Good news for Dish boosts earnings

Kelly takes Blockbuster reins, TiVo settlement pans out

Wall Street rewarded Dish Network topper Charlie Ergen for eliminating a lot of overhang at the satcaster on Monday by boosting the company’s shares by nearly $4 to $29.

First, Dish announced it had reached a settlement with TiVo, ending six years of patent litigation. Dish agreed to pay TiVo $500 million: an initial payment of $300 million and six additional payments for the remainder between 2012 and 2017.

As part of the settlement, Dish, along with Ergen’s other company, EchoStar, and TiVo agreed to share DVR-related patent licenses with each other. TiVo also agreed to help Dish promote its newest acquisition, the Blockbuster video chain.

Wall Street had worried that the lawsuit could force Dish to disable millions of DVRs, resulting in an exodus of subscribers who enjoy the playback service.

Ergen said the decision to settle followed a federal appeals court ruling two weeks ago that required Dish and EchoStar to disable some DVRs. The settlement voids that order. “It got to a point that there wasn’t anything to argue about any more,” he added.

He said that it was always a question as to whether the U.S. would get Osama bin Laden before TiVo and Dish actually resolved their differences. “We signed this deal on Saturday so we beat them by a day,” Ergen said.

The settlement “sends a clear message about the strength and enforceability of our Time Warp patent to others in the industry, especially AT&T, Microsoft and Verizon, who are currently involved with pending litigation,” TiVo CEO Tom Rogers said.

On Monday Dish reported first-quarter results that exceeded Wall Street’s expectations. With Dish losing 156,000 subscribers in the fourth quarter and raising prices $5 across the board, the Street worried sub losses would gain momentum.

But Dish said it added 58,000 subs in the first quarter, bringing its total to 14.2 million. What’s more, revenue gains of 5.5% in the period to $3.22 billion beat Street estimates, while net profits more than doubled to $549 million.

The Street has been mystified by Ergen’s strategy for Blockbuster. Earlier last month, Dish surprised the industry when it emerged as the winner of a bankruptcy auction for the vid chain with an offer of $320 million. The deal closed last week.

For the first time, Ergen offered some insights, though not in great detail, about why Blockbuster makes sense for Dish.

While conceding that streaming service Netflix’s lead in the sector may be “insurmountable,” Ergen said Blockbuster under Dish could provide Hollywood studios with a better financial model. Ergen said much of Dish’s strategy for Blockbuster will be determined by the extent to which the studios believe there is still a business in physical DVDs.

Ergen named one of his deputies, Michael Kelly, as prexy of Blockbuster, calling him the visionary behind the acquisition. “His leadership will be key to returning Blockbuster to profitability and improving the experience we offer to consumers across the U.S. and globally,” Ergen said.

Kelly had been an exec VP of Dish’s commercial services division. In 2000, he sold his Kelly Broadcasting Systems, which distributed international radio and TV programs in the U.S., to Dish.

Kelly said on Monday that Blockbuster will allow Dish “to break into the digital business heavier. This could make sense for us in the long term.”

Ergen conceded that the strategy for Blockbuster may still seem murky to some, going as far as to compare it to a “Seinfeld” episode. “Wait and see, it will all come together in the last few minutes. I know ‘Seinfeld’ was a show about nothing, and I am sure our skeptics will say our strategy is about nothing. But everything we do has a purpose.”

Blockbuster still operates 1,700 stores. How many of those will close depends on the studios and their desire to be in the DVD business, Ergen said.

In assessing the day for Dish, Sanford Bernstein analyst Craig Moffett wrote in a note: “To paraphrase Mark Twain, reports of Dish Network’s demise were greatly exaggerated.”