Dish Saves 14% of its Value, and Perhaps More, By Settling Patent Dispute

Dish Network (NASDAQ:DISH) recently settled its long-standing patent dispute with TiVo and released its Q1 2011 earnings, beating analyst estimates. Based on the company’s improved financial performance in the recent quarter, we have upgraded our price estimate for Dish Network. Below we take a closer look at the dispute settlement. The company competes with satellite-TV providers like DirecTV (NASDAQ:DTV), cable service providers like Comcast (NASDAQ:CMCSA) and Time Warner Cable (NYSE:TWC) and telecoms like AT&T (NYSE:T) and Verizon (NYSE:VZ).

Our price estimate for Dish Network stands at $31.48, implying a premium of roughly 10% to market price.

TiVo Dispute Settled – Removes Uncertainty Around DVR Business

Dish Network, along with EchoStar Corp., will reportedly pay $500 million to TiVo to clear the pending litigation. As a result, Dish and EchoStar will still be permitted to use some TiVo patents for video recording. ^[1]

This should add some confidence for Dish Network investors. The TiVo dispute has played a major role in suppressing Dish Network’s stock price  for some time, although we’ve consistently maintained our price estimate well above market price. It’s possible that investors were unsure about the continuity of Dish Network’s DVR business given the ongoing patent dispute with TiVo. Ultimately, the dispute settled and the market rewarded Dish Network’s stock.

We previously published a detailed analysis about how Dish Network could have been impacted if it had lost its case against TiVo. According to our analysis, Dish might’ve saved as much as 14% of its value by settling the lawsuit, and perhaps more if we account for possible subscriber defections.

With Dish Network reporting improved financial performance in Q1 2011, the legal settlement is like icing on the cake. We estimate that the DVR business constitutes about 14% of Dish Network’s equity value and it looks like the metrics driving this value will proceed unharmed. The settlement has removed looming uncertainties around the possibility of a steep dip in DVR gross margins if Dish had to pay licensing fees to TiVo or around additional capital expenditures that Dish would have incurred if it had decided to buy all new DVRs.

See our full analysis for Dish Network’s stock here

1. Dish Shares Rise Most Since 2008 After Settling TiVo Lawsuit, Bloomberg Businessweek, May 2 2011 [↩]