Court Hearing On TiVo’s Patent May Be Company’s Last Stand

TiVo (NSDQ: TIVO) is probably the most famous name in the consumer digital video recorder market, but its market share — estimated to be around 8 percent of the DVR market last year — hardly reflects that anymore. Since cable and satellite companies started getting into the DVR business, TiVo has been steadily edged out. A court case being argued Tuesday could determine whether the company gains some much-needed leverage against its cable and satellite rivals, or instead gets another push toward obscurity.

One thing that TiVo has been able to rely on to give it an edge: its “time warp” patent, which company officials say give it rights to basic DVR functions, including the ability to record one show while watching another.

Alviso, Calif.-based TiVo sued its rival EchoStar (NSDQ: SATS) and won back in 2006. Since then it has collected over $100 million in damages, and won an injunction ordering the shutdown of about 4 million EchoStar DVRs. But the litigation has dragged on, and EchoStar hasn’t had to shut down any of those machines–yet. After its court loss, EchoStar argued that it created a software “design-around” of TiVo’s patent, which it downloaded to the infringing DVRs.

Last year, U.S. District Court Judge David Folsom held a short trial on that design-around, and ruled it insufficient. He again ordered EchoStar to shut off its DVRs, and pay around $200 million in contempt fees.

Unsurprisingly, EchoStar appealed that ruling as well, saying it shouldn’t have to shut off its DVRs since it re-designed its software so thoroughly–hiring 15 engineers who spent more than 8,000 man-hours creating a work-around to TiVo’s patent. EchoStar lost that appeal before a three-judge panel, but now the full appeals court has agreed to hear the case. That’s a rare occurrence that signals the court is interested in setting precedent on how disagreements over patent “design-arounds” should be dealt with.

EchoStar is arguing that If TiVo wants additional penalties paid out over its patent, it should have to file another court case and re-prove its case of patent infringement. For its part, TiVo says that expedited contempt hearings–like the one it won in East Texas last year–are the right way to handle disputes about whether a re-designed product still infringes a patent.

In the upcoming hearing, TiVo will argue that the injunction it won simply won’t have much value if it has to constantly re-prove its patent was infringed. Its lawyers already argued–successfully–that EchoStar’s “design-around” didn’t make significant changes to the DVR functions.

Market reactions to the recent legal developments suggest that this might be a life-or-death battle for TiVo, which aside from the quarter in which it won its patent windfall, has been consistently unprofitable.

For several years now, TiVo has been undercut by cable and satellite operators offering DVR services without the big up-front cost of a TiVo box. But TiVo has still been able to score distribution agreements with rivals like Comcast (NSDQ: CMCSA) and DirecTV (NYSE: DTV), and its best shot at future profitability likely lies in those type of agreements, rather than direct sales to consumers.

Any company negotiating with TiVo now knows that if it doesn’t strike a deal, it could end up on the receiving end of a patent infringement suit–as Verizon and AT&T (NYSE: T) were last year, when those companies started pushing into the DVR market. (The lawsuits are both pending in East Texas.) While it may not be explicit, TiVo’s ability to win a patent suit surely gives it additional leverage in those negotiations.

If TiVo wins this appeal, it could still be in a position to persuade rivals that, even if they don’t want to partner with TiVo, they at least need to pay the once-pioneering company off to license its patent. But if it loses, its negotiating leverage will mostly vanish. That could be a fatal blow for a company already at the margins of the DVR business.

Please join us today, Monday, Nov. 8th, in Los Angeles at our paidContent Entertainment: The Battle for the Digital Home, where the issues surrounding DVRs will be explored in depth and TiVo’s Jeff Klugman, SVP, Products & Revenue, TiVo, will be speaking.