May 25, 2001 3:50 PM PDT

Industry ponders impact of TiVo patent

Competitors and industry watchers of the interactive television market aren't sure yet what to make of TiVo's new patent.

On Thursday, the digital video recording pioneer announced that it has received a broad patent from the U.S. Patent and Trademark Office for a "multimedia time warping system."

The patent, which TiVo filed for in 1998, is described in the application as an "invention allowing the user to store selected television broadcast programs while the user is simultaneously watching or reviewing another program."

News of the patent has competitors, such as ReplayTV and Microsoft, scratching their heads as they try to sort out how the patent will affect their businesses. But it's clear that Wall Street has taken a shine to the news.

TiVo's stock closed Wednesday at $4.94. It shot up 72 percent Thursday and another 32 percent Friday to close at $11.21.

Digital video recorders allow people to record TV programs onto a hard drive instead of onto a videocassette. With the service, viewers can pause live programming or replay it. TiVo's service also allows viewers to pick shows they want to watch in the future and record them. In addition, it learns the viewing habits of subscribers and records shows they might like.

TiVo competitors such as ReplayTV and Microsoft are circling the wagons as they wait for the first salvo from TiVo.

"As a matter of policy, Microsoft does not comment on the specific patents its competitors receive," the software giant said in a statement Friday. "However, Microsoft has an extensive portfolio of patents of its own that protects its products."

Steve Shannon, ReplayTV's vice president of marketing, said TiVo's patent covers "one method of performing digital video recording" and that ReplayTV's is "completely different."

But Barton said the patent, with its 61 claims, is "broad enough for people in the space or those looking to enter will have to look at it and talk to us."

Barton added that companies may be able to engineer around the patent, but it would be difficult to do so efficiently.

TiVo can now look to licensing fees from the patent as a new stream of revenue. Analysts, such as Sutro & Co.'s David Miller, were upbeat about the company's prospects.

"We believe this patent issuance is long overdue and will watch with eager anticipation as TiVo creates a separate revenue stream around licensing activities," Miller said in a research note Friday.

Another avenue for TiVo will be to take legal action against companies perceived as infringing on its patents. During a conference call Thursday, Chief Technology Officer Jim Barton said legal action may be one approach. But, he added, "we're interested in licensing because growing the market will take an effort by everyone working on it."

TiVo began beefing up its legal team last fall to protect its patents. The company already had two patents and has another 16 pending.

However, legal action would be a drain on funds, which the company is concerned with as it burns through its cash reserves. TiVo restructured its operations in early April to reduce is burn rate. In addition, the coffers of its competitors may be in better shape: Microsoft recently introduced UltimateTV, a revised interactive TV service that offers digital video recording.

America Online, a rival to Microsoft, is a major investor in TiVo. AOL invested $200 million in TiVo last June.

TiVo is facing its own legal problems. Media giant Gemstar-TV Guide International is suing the company for alleged patent infringement related to electronic program guides.

ReplayTV's Shannon noted that TiVo must be selective when it tests the patent.

"They should pick carefully who they want to slap," Shannon said. "They should try not to slap someone who will slap back."

Many of the early players, such as ReplayTV and Microsoft, have strong patents themselves, Shannon said. In addition, he said, TiVo might want to trade technologies with its competitors.

Shannon added that TiVo's patents will more likely affect the smaller latecomers to the digital video recording and interactive TV market that may not already have strong patents.

Along with TiVo, ReplayTV was one of the first to enter the digital video recording market. However, ReplayTV altered its strategy late last year to offer digital video recording to cable operators instead of consumers. Earlier this month, ReplayTV announced a five-year licensing agreement with set-top box maker Motorola.

 

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