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.
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 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.