My mom loves TV. But she loves TiVo (Nasdaq: TIVO ) even more. How do I know? Because each time she and my Dad come to visit, she can't stop talking about the DISH Network satellite receiver that allows us to pause live TV.
Of course, my Mom deserves more than a clone; she deserves the best. She deserves TiVo -- and now couldn't be a better time to buy the stock. Days after rolling out its new ad initiative, TiVo inked a deal with Brightcove to bring Web video to its boxes. There's just one catch: The new feature, which could roll out next month, is only for those who own their TiVo boxes outright. No DirecTV subscribers, please.
Detractors will suggest that this move alienates a huge portion of TiVo's customer base. They'd be right; DirecTV accounted for 66% of TiVo subscribers as of the latest earnings report. I still like the risk. As Foolish friend Alyce Lomax has pointed out more than once, TiVo badly needs to differentiate itself if it wants to keep selling hardware. And it needs to sell boxes -- a lot of boxes -- to reclaim profitability.
Brightcove will make that job easier. So will a favorable judgment in its patent infringement suit versus EchoStar (Nasdaq: DISH ) . A Texas jury awarded TiVo $74 million in the case, ruling that EchoStar "willfully infringed" on TiVo's patent. For its part, EchoStar has vowed to continue the fight, but I think the ruling makes it far more likely that TiVo will be earning sizable royalties from knockoffs before long.
The math is reasonably simple to do, and it's informed by TiVo's court complaint. The company said that it was seeking $87 million in damages, arising from 4 million digital video recorder sales EchoStar had made at the time. That suggests that TiVo believes its fair royalty is $21.75 per box. Reading the jury's ruling similarly -- $73.9 million divided by 4 million -- gets a royalty of $18.50 or thereabouts.
Think about that, and then think about this: More than 100 million U.S. households have TV. DVR-industry researcher The Carmel Group says that roughly half of those homes will have a DVR of some sort by 2010, up from 15.6 million today. That leaves an available royalty stream from 34.4 million DVR sales. Multiply that by $18.50, and you've got $636 million -- and that may be lowballing it. After all, TiVo isn't about to stop selling boxes.
According to Carmel, the total DVR market will grow to equal $5.5 billion that year. Just 15% of that, or half TiVo's current market share, is $825 million annually. Now balance that against what TiVo trades for today: $717 million. A growth firm like TiVo isn't likely to trade for less than its annual revenue run rate. It's more common for firms to trade for two to three times that figure.
TiVo is an innovator, and its moat, once in jeopardy, now looks a lot wider and deeper. That's got to be worth something to the deep-pocket crowd currently racing to combine the Web and TV. Google (Nasdaq: GOOG ) , eat your heart out. Or just spend a billion to acquire TiVo, like I recommended in November. That ought to do my Mom proud. Happy Mother's Day!
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Fool contributorTim Beyersis still hoping to own a real TiVo someday. Tim didn't hold shares of any of the companies mentioned in this story at the time of publication. You can find out which stocks he owns by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.