TiVo, DirecTV Kiss and Make Up for High-Definition DVR

TiVo Inc. said Wednesday it will launch a new high-definition digital video recorder under an extended agreement with DirecTV Group Inc., reigniting a once-cooling relationship.

The new development deal extends the companies' agreement by five years to Feb. 15, 2015, and calls for satellite television provider DirecTV to market TiVo's DVR products to new customers for the first time since DirecTV began using a rival DVR.

The partnership helps TiVo, a pioneer in DVRs, gain access to DirecTV's HD market. High definition is a key growth area for TiVo because it generally makes more per unit sold than with standard definition recorders.

TiVo shares gained 24 cents, or nearly 3 percent, to close at $8.75 in trading Wednesday, while shares in Dish held steady at $28.33.

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DirecTV and TiVo began working together in 2000 when DirecTV first offered DVRs with TiVo service to its customers.

But over time the relationship became muddled, with DirecTV using DVR technology from NDS Group PLC., a unit of Rupert Murdoch's News Corp., which is a former DirecTV shareholder. Late last year DirecTV extended its contract with NDS to 2013.

DirecTV has continued to support TiVo service for existing customers, but the subscription base has shrunk as boxes break and as subscribers leave or upgrade to HD service.

With the new TiVo deal, TiVo gets a chance to serve DirecTV's HD customers.

El Segundo, Calif.-based DirecTV said it will still offer its own set-top boxes to customers, but the new TiVo box will be an additional option.

This could boost Alviso, Calif.-based TiVo, whose subscriber base has been dropping steadily due to increased competition from generic recorders from cable and satellite operators.

TiVo, which also has distribution deals with cable operators Comcast Corp. and Cox Communications Inc., had 3.6 million subscribers at the end of the second quarter compared with 4.2 million a year earlier.

The new TiVo-DirecTV DVR is expected to be available mid- to late 2009 and will support both companies' features and services. Pricing for the high-definition TiVo-DirecTV product has yet to be determined, according to the companies.

However, DirecTV will pay a "substantially higher" monthly fee for homes that use the new TiVo-DirecTV HD DVR than it pays for older TiVo-DirecTV DVRs, according to a filing with the Securities and Exchange Commission.

The deal also gives DirecTV the option to extend the agreement for another three years to February 2018.

Further financial specifics were not disclosed.

Speaking at the Kaufman Brothers 11th Annual Investor Conference in New York, TiVo Chief Executive and President Tom Rogers said the two companies are looking forward to their renewed partnership.

"Both DirecTV and ourselves are excited that a marriage that once worked extremely well together now has a second shot," he said.

Getting into the high-definition market should benefit TiVo, as DirecTV subscribers have been moving to HD but have not had a TiVo option available to them, Citi Investment Research analyst Tony Wible wrote in a client note.

"The new deal should help protect the roughly $22 million of high-margin revenue TiVo receives from DirecTV today," he added.

BMO Capital Markets analyst Leland Westerfield said this agreement "sets the stage for TiVo to strike a spate of such marketing agreements with other pay-TV operators when (and if) the matter of TiVo vs. EchoStar Corp. is finally resolved."

In January, the U.S. Court of Appeals for the Federal Circuit agreed that DVRs distributed by Englewood, Colo.-based Dish Network Corp., which was spun off in January from EchoStar Communications Corp., violated the software elements of TiVo's patent.

The ruling set a legal precedent that gives TiVo leverage as it negotiates partnerships with other satellite and cable TV providers who want to use DVR technology.

Westerfield noted that the new DirecTV deal comes one day ahead of the contempt of court hearing in that case and adds pressure to Dish Networks. The DirecTV deal is non-exclusive for both parties — meaning that TiVo can sign with Dish Networks, too.