As Comcast’s primary supplier of video products, Arris “could face challenges importing X1 boxes” to the MSO following yesterday’s ruling by the International Trade Commission that Comcast had violated two TiVo patents, Simon Leopold, an analyst with Raymond James, opined in a research note issued Wednesday.
The ruling, announced Tuesday (November 21), now moves to a 60-day presidential review before it takes effect, but it could prohibit Comcast from importing boxes equipped with software that is subject to the TiVo patents.
For its part, Comcast said it respectfully disagrees with the ITC’s decision and that it will remove the feature while it pursues an appeal. The feature, in this case, is functionality that lets video customers schedule DVR recordings remotely from mobile devices that they would watch later via the set-top box.
Two set-top makers – Arris and Technicolor -- were identified as respondents in the case. Pace was also named (Arris acquired the U.K.-based company in early 2016).
Arris and Technicolor have been asked for comment regarding the ITC ruling.
UPDATE:Arris issued this statement Wednesday: "ARRIS was again found not to have infringed on any of Rovi’s patents; however, we are nevertheless disappointed and respectfully disagree with the ITC’s determination that there was infringement by any of the parties in this matter. Going forward, we will continue to support Comcast's appeal. We believe that the inclusion of ARRIS was improper based on our existing agreements with Rovi, which was borne out by the Commission's ruling."
Arris, Leopold wrote, “could face challenges importing X1 boxes for Comcast with this ruling.”
Leopold said Arris management “expressed a lack of worry when we spoke to them about this risk, which suggests they have some insight, but citing the litigation and the fact that the issue is in the hands of their top customer, they declined to elaborate.”
Update: In the wake Comcast's statement and its temporary work-around to remedy the situation following the ITC ruling, Leopold issued a follow-up note today that "[w]e expect this to reduce overhang on ARRIS stock."
That seems to be playing out so far, as investors don’t appear to be concerned. Arris shares were up 12 cents (0.41%) to $29.15 each in mid-day trading Wednesday.
In view of similar cases, the situation here could affect the timing of shipments, but not the long-term demand, Leopold noted.
“Comcast will buy video equipment based on its deployment plans, which are unlikely to change, so what doesn’t get ordered during a period where the product is unavailable, should likely be ordered later,” he added.
Leopold said he expects Comcast and TiVo to continue negotiations during the 60-day review period, but also outlined several options that are available to Comcast:
-To pay the license fee for the feature and keep it as is (Leopold said TiVo’s recent renewal/extension with AT&T has a Most Favored Nations clause that “likely sets a floor” on what might be acceptable).
-To implement a work-around in the code.
-To important boxes without software and install the software in the U.S. “This may buy time and shift jurisdiction, but is likely just a stalling tactic,” the analyst wrote.
-Remove the offending feature from the software code and possibly negotiate to add it back.
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