TiVo 2003 Annual Report Download - page 35

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deliberately infringed this patent by making, selling, offering to sell, and using within the United States the TiVo-enabled DVR. Pause Technology seeks
unspecified monetary damages as well as an injunction against our operations. It also seeks attorneys' fees and costs. On February 6, 2004, we obtained a
favorable summary judgment ruling in the case filed against us in 2001 by Pause Technology LLC in the United States District Court for the District of
Massachusetts. The court ruled that our software versions 2.0 and above do not infringe Pause's patent, and accordingly has ordered that judgment be entered
in our favor. On March 3, 2004, Pause Technology filed a notice of appeal to the United States Court of Appeal for the Federal Circuit, appealing the
February 6, 2004 summary judgment ruling in favor of TiVo. We are incurring expenses in connection with this litigation, which may become material, and in
the event there is an adverse outcome, our business could be harmed.
On February 5, 2002, Sony Corporation notified us that Command Audio Corporation had filed a complaint against Sony Electronics, Inc. on February
2, 2002 in the U.S. District Court for the Northern District of California. The complaint alleges that, in connection with its sale of digital video recorders and
other products, Sony infringes upon two patents owned by Command Audio (U.S. Patent Nos. 5,590,195 ("Information Dissemination Using Various
Transmission Modes") and 6,330,334 ("Method and System for Information Dissemination Using Television Signals"). The complaint seeks injunctive relief,
compensatory and treble damages and Command Audio's costs and expenses, including reasonable attorneys' fees. Under the terms of our agreement with
Sony governing the distribution of certain DVRs that enable the TiVo service, we are required to indemnify Sony against any and all claims, damages,
liabilities, costs, and expenses relating to claims that our technology infringes upon intellectual property rights owned by third parties. We believe Sony has
meritorious defenses against this lawsuit; however, due to our indemnification obligations, we are incurring material expenses in connection with this
litigation. Since February 2002, we have incurred $4.2 million legal expenses. The outcome of this matter or range of potential losses is currently not
determinable. If Sony were to lose this lawsuit, our business could be harmed.
In addition, we are aware that some media companies may attempt to form organizations to develop standards and practices in the digital video recorder
industry. These organizations or individual media companies may attempt to require companies in the digital video recorder industry to obtain copyright or
other licenses. Lawsuits or other actions taken by these types of organizations or companies could make it more difficult for us to introduce new services,
delay widespread consumer acceptance of our products and services, restrict our use of some television content, increase our costs, and adversely affect our
business.
We are highly dependent on our relationship with DIRECTV for subscription growth.
Our relationship with DIRECTV could be affected in the future by News Corp.'s acquisition of The DIRECTV Group. On December 22, 2003, News
Corp. acquired General Motors 19.8% economic interest in Hughes, subsequently renamed The DIRECTV Group. Simultaneously, News Corp. acquired an
additional 14.2% of The DIRECTV Group for a total of 34% of its outstanding stock. It is possible that DIRECTV under News Corp. could seek to transition
to an alternative DVR technology platform, such as that created by NDS, which is majority owned by News Corp. It is also possible News Corp. may slow the
pace of DVR deployment by DIRECTV in an effort to protect its content businesses from perceived threats posed by DVRs.
If our current agreement with DIRECTV expires without being renewed, amended, or replaced, our business could be harmed. A significant number of
our new and existing TiVo service subscriptions are DIRECTV customers with TiVo. Our current agreement with DIRECTV does not expire until February
2007. Neither TiVo nor DIRECTV will have any further obligations to each other, if our current agreement with DIRECTV expires without being renewed,
amended, or replaced. While DIRECTV would have the right to continue to service existing DIRECTV receivers with TiVo without payment to TiVo, it
would not have the right to add new DIRECTV customers with TiVo. And while TiVo would no longer be able to generate additional revenue from the then-
current DIRECTV customers with TiVo, TiVo would have no further obligation to provide upgrades, fixes, new features, or software support. DIRECTV,
however, also has the option under our current agreement to buy a royalty-bearing software and technology license from TiVo. This license would grant
DIRECTV access to our source code and technology to make, modify (with certain exceptions), sell, and distribute DIRECTV receivers with TiVo to add new
subscribers after the expiration of our current agreement.
Our limited operating history may make it difficult for us or investors to evaluate trends and other factors that affect our business.
We were incorporated in August 1997 and we have been providing subscription services only since March 31, 1999. Prior to that time, our operations
consisted primarily of research and development efforts. To date, only a limited number of DVRs have been sold and we have obtained only a limited number
of subscriptions to the TiVo service.
As a result of our limited operating history, our historical financial and operating information is of limited value in evaluating our future operating
results. It may be difficult to predict accurately our future revenues, costs of
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