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Talk to Matthew Zinn, and there will come a point — finally — when he’ll stop bragging about his TiVo. In that respect Zinn, who is TiVo Inc.’s general counsel, is like a lot of other TiVo evangelists, eager to spread the word about the technological marvel, a nondescript black box that hooks up to the television and lets users pause live programming, record a whole season of “The West Wing” by pressing one button, and even watch the first 10 minutes of “The Sopranos” while recording the last ten. TiVo lets users tackle television in their own way. If only Zinn could tackle TiVo’s legal issues his way. The eye-popping technology has made TiVo’s name — and now it brings it peril. Faced with heated competition, TiVo’s betting big on a high-risk patent infringement suit and some high-stakes — and, right now, highly speculative — licensing deals. At the same time, TiVo risks the wrath of other patent owners who have staked a claim to TiVo territory, as well as content providers who may hamper its ability to innovate and compete. How these matters turn out won’t just make or break TiVo’s bottom line — they will most likely make or break TiVo. “We’re a little company caught between cable and satellite companies on one hand, and studios and other content providers on the other,” says Zinn, 39. “We’re in the crosshairs.” One thing is certain: digital video recorders like TiVo are hot. And they’re only getting hotter. In 2003, 3.2 million households in the United States had one, and by 2008 that figure is expected to hit 34 million, according to the market research firm IDC. TiVo, which was founded in 1997 in Alviso, Calif., introduced the first DVR, and its newest products are widely regarded as best-of-breed. But other DVRs — cheaper, less powerful systems offered by cable and satellite providers — are making inroads on TiVo’s territory. Worse, the publicly owned, 350-employee company has yet to turn a profit, losing $32 million last year. Driving up earnings means driving up its customer base, and one way to do that, TiVo has recently decided, is to drive all those generic DVRs off the air. In January, TiVo began getting tough with its patent portfolio, suing EchoStar Communications Corp., the parent company of satellite TV provider Dish Network. EchoStar wasn’t a particularly surprising target. The company has had great success with the less flashy DVR it offers its subscribers, capturing 36 percent of the market by the end of 2003 to TiVo’s 39 percent, according to IDC. It had also been one of the many satellite and cable companies to whom TiVo had unsuccessfully pitched a license. “We had been in negotiations with them,” Zinn says. “It became clear to us that they were not interested in licensing our technology.” TiVo, represented by Irell & Manella’s Morgan Chu, claims that EchoStar infringes TiVo’s 2001 MultiMedia Timewarping System patent, which covers, among other things, the technology that allows DVRs to play back the start of a program while recording the end. (EchoStar, represented by Morrison & Foerster’s Rachel Krevans and Harold McElhinny, argues that it doesn’t infringe the patent.) While Zinn won’t say what — if any — pay television providers may be next, TiVo’s chief financial officer, David Courtney, told analysts in March that the company expects expenses to rise in 2004 due to the EchoStar litigation and other potential suits. There could be a problem with this litigation strategy: TiVo’s patents on manipulating television — it has nine U.S. patents on the technology, as well as eight design patents — are part ace-up-the-sleeve, part Pandora’s box. TiVo may have a rough time winning on the core TimeWarp patent. “TiVo’s problem is that it is not a terribly well written patent; it’s very narrow and very easy to get around,” says Scott Harris, a partner at Fish & Richardson who represents a company that is thinking about getting in on TiVo’s space. “You change one thing very slightly, and you’re OK,” he says. Kirk Wong wrote the TimeWarp patent when he was an associate at the Glenn Patent Group, right after he left his in-house position at TiVo. Today, Wong is an associate at San Jose, Calif.’s Hickman Palermo Truong & Becker and still works with the company. He would not comment, citing the EchoStar litigation. Making matters even dicier: TiVo is bringing an infringement suit in an area that has never been particularly friendly to plaintiffs. Indeed, suing on interactive television patents has historically been about as effective as betting on the Cubs in a pennant race. Gemstar-TV Guide International Inc. brought, and lost, several suits that claimed infringement of its interactive programming guides. In 2003, it settled a suit with TiVo, which now licenses Gemstar’s patent. Meanwhile, TiVo itself has been a target for infringement suits. Pause Technology Inc. sued TiVo in 2001 over a patent for pausing live television. TiVo prevailed on summary judgment in February, but it’s not quite out of jeopardy. At least seven patents owned by various companies cover pausing live television — many of them have yet to be commercialized, let alone litigated. TiVo has been talking up its new hard line: In a press release announcing the EchoStar suit, TiVo chairman and chief executive Mike Ramsay said that “as the DVR category grows, we will be aggressive in protecting” the patent portfolio. But litigation is clearly a last-ditch resort. For one thing, licensing talks are ongoing with many of the same providers that are rolling out generic, non-TiVo DVRs. For TiVo, licensing is crucial. The company makes its money on the TiVo service, which it sells for $12.95 per month (or for a one-time charge of $299). Its strategy is to pull in subscribers, either by partnering with consumer electronics manufacturers who will sell TiVo boxes under their own names, or with cable or satellite providers that put TiVo technology into their own set-top boxes. Yet licensing has never been easy for TiVo. When Zinn arrived in 2000, dealmaking was done the traditional dot-com way: haphazardly. “We had fewer deals back then, and everyone in the company was involved in every deal,” Zinn says. TiVo’s earliest deals — with hardware manufacturers Sony Corp. and Koninklijke Philips Electronics N.V. — were unhappy, short-lived affairs. The companies could never agree on price points or production rates, and the resulting product shortages did little to boost subscriptions. “Those deals, frankly, weren’t as well done as the ones we do today,” says Zinn. Indeed, the Sony and Philips deals proved such a sour experience that TiVo eventually began making its own hardware. In October 2001 TiVo injected some order into the chaos, forming a licensing business unit, now numbering five people, under TiVo vice president Jeff Klugman. The licensing group negotiates the deals, relying on the legal department to write them up. Zinn, however, had no plans to sit on the sidelines. He hired Max Ochoa, an associate from Cooley Godward, to work exclusively on IP licensing matters. Zinn put Ochoa’s desk right in the middle of the licensing group. “I like to embed people with the business unit they support,” Zinn says. “You sit there, and you tend to sit in on conversations. You learn a lot more and can weigh in on the deal because you’re part of a tighter team.” It was after the licensing group took shape that TiVo finally struck partnership gold. In 2002 the company renegotiated a 3-year-old deal with DirecTV, the largest provider of direct broadcast satellite television in the U.S. Under the new arrangement, DirecTV took total responsibility for customer acquisition and support, and TiVo’s subscriber numbers started rising. Of the 708,000 users who signed up for TiVo service in 2003, 448,000 came from DirecTV. In 2004, TiVo estimates that 1 million of 1.5 million new subscribers will come from DirecTV. A major reason for the growth has been DirecTV’s lowball pricing, offering its subscribers a TiVo box for $99 and monthly TiVo service for just $4.99. DirecTV struck a hard bargain. TiVo has disclosed that its monthly net per DirecTV subscriber is just $1.35 — compared to $5.60 for the stand-alone subscriber. The bigger problem, however, is the very success of the partnership. With two-thirds of its new subscribers coming from DirecTV, TiVo would take an enormous hit if it lost the partnership — and that’s not out of the question. Last year, News Corp. bought 34 percent of DirecTV’s parent, Hughes Electronics. News Corp. owns another company, NDS Group, that makes DVRs. TiVo’s licensing agreement with DirecTV is nonexclusive, and there’s been plenty of speculation about what DirecTV’s new management plans to do. “It wouldn’t surprise me if NDS has a role,” Ramsay said at the March analyst meeting. The uncertainty of the DirecTV deal has made it even more important for TiVo to woo cable licensees. But here TiVo keeps hitting a wall. Zinn says discussions are ongoing with several cable companies. The problem, he adds, is that “they don’t tend to allow their vendors to make much money. They want full control over everything. They’re loath to let you make a margin.” Zinn should know. Before coming to TiVo, he spent two years as a senior attorney at MediaOne Group, three years as a corporate counsel at Continental Cablevision, and two years representing cable companies as an associate at Cole, Raywid & Braverman in Washington, D.C. Licensing fees aren’t the only sticking point. Cable companies also like pilot projects, and TiVo wants a full-scale deployment. In the meantime, a growing number of cable companies are going their own way. Last year, Time Warner Cable rolled out its own DVR service. Comcast, the largest cable company in the country, has announced that it will launch a non-TiVo DVR service in 2004. Zinn is optimistic that these rollouts won’t foreclose a later deal with TiVo: “They may be starting out with a low level of product, but they can do a deal with TiVo for higher-level functionality. No one here is throwing in the towel.” But not everyone shares Zinn’s confidence. “The pay-TV operators have to wonder what the value is of having a name-brand DVR,” says IDC analyst Greg Ireland. “EchoStar hit 1 million subscribers before TiVo did.” TiVo’s strategy is to bolster its negotiating position through innovation — to bootstrap so many new tricks to its service that cable customers won’t settle for the DVRs offered by their providers. New patents written by Hickman Palermo — more than 100 of them — are pending on all sorts of bells and whistles. Last year, TiVo launched a $99 service that enables users to stream content from one TiVo in the house to another. It’s gearing up to release TiVo to Go, which will allow programs to be streamed to a PC, where they can be viewed or burned to a DVD. Finally, TiVo has started integrating its service with a new crop of DVD recorders — an electronics segment expected to explode in the coming years. Pioneer Corp., Toshiba Corp., and Humax Co. Ltd. have already taken licenses. Here, too, there are caveats. The patents that TiVo has pending, Zinn concedes, will be very narrow — “assuming,” Zinn says, “that we’re even able to get these patents.” That will make enforcement hard. A bigger problem, perhaps, may come from copyright owners. With every trick that gives TiVo a new way to copy — and share — a pristine digital version of a copyrighted program, the company faces the wrath of content providers. When SonicBLUE tried to outfeature the competition by giving its ReplayTV DVR a way to skip commercials, practically the entire entertainment industry came after it, leading to 2 1/2 years of litigation that eventually bankrupted the company. “TiVo has always been more circumspect than ReplayTV, but features like sharing content between TiVos or between a TiVo and a PC could cause problems,” says Jonathan Zittrain, co-director of Harvard Law School’s Berkman Center for Internet and Society. Among copyright experts there are rumblings that the old VCR fair use case law won’t long apply to a souped-up DVR, where functionality is controlled by software and firmware that can easily be modified. “You can see TiVo running into a Napster problem,” says Zittrain, with the basic time-shifting capabilities allowed but the fancy program-sharing features prohibited, leaving TiVo not much more than a generic DVR. For Zinn, the problem is how to innovate enough to woo customers and licensees without innovating so much that content providers come down on TiVo. “How do you give consumers more flexibility without infringing on copyrights?” he asks. Zinn may have plenty of programming on his home TiVo — but he’s got plenty of questions to keep him up at night, too.

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