Tivo's $500 million patent settlement with Echostar, Dish disappoints some

Tivo, Dish Network and EchoStar said Monday that the companies settled all ongoing patent litigation for $500 million.

Simply put, Tivo gets a nice win---an initial payment of $300 million and then another $200 million spread out in six installments from 2012 to 2017.

Among the moving parts:

• Tivo granted Dish a license for its Time Warp patents.
• Tivo granted EchoStar a license for the Time Warp patent.
• EchoStar granted Tivo a license for DVR patents for co-branded, Tivo branded and ingredient branded products.
• Tivo will help Dish promote the Blockbuster digital video service.

While this settlement puts patent litigation to bed, Tivo's business model is still in question. When will Tivo make money? Tivo has lost money every fiscal year except for 2009 when results were padded a damages award from Echostar. One big issue in the Tivo settlement is what's missing: A future licensing revenue stream.

Evercore analyst Alan Gould noted that "it does not appear that there will be any future license fees."

Gould said in a research note:

Our “full win” scenario assumed $700 million of past damages and an net present value of $1.4 billion for future royalties assuming $2 per DVR per month through mid-July, and the expiration of the “389” patent. That scenario implied a $20 per share price for TiVo. Our $14 price target assumed a 60% discount on those fees. We are lowering our price target to $11 per share based on the lower fees than even our discounted amount.

Indeed, the reaction to Tivo's settlement with Echostar and Dish is fairly weak. Shares are up about 6 percent to $10.20 in early trading.