TiVo Records the End of Two Courtroom Dramas. Time to Buy, or Time to Panic?

TiVo (NASDAQ: TIVO  ) shares jumped 8.3% yesterday as the company settled its differences with Google (NASDAQ: GOOGL  ) , Arris (NASDAQ: ARRS  ) , and Time Warner Cable (NYSE: TWC  ) .

One analyst estimated that the settlement of TiVo's patent claims might amount to $939 million (because 68.3% of all estimates are pulled out of thin air). This deal, struck just weeks before the scheduled trial, would leave the door open for an even larger settlement with Cisco Systems (NASDAQ: CSCO  ) before that trial starts in 2014. The Cisco infringement was said to be worth "billions of dollars" to TiVo, according to pre-trial court filings.

And then the other shoe dropped. Trading of TiVo shares was halted in the pre-market hours, as the company presented the full news story in an SEC filing and press release. As it turns out, Cisco also settled on Thursday and TiVo has no more major court battles on the table. The lump-sum payment adds up to just $490 million, covering both the Cisco suit and the Motorola/Google/Arris/Time Warner Cable action. These are not the dollars investors were looking for.

When trading opened again, still in pre-market hours, TiVo shares plunged as much as 21%. The trend held after this morning's opening bell. Shares were down 18.2% two minutes after the market open, with more than twice TiVo's average daily volume already having changed hands.

It's not the enormous payday some investors may have hoped for. The one-time cash payment will be recognized in bits and pieces over the next five years in the Motorola-based case, and 10 years for the Cisco portion. Don't expect any additional royalty or license fee streams on top of this lump sum. This is why TiVo shares are falling through the basement floor today.

Being a TiVo shareholder myself, I don't see any reason to sell. In fact, it's a wonderful outcome.

Source: TiVo.

The twin settlement works out to $3.87 per TiVo share. Analyst firm MKM Partners recently said that share prices in early May only priced in about $3 of potential patent-case value. MKM wanted at least $1 billion and maybe as much as $2.3 billion out of Motorola and Cisco. On a massive deal (or judgment) like that, I proclaimed my intention to sell immediately to lock in my incredible and unsustainable profits.

The real settlement is a far more reasonable outcome. It's comparable to the $500 million TiVo collected from DISH Network two years ago, and about twice the size of the $250 million settlement over Verizon's (NYSE: VZ  ) FiOS service, with its far lower customer count. This is the right ballpark for what the patent settlements should be worth, and sets another correct precedent for the not-terribly high value of technology and business method patents. It's not the right way to get rich. I don't want to own a patent troll, and TiVo just stepped away from that horribly incorrect path.

It also frees up TiVo's resources to focus on what does matter, which is to rebuild the company in a more sustainable model. TiVo is already moving from making digital video recorder boxes to developing and licensing turn-key software and services for the digital millennium. The company has already scored royalty-bearing deals with several major cable and satellite companies. Getting the messy court cases out of the way and settled in full public view sets the stage for more productive deal-making discussions with holdouts.

The 15 minutes (or years) of DVR fame may soon be over, but the company has a plan for the next stage. The new TiVo wants to be the genius that ties today's fragmented entertainment experience together, giving consumers a simple way to find their favorite content no matter what hosting service it may come from. It's the media hub or clearinghouse to sit in between cable stations, Hulu, YouTube, HBO, and Netflix.

Oh, and TiVo also doubled the size of its share buyback program to $200 million, leaving more than $160 million of unused authorizations to exploit in the face of suddenly cheap share prices. That's enough to soak up about 11% of TiVo's float at post-drop prices, assuming that shares don't bounce back when investors and analysts digest the news properly.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 09, 2013, at 1:00 PM, will1946 wrote:

    Yes, to about everything you said. What puzzles me is that a stock can go down 19% after scoring a half billion dollar lawsuit win. It is really weird.

  • Report this Comment On June 11, 2013, at 2:03 PM, btrenda wrote:

    Financial bloggers, as usual, seem to be missing the point.

    Patent trolls are a real thing, but Tivo is not one of these. Patents exist for a reason-- to provide an incentive for people to develop new technology without fear that others will copy their idea, thus rendering the R&D expense a waste. A patent troll is someone who creates or buys a patent and then just sits on it (not developing an actual product) until they find someone they can sue for violating it. This doesn't provide any real value, and makes new products harder to build.

    Tivo, on the other hand, created a product that many, many people find invaluable, and patented it-- rightly so. Then other companies, who enjoyed an oligopoly on TV distribution, violated these patents, and absorbed much of Tivo's market potential. This is why Tivo sued. Nothing wrong with this.

    But Tivo has been poorly managed. Instead of extracting monetary damages for these patent violations, they should have used the threat of litigation, or even actual litigation, to cut distribution deals that would have ensured these cable and satellite companies used Tivo's software in their own DVR devices. Instead of getting a licensing fee, Tivo should have provided a free or low cost license in exchange for controlling the user experience across all DVR's (which they could have accomplished using their patents and the threat of litigation). This would have given Tivo a Google-like position in Television, i.e. a virtual monopoly on the way people interact with their TV content, and potentially a significant advertising business sitting on top of that. Also, this would have changed the underlying cost structure of Tivo's business, which would have moved from being a hardware manufacturer to being more of a media/ software/ advertising business. This business would have scaled well, and would have allowed for flexibility as the TV business morphs in the future.

    But instead, Tivo's management continued to tilt at the windmill of building hardware for a market that was already saturated with low cost DVR's, distributed and potentially subsidized by the cable and satellite companies. Selling a standalone product in this environment is not going to work. And as TV continues it's glacial but inevitable transition to digital delivery, Tivo's hardware will continue to become more and more irrelevant.

    I've been betting on Tivo's management to figure this out for a long time, making big bets and losing money basically every time Tivo failed to capitalize on the opportunities in front of its face. It has seemed obvious for the last ten years that this was the big opportunity for Tivo, but apparently not. Of course, the financial press only writes about subscriptions, expenses, and litigation, because well-- some people build companies and some people watch from the sidelines and write articles.

    Tivo's management missed a big opportunity to build a valuable business, and now sits on a pile of crap that will never be worth much, especially now that all the patent litigation is behind them and they now have zero leverage to get distribution deals done.

    Tivo, you're not a patent troll. You're just really bad at business.

    Motley Fool, you're not dumb. You just don't know anything about business.

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