TiVo Investors Sense Trouble

Last week, TiVo (TIVO) announced that the U.S. Court of Appeals for the Federal Circuit granted a stay on the contempt order imposed by the U.S. District Court that otherwise would have compelled Dish Network (DISH) and EchoStar (SATS) to disable millions of digital video recorders (DVRs) that infringe on TiVo’s patent for “Time Warp” software.

For now, Dish Network and EchoStar subscribers can keep using their DVR service.  TiVo shares reacted sharply to the news and plummeted 15.6% on July 2, 2009 and closed at $9.09.

The two companies have been locked in a dispute over allegations that EchoStar, through its Dish Network, infringed on TiVo’s “Time Warp” technology, which allows subscribers to pause, rewind and record live television. The appeals court granted a temporary stay in a 4-year-running case, which has ultimately delayed the resolution.

Earlier, on June 2, 2009, a federal court found that the modified digital video recorder technology designed by Dish Network still infringed TiVo’s patents, and asked the former to pay the latter another $103 million plus interest as damages.  Following the decision, TiVo’s shares jumped more than 53.2% on June 3, 2009 to $10.70.

TIVo had earlier received damages of $104.6 million from Dish Network in October 2008 on account of a favorable ruling of the U.S. District Court that concluded that Dish Network had infringed TiVo’s patent on its time-warp technology for digital video recorders, and that the infringement was willful. The decision recognizes that TiVo’s intellectual property is valuable and provides further incentive for other companies to enter into commercial arrangements with TiVo.

We maintain a Hold rating with a six-month target price of $8.00.

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