Over 4 years in the making, Netflix (NFLX) digital video has finally found its way to TiVo (TIVO)!

After knocking around in the judicial system for several years, TiVo’s (TIVO) patent infringement case may finally see (some) closure. As EchoStar (SATS) & DISH’s (DISH) appeal will not be tackled by the Supreme Court, they’ve announced their intentions to pay TiVo the original $104 million award (including interest) shortly. Of course, this may just be the first installment… There’s potentially more cash at play, pending claims of continued infringement and the contempt hearing outcome.

EchoStar & DISH’s response:

Comcast’s (CMCSA) Fancast property has recently expanded from solely streaming (Hulu) web video, to offering Internet video downloads. Joining the likes of Amazon (AMZN) Unbox, CinemaNow, and Blockbuster (BBI), the Fancast Media Manager allows you to rent or purchase television and movie content for Windows PC viewing. Though playback is limited to Windows, the Fancast Store (Beta) supports web purchases from other operating systems, such as Mac OS X.

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TiVo (TIVO) held its quarterly call Wednesday and, while I don’t pretend to be a financial analyst, I’ll share my uninformed observations.

As TiVo sometimes does, the Investor Relations group began their earnings day by releasing a bit of fluff news to the press - I don’t know if this is designed to distract the market to soften the blow, juice the stock price, or what. Regardless, I didn’t bite.

TiVo’s (TIVO) not the only primary television add-on with web video intentions. Verizon (VZ) is currently beta testing web video on their set-top boxes and their initial marketing partners include Veoh, Blip.tv, Break.com, and YouTube. Unlike TiVo which taps directly into YouTube’s H.264 content, Verizon utilizes their Media Manager PC software as an intermediary. Sites are indexed on a regular basis and when a video is selected from the DVR, the PC software automatically transcodes and streams content on the fly.

In addition to serving up those large video aggregation sites, Media Manager software also facilitates shipping virtually any video podcast to your DVR. The functionality is similar to what TiVo provides today. However, from a conceptual and functional point of view Verizon’s solution looks like it’ll be more elegant - allowing you to add RSS subscriptions directly to Media Manager via web browser.

As many of you may know, I’m regular Starbucks (SBUX) patron. For me, “working from home” is a euphemism for plopping myself anywhere more comfortable than the soul-sucking florescent glow and countless unproductive meetings housed within the confines of a typical office environment.

I’ve been pestering one of my local haunt’s managers for details on when we’d finally see them implement free WiFi via AT&T (T) - both with anticipation and dread. I wouldn’t mind saving the $20/month spent on unlimited T-Mobile HotSpot access (backup for 3G card, especially in United airport terminals), but I wonder how much more crowded the already bursting-at-the-seams coffee shops will become.

Bear Stearns was out with a new report Friday suggesting DirecTV (DTV) may warm to the idea of renewing ties with TiVo (TIVO) under Liberty Media’s ownership (LINTA), leaving Murdoch’s NDS (NNDS) venture behind. Or perhaps choosing to upsell a TiVo solution.

We believe the new DTV management may be more amenable to renewing a relationship with TiVo. The TiVo HD-DVR offers several advantages over the NDS DVRs, including better user interface, wireless access can provide quasi-VOD service, ad revs would be incremental, and TiVo’s HD-DVR is already cheaper than NDS’ HD-DVR.

Chris Albrecht on NewTeeVee posted an interesting analysis a few weeks ago on Yahoo’s (YHOO) difficulty integrating its video properties and services on the Web. While Yahoo has re-launched its video section, it hasn’t managed to highlight all the things you can with video using Yahoo’s services. Specifically Albrecht points to the fact that there’s no link to Yahoo content that complements a movie trailer shown on the new video page, and the fact that there’s almost no reference (just a tiny link at the bottom) to Yahoo’s Jumpcut video editing application, which would dovetail nicely with the video-uploading app featured at the new Yahoo Video.

I’ve lost track of how many times ReplayTV has switched hands. And today they’ve ended up under DirecTV’s (DTV) wing for who knows what purpose. Replay had abandoned the hardware DVR market, though they still have subscribers (that we know), and they’ve been making a play for the PC software DVR market. A small fish in a small pond.

So far, this is all we know:

So did the Comcast (CMCSA) TiVo (TIVO) on Motorola (MOT) hardware publicly launch this week in New England (AP, Bloomberg, Reuters), or is this damage control? The email alert that media outlets received indicated something along the lines of:

A couple of things can now happen: 1) TiVo can appeal the decision through the appeals process of the Patent Office, then the federal court of appeals, and finally the Supreme Court; and/or 2) TiVo can work with the Patent Office examiner to modify the claims to make them acceptable to the Office. This second option is particularly valuable because two of TiVo’s claims (#1 and #32) form the basis of all the rejected claims.

TiVo earnings call release

Seeking Alpha transcript

So now that the financials are out of the way, let’s discuss TiVo’s upcoming product lineup.

The Company launched “Amazon Unbox on TiVo,” available to over 1.5 million broadband-ready TiVo boxes and offering subscribers a great way to find, download and watch on their televisions thousands of movies and TV shows available through Amazon Unbox.

In addition to prioritizing broadband features such as Amazon Unbox in the upcoming fiscal year as key DVR differentiators, Bear Stearns believes TiVo will unleash a marketing “blitz” in May preceding the Comcast (CMCSA) Motorola (MOT) TiVo rollout. And while they felt Denver might be the first market to receive this unit, they’re no longer as confident. Though they still expect a “late-spring” deployment… somewhere.

When Merchant & Gould attorneys were retained to provide an opinion regarding a patent over which litigation was pending, they had a conference call with litigation counsel from Morrison & Foerster. The only participants in the call were Merchant & Gould attorneys retained to provide advice on legal matters related to the pending litigation, and Morrison & Foerster counsel representing EchoStar in the litigation. [ … ] Document 88 was never communicated to EchoStar (in this form or orally), and it does not reference, describe, or disclose any communication with EchoStar.

EchoStar, then, appears to be taking the position that direct communication with the law firm they retained to represent them in the litigation is legally distinct from communication with EchoStar itself with respect to the that litigation. We doubt TiVo’s (TIVO) attorneys will see it the same way. We wonder if the judge will.

ORDER DIRECTING that Echostar and Homer Knearl SHOW CAUSE by 3/30/07, why the following documents should not be produced: MG PRIV 16, 27, 32-35, 37, 55, 68, 69, 72, 73, 75, 85, 88, 95, 105, 177, 179, 180, 271, 274, 276, 287, 291, and 305. Echostar or Knearl must state in detail for each document the privilege asserted, and the grounds for that privilege, including a description of the identity and role of each author, recipient, cc recipient, or bcc recipient of the document. IT IS FURTHER ORDERED that if any portion of the above documents was submitted to the Court in redacted form, unredacted copies be provided for in camera review by 3/30/07. These documents shall be marked in such a way as to allow the Court to discern easily which portions were previously redacted. Signed by Judge William S. Duffey Jr. on 3/22/07. (kt) (Entered: 03/22/2007)

The clarified rules of discovery issued by a U.S. Court of Appeals last year for this situation require documents to be produced to TiVo (TIVO) only if they were communicated by the law firm to the client (i.e., Echostar (DISH)), or if they reference a communication with the client.

At the end of Q3, TiVo had 138,000 fully-amortized Lifetime subscribers. At the end of Q4, that number was 166,000. But in the four-year-ago period, TiVo added approximately 50,000 Lifetime subscribers, meaning that without churn, the fully amortized number would have been 188,000. Thus, there were about 22,000 lifetime subscriptions cancelled in Q4. This result requires a significant bump in both bulk and ongoing churn of the Lifetime subscribers (we’re using 27% and 2.2%, but the numbers are interdependent and could therefore be any combination that results in the same total churn).

That leaves 40,000 cancellations of recurring subscribers which, when divided by about 955,000 (average) recurring subs during the quarter, gives us a churn of recurring subscribers of about 1.4%/month – nearly unchanged from the average over the trailing twelve month period.

Deployment

The Comcast-Moto-TiVo is already in trials, and deployment is slated to begin this Spring. The roll-out will be managed by Comcast — they set the schedule within their various markets. (As in: not all regions are likely to get the TiVo option simultaneously.) While there are no details on monthly pricing yet (which I assume could vary by market), David tells me Comcast really wants to get this product out there and is planning to charge only a “modest fee.” (I’ll take a stab and guess a $5 - $10 increase over current DVR rental fees would cover licensing and allow Comcast to make a few bucks without sticker shocking customers.)

So here’s how it works: you let Comcast know you want to upgrade your DVR to TiVo, they flip a switch, and your current Motorola box (6412 or 3412) downloads the software. Reboot, and voilà you have TiVo — with prior settings and recordings preserved and no truck roll required. Your current crappy Comcast remote will control the TiVo software, but as part of the upgrade Comcast will mail you a custom Comcast TiVo remote (with new OnDemand, A, B, C, and D buttons).

In Part 1 and Part 2 we focused on TiVo’s biggest business: their subscription recording service. But TiVo has other irons in the fire, and to get a value for the company, we need to consider those items, as well. But first, we’ll finalize our look at subscribers.

In Part 1, we found the NPV of TiVo’s current subscriber base [including a conservative estimate of the value of the DirecTiVo subscribers], but we have since discovered a flaw in our calculation of TiVo’s advertising revenue [that has also led us to some new insights – but we’ll get to those another day], which we have recomputed as an average $0.47 per month per subscriber for the past twelve months – less that we originally estimated. But we were also able to get a more accurate estimate of the cash flow of monthly and lifetime subscribers, and so we will use those numbers, too. These improvements have caused us to revise our estimate of the NPV of TiVo’s subscriber base to $407 million – somewhat higher than the $388 million we found before.