NEW YORK (Reuters) - Dish Network and EchoStar Corp will pay TiVo Inc $500 million to settle a patent infringement lawsuit involving TiVo's video recording technology, putting an end to a long and costly legal battle.
TiVo's shares rose 5 percent and Dish shares soared 15 percent on Monday after the announcement.
Dish and EchoStar, both controlled by Charlie Ergen, will make an initial payment of $300 million to TiVo, with the remaining $200 million to be paid in six equal annual installments between 2012 and 2017, the companies said in a statement.
TiVo will license its technology to Dish and EchoStar, while EchoStar would license to TiVo certain DVR-related patents.
Revenue from the $500 million dollar payout "changes TiVo's earnings profile very substantially," Chief Executive Tom Rogers said in an interview. TiVo had previously been awarded $100 million in an earlier payment, bringing the total payout from the lawsuit to $600 million, TiVo said.
TiVo's annual revenue for its last fiscal year ended January 31, 2011, was about $168 million.
Rogers said Monday's agreement sets up the company well to succeed in pending patent infringement lawsuits with AT&T, Verizon and Microsoft.
"Everybody knows Charlie Ergen is about the toughest litigant around and the fact that he came to a half a billion (dollars) settlement should send signals to the rest of the industry," Rogers said.
Monday's settlement benefits all parties, said Kaufman Bros analyst Todd Mitchell.
"It's positive for Dish in the sense that they're done with this case and it's positive for TiVo because it will receive a lump sum of cash, which it needs to finance their business," Mitchell said.
Mitchell added that the payout would have "no significant impact" on Dish's cash balance. He said the amount was within his expectations, but acknowledged it was lower than what most Wall Street analysts had expected TiVo to receive.
The legal battle dates back to 2004, when TiVo accused satellite TV provider EchoStar's Dish Network of violating TiVo's patent for Time Warp software that allows users to record one TV program while watching another.
As part of the agreement, TiVo said it would help Dish promote the Blockbuster digital video service. Dish paid $320 million for Blockbuster in a bankruptcy auction in April. It also said Michael Kelly, an executive vice president at Dish, would become the president of Blockbuster.
On a conference call, Ergen told analysts the company was still evaluating whether to close Blockbuster's 1,700 stores, saying it depends largely on the deals it is able to strike with movie studios.
The Blockbuster deal was the latest in a spate of acquisitions spearheaded by Ergen. Earlier this year, Dish said it would expand its broadband spectrum by acquiring DBSD North American while Dish's sister company, EchoStar, said it would buy Hughes Communication, a satellite communications company.
Analysts quizzed Ergen on Monday's conference call about the buying spree, but the executive was vague, insisting he was employing a "Seinfeld strategy," or a plan that does not seem to make sense at first but that comes together later.
Seinfeld was a popular American television show that aired from 1989 to 1998 and starred comedian Jerry Seinfeld.
"I think that everything we do has a purpose, and we feel like it ultimately fits together," Ergen said.
One analyst said that investors should not be worried about how Dish handles its new assets, since they were affordable and offered the company some options beyond its satellite TV business.
"These deals were not expensive or involve huge amounts of capital, and Dish is clearly buying some flexibility and options here," said Collins Stewart analyst Thomas Eagan
The news came as Dish said it had doubled its quarterly profit due to subscriber numbers in the first quarter. Most analysts were expecting the company to lose subscribers. Its revenue increased 5.5 percent to $3.22 billion.
TiVo shares were up 5 percent at $10.05 and Dish shares were up 16.2 percent at $29.10 in afternoon trading.
Additional reporting by Yinka Adegoke in New York and Himank Sharma in Bangalore; Editing by Derek Caney and Maureen Bavdek