Chalk One Up for TiVo

The long-sought legal win in a dispute with EchoStar Communications (DISH) netted TiVo $74 million in damages. A Texas jury ruled Thursday that EchoStar had violated the Alviso, Calif., company's "time-warping" patent, which allows users of digital video recorders, or DVRs, to record one program while playing back another.

While certainly good news for TiVo, Wall Street analysts say the verdict doesn't justify the extent of the run-up in the stock price. TiVo has never turned a profit, analysts point out, and the company is bracing for a lengthy appeals process and a countersuit from EchoStar. Worse, TiVo isn't much closer to a much-needed licensing agreement with EchoStar, the nation's No. 2 satellite-television provider with about 12 million subscribers. If that wasn't enough, TiVo also faces DVR competition from big cable and telecommunications outfits like Time Warner (TWX), Cablevision (CVC) and Comcast (CMCSA) that have deeper pockets and broader audience reach.

"This is the first inning in a long ballgame," says April Horace, an analyst at Hoefer & Arnett, an investment bank in San Francisco. "Looking historically at this, the cable industry fights patents and does not just roll over and license technology." Horace maintains a Sell rating on TiVo's stock.

Michael Kelman, an analyst at Susquehanna Financial Group, an independent research, brokerage and trading firm in Bala Cynwyd, Pa., says the likelihood of a long legal slog will be an unhappy kind of time warp for TiVo and investors.

"The court cannot force EchoStar to start paying TiVo on an ongoing basis. That must be a commercially negotiated agreement," Kelman says. "The appeals process will drag this out. EchoStar has shown itself to be a tough negotiator, and they'll defend themselves. It'll be dragged out for another one or two years."

But that doesn't necessarily mean TiVo shelled out of those lawyers' fees for nothing. Sean Badding, president and senior analyst at Carmel Group, a technology research firm in Monterey, Calif., says the courthouse victory should bolster management's efforts to drum up more licensing business.

"The idea now is that TiVo holds the keys to the DVR doors," Badding says. "If anyone has to pass through them it really has to think twice about working with TiVo. This has to make companies think twice about deploying competitive technology."

The Analysis
TiVo, which came out with the DVR eight years ago, is turning into the poster child for the proposition that superior technology doesn't always equal success in the market.

Users are fiercely loyal to the set-top boxes that, among other features, permit the recording of favorite TV shows, the fast-forwarding and rewinding of "live" programs and the skipping of commercials. TiVo has even found its way into the modern lexicon: "Honey, don't forget to TiVo 'American Idol' since we have a PTA meeting on Tuesday."

Yet while it's the leading name in digital video recording, TiVo doesn't dominate the market. Far from it. Bigger, richer cable and satellite providers have their own branded DVRs that are often cheaper and easier to sign up for than TiVo's service. That makes TiVo's slight edge in user-friendliness and added features a tougher sell.

According to a Carmel Group survey, about half of all cable and satellite subscribers will have some brand of DVR by 2010. About 7.5 million of the country's estimated 27 million satellite-subscription households, or 28%, now have the devices. Of the 65 million households that have some form of cable TV service, about 6.5 million have DVRs, says Carmel Chairman Jimmy Schaeffler.