Rovi Restarting Licensing Talks with Netflix Following ITC Ruling

Rovi sued Netflix in U.S. District Court, San Jose, Calif., in 2012 along with LG Electronics, Mitsubishi, Roku and Vizio, claiming the companies violated seven patents, including those covering parental control technology, a client-server-based interactive program guide for TVs and a method for providing personalized viewing recommendations. Rovi has since reached settlements with LG, Mitsubishi and Vizio (CED Feb 15 p2). The administrative law judge in June ruled Netflix didn’t violate the patent involving parental control, but found three other patents valid (CED June 11 p6). The full ITC is expected to issue a final ruling by October. The federal court case was stayed pending the ITC investigation. “Now that the detailed ruling is available, we have restarted these negotiations and anticipate bringing them to closure,” Carson said, saying Rovi also will restart “litigation as quickly as possible” after the final ITC decision.

In the federal court case, Netflix’s entire video streaming service will be at issue, as opposed to the more limited ITC review of imported products that potentially infringe U.S. patents, Carson said. Rovi argued in the ITC case that an “infringing application” was being embedded in a product by an offshore supplier.

"The ITC case turned on the importation issue,” Carson said. “In a U.S. District Court, Netflix’s entire service will be reviewed and importation will not be an issue. In that venue, we believe that similar findings on claims construction and validity will result in a favorable verdict on infringement. We hope the ITC’s finding of validity will convince Netflix and others that commercial negotiation should be used to resolve matters. However, if this doesn’t prove feasible, we will continue to use all of our remedies to protect our IP, including litigation.” Netflix officials didn’t comment.

Having reached over-the-top (OTT) licensing deals with Apple, Hulu and Walmart’s Vudu, Rovi has created “enough momentum” with OTT services to begin “stepping up the pace” of negotiations in that segment, Carson said. Rovi initially landed an agreement with Apple in 2010 and has a longtime pact with Samsung that was extended to include OTT services, industry analysts have said. Rovi also has an agreement to combine Apple supplier Nuance Technology’s Dragon TV speech recognition technology with its interactive program guides (IPG). The ITC ruling in June did delay at least one potential licensing pact that could have been signed in Q2, but was postponed following initial reports of the ruling, Carson said. Rovi has since pushed out other potential licensing pacts, but still expects to complete several agreements in the second half with CE and OTT companies, Carson said.

Meanwhile, Rovi “continues to make progress” on potentially deploying TotalGuide IPG-equipped set-tops with Cogeco and BendBroadband as well as “other service providers, said the company spokesman, who declined to disclose the timing for introduction. The set-top TotalGuide IPG also was being tested in field trials with Armstrong Cable and Charter Communications at one point (CED Feb 21/12 p3) but Carson didn’t provide an update during the call on those potential deployments. The deployment with Charter was among the largest potential agreements, with the cable operator having more than 4 million subscribers. Rovi initially hoped to have the cable set-top deployments start in early 2012 (CED Nov 15/11 p1), but later revised that to this year. Eleven mostly smaller cable operators renewed licensing pacts with Rovi in Q4 2012 that included the TotalGuide IPG, and six were expected to introduce the feature in the first half (CED Feb 15 p3). Canadian cable operator Cogeco, along with BendBroadband and Eastlink, have begun offering TotalGuide XD and two more service providers submitted applications to Apple in Q2, Rovi officials said. TotalGuide XD allows channels to be tuned from a smartphone or tablet. While TotalGuide XD initially was only available for the iPad, it will be released as an Android application in September, Carson said. Armstrong has been testing TotalGuide XD for a year. Blue Ridge Communications, Buckeye Cable and Mediacom also have TotalGuide XD agreements with Rovi.

Rovi also reached agreements in late July to sell its Rovi Entertainment Store video-streaming business that provides the platform for Best Buy’s CinemaNow, Dish Network’s Blockbuster On Demand and other services. Rovi has been shopping the platform, which it acquired in buying Sonic Solutions, since last year after abandoning efforts to revamp it. As part of the agreement, Rovi agreed to transfer $8.5 million to Rovi Entertainment Store’s buyer, private equity-backed Reliance Majestic Holdings and received a $2 million unsecured note in return, the company said. Rovi didn’t disclose further details, but Majestic signed an IP licensing agreement, the company said. Rovi took a $57.1 million Rovi Entertainment Store-related asset impairment charge against Q2 earnings, the company said in SEC documents. Rovi Entertainment Store generated $4.3 million in Q1 revenue, up from $2 million a year ago. Rovi also agreed to sell its consumer Web business for $1 million to All Media Network, which received backing from Ackrell Capital, in a transaction that’s expected to close this month, a Rovi spokesman said. Rovi recorded a $6.8 million charge against Q2 earnings for goodwill and asset impairment charges tied to the Web business, which produced $1.4 million in revenue, down from $1.6 million a year ago. The web businesses including Sidereel and the Allmovie, Allgame, Allmusic and Celebified web sites, the spokesman said.

Rovi’s Q2 net loss widened to $74 million from $18.5 million a year ago as revenue, hampered by a sluggish DivX business, fell to $146.3 million from $154.6 million. The downturn in earnings was partly tied to a $1.4 million charge that included $700,000 to accrue for the value of lease payments for closed offices and $300,000 for severance, Rovi said. Rovi’s service provider sales improved to $83.7 million from $75.9 million last year, while those from CE video delivery and display, which includes DivX, fell to $21.2 million from $32.9 million. The drop in the DivX business was largely due to fewer products shipping that contained the technology, Rovi said in an SEC filing. There also was a “significant decrease” in DivX revenue from licensing agreements, some of which are up for renewal this year, the company said. Rovi signed a new DivX agreement with Samsung to deploy the technology in smartphones. Rovi is expected to release DivX 10 this fall, incorporating high efficiency video coding compression technology. CE discovery and advertising revenue, which includes IPG products, slumped to $26 million from $31.8 million, as several licensing renewals were delayed from Q2, Rovi said.