DISH Network: DVR Shutdown Danger Looms Ahead

Danger lurks dead ahead for Dish Networks (DISH).

As Bernstein Research analyst Craig Moffett noted this morning, U.S. District Court Judge David Folsom yesterday extended a stay of the DVR injunction issued against the company in connection with the TiVo (TIVO) patent infringement case until April 30. The extension, he notes, was in response to a March 9 emergency motion for an expedited evaluation of the latest DISH software workaround of the TiVo patents.? Moffett says the judge effectively declined to review the software, claiming he was simply too busy with other cases.

Moffett says DISH is “now negotiating with a gun to its head.” He says it would now appear to be impossible for the company to have a non-infringing workaround approved by April 30, Dish’s hopes rest on a motion for a rehearing of the Appeals Court decision which went against DISH.

The analyst notes that the company’s rhetoric about the importance of the case has “escalated dramatically” in recent court filings. In one recent case, he reports, Dish said “if the court’s injunction goes into effect, it would have disastrous consequences” for the company. “Hundreds of thousands, if not millions, of subscribers would likely disconnect service within days.”

If DISH fails to reach a settlement with TiVo by April 30, Moffett says, they would have two options. One, disable the offending boxes, which would not go over well with the company’s subscribers. Or two, it could continue to willfully infringe; in that scenario, there is a rish the judge could impost additional sanctions and/or disgorgement of profits.

“What seems most misunderstood by investors is that even if they did have a software workaround, it is likely that DISH would still have to disable the infringing set-top boxes on April 30,” he writes. “The injunction orders a shutdown, not a softwa! re solut ion…It would appear that Dish’s attempt to find a workaround are largely irrelevant to the $3 billion question of whether it has to shut down existing infringing boxes.”

Moffett concludes that there is “enormous risk” is DISH shares, which he rates Market Perform.

DISH is up a penny at $20.45.

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