DVR co. wins EchoStar suit

This article was updated on April 16, 2006.

NEW YORK — Just when it looked like cable operators and satcasters would beat TiVo at its own game, TiVo has hit pause.

In a ruling in a Texas courthouse late last week, the company won a $73 million judgment against EchoStar when a jury found that the satellite broadcaster had infringed on TiVo’s “time warp patent.”

More important, TiVo won a fundamental precedent: that the company’s method of using a hard drive to store many hours of recorded TV, and pause and rewind live TV, is something it legally owns and can even be paid royalties for.

EchoStar says it will appeal the ruling, and there is little chance TiVo will see any money from the judgment in the near future.

But even if EchoStar successfully challenges the judgment or drags it out on appeal, the balance of power has shifted. With the ruling, cable operators and other DVR providers are now forced to rethink their strategy. They’ll either have to dramatically change their digital-recording products, ratchet down the marketing or cut a deal with TiVo.

For TiVo, meanwhile, the win also could prompt a U-turn. Over the last year, the company had been evolving from being a hardware vendor to becoming a services provider. The company, best-known for giving Madison Avenue fits thanks to it’s machine’s ability to zap out advertising, even began selling embedded ads, in partnerships with Comcast and DirecTV.

But with the court verdict, TiVo is now in a stronger position than ever to focus on the recording biz. Already the company has several promising new recording initiatives, such as a deal with Verizon that allows users of both services to program TiVo via their mobile phones. Initiative is set to launch this summer.

And while the suit does not immediately grant an injunction, TiVo indicated in a statement that it will seek one against EchoStar.

Nor is it simply TiVo that could be affected. Cable operators and satcasters have staked their digital hopes — and in some cases their battle against telco TV offerings — on their ability to offer television-recording services.

If such services become trickier, traditional TV companies could find it harder to woo customers. That’s likely one reason why EchoStar has so fiercely contested the suit; after all, the company, with more than $1 billion in cash reserves, could easily absorb a $73 million hit.

On Friday, EchoStar even released a statement saying it would continue to fight and that it believes the ruling will be reversed.

One big legal question yet to be resolved is what royalties EchoStar must pay to TiVo for new systems it sells after the verdict, a murky enough question that the company may simply cut back on marketing new recording devices.

The company has more than 4 million DVR users, most of whom signed up for the service free as Echostar subscribers.

The suit doesn’t totally free up TiVo. Earlier last week, the company entered a sort of non-aggression pact with DirecTV, its largest source of customers. TiVo agreed not to sue DirecTV over patents in what was essentially a trade for DirectTV continuing to support the device.

The agreement gives DirectTV an advantage in marketing its own DVRs at a time when EchoStar faces uncertainty. In retrospect, it looks unnecessarily conservative for TiVo, as it ties the company’s hands and forces it to continue a deal that, while it has brought in customers, hasn’t always offered the widest margins.

Still, TiVo’s tactics have been praised by experts, who said the company had made the right strategic calls, even down to its choice of venue; Texas is thought to draw from a jury pool sympathetic to an underdog.

And others lauded the company for signing a deal with the more popular DirecTV but legally targeting the weaker Echostar.

In other TiVo news, the company announced last week that finance veep StuartWest will take over as acting CFO from outgoing exec Dave Courtney.

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