunner, one of the most experienced litigators in the country, according to the New York Times. Dunner is the attorney who got an $80 million judgment against Mattel reversed after a jury said the toymaker's Hot Wheels tracks infringed an inventor's patents.

On the other side is TiVo, represented by Seth Waxman, a former U.S. Justice Department attorney in the Clinton administration. He lately has been appealing to the U.S. Supreme Court on behalf of prisoners being held under anti-terrorism laws at Guantanamo Bay in Cuba.

Today, each legal team will get about 15 minutes to clarify their arguments, and the judges will determine, eventually, whether a past patent infringement decision favorable to TiVo will stand.

Industry watchers said the outcome could boost TiVo's strategic and financial position, affect EchoStar's plans to split itself in two and have ripple effects for cable operators.

The legal showdown concerns a $73.9 million judgment that EchoStar was ordered to pay TiVo a year ago after a jury said DVRs used by EchoStar's Dish Network infringed TiVo patents. With supplemental damages and interest, EchoStar -- led by chairman and CEO Charles Ergen -- could owe TiVo -- guided by CEO Tom Rogers -- more than $100 million so far.

More than that, a judge previously ruled that EchoStar should disable the DVRs it had deployed, which no doubt would have encouraged mass defections from Dish while sending shivers to other companies deploying DVRs not licensed from TiVo.

At the time, EchoStar had about 4 million DVR users -- a figure that now stands at about 6 million. Since that decision a year ago, an appellate judge stayed the injunction while EchoStar appeals.

The appeals process has been under way for months, and the timing of the judges' decision is unclear -- it might come as quickly as a day after today's hearing or as much as a year or more after, observers said.

A ruling upholding TiVo's victory could encourage EchoStar to strike a quick licensing deal with the money-losing DVR pioneer, giving it much-needed leverage in striking other licensing arrangements, industry watchers said.

It already has such agreements with Comcast Corp. and Cox Communications, though both cable operators have yet to broadly deploy the TiVo service, and a DirecTV-TiVo relationship has been winding down for a few years. TiVo has 2.5 million DirecTV and 1.7 million stand-alone subscribers.

TiVo stock, which traded above $70 in 2000, has been in the single digits for years as consumers in large numbers opt for generic DVRs that handle the basics of recording and pausing live TV without extra bells and whistles. But it has seen a run-up ahead of the legal showdown. TiVo led Wednesday's gainers on The Hollywood Reporter's Showbiz 50 stock index, up 8% to $7.13, close to its 52-week high.

Bear Stearns analyst Kunal Madhhukar said TiVo's fortunes also will change dramatically with an appellate win. The analyst has an $8 target on TiVo, but said it's worth $16 with a legal victory over EchoStar, an outcome to which he assigns a 50% probability. He said that there's a 40% chance a new trial will be ordered and a 10% chance of EchoStar prevailing.

"TiVo's victory would have big implications, but they're likely not priced into current valuations," he said.

On Wednesday, analyst Jeff Schreiner of American Technology Research initiated coverage of TiVo with a "buy" rating and $11 target, saying there's a 60% chance TiVo will win the appeal. He argued "Dish's brief does not provide legal basis for dismissal or retrial."

Several experts, speaking on condition of anonymity, predict a decision -- one way or the other -- in about six months.

While EchoStar identifies several reasons for an overturned decision -- including some that hinge on ambiguous legal procedures -- a main one is that TiVo's patents primarily relate to analog signals. TiVo, of course, denies that its patents ignore digital satellite TV.

Madhhukar estimates that TiVo's deal with Comcast will earn it 75 cents per month for each TiVo DVR deployed. But if TiVo defeats EchoStar in the legal arena, subsequent deals with other cable TV companies could be for $1.50 a month "for all their DVRs, because they'd all be infringing on TiVo's patents," he said. "If I'm a cable company, I'd definitely have an executive watching this hearing."

If EchoStar loses again, its next step is to appeal to the U.S. Supreme Court, which likely would take very little time in determining whether it would hear such an appeal or not.

In the meantime, EchoStar is considering whether to split itself into two separate companies, one being Dish and the other consisting of the remaining assets, such as the recently acquired Slingbox and set-top technology. Some experts said a split could be impeded by the overhang of a lawsuit. "If Dish wants to become two companies, that makes them more amenable to settling their dispute with TiVo," one source argued.