Learning lessons from TiVo: Don’t make patents your business

TiVo (s TIVO) has settled its remaining patent infringement lawsuits with Google, (s GOOG) Cisco (s CSCO) and Time Warner Cable, and the company announced Thursday that it will receive a lump-sum settlement of $490 million from Cisco and Google.

That may sound like a lot of money, but investors had clearly expected more: TiVo’s stock was down 17 percent by Friday afternoon. TiVo’s tanking stock may be the direct result of the company indicating that it would receive a higher payout — Variety reported Friday that TiVo’s own court filings were stating the company was entitled to “billions of dollars” in damages.

But there’s also a bigger lesson here: TiVo may still be developing and selling DVRs, but its core business shifted some years ago from consumer electronics to patents. Turns out that’s bad business, and hard to recover from.

TiVo’s love for patent infringement lawsuits goes all the way back to 2004, when the company sued Dish’s (S DISH) technology partner EchoStar (s SATS) for violating its digital video recording patents. TiVo won in court, and EchoStar / Dish eventually agreed to pay $500 million. TiVo went on to sue other DVR makers as well as pay TV operators deploying these machines, and secured additional settlements from AT&T (s ATT) and Verizon. (s VZ) The total payout so far for TiVo: Around $1.6 billion.

But TiVo’s core business suffered as it was raking in the dough from patent settlements, with subscribers leaving the service for cheaper operator-provided DVRs. TiVo now has about one million consumers left who are directly subscribing to the company’s DVR service, down from 1.7 million five years ago.

In the last two years, TiVo has been making inroads with operator partnerships, which has actually contributed to a turnaround: Overall subscriber numbers are rising again since late 2011, and the company now has 3.4 million total subscribers. That’s up significantly from the less than two million it had two years ago, but not quite back to its all-time best of more than 4.4 million in 2006.

But there’s a problem with that growth: Those customers coming from operator partnerships are bringing in a lot less revenue per user, meaning that the company needs a lot more of them to make up for the folks who used to subscribe to TiVo directly but have been leaving over the last few years. It’s a long game, and those patent settlements helped to keep investors on board.

Except, it looks like many of them didn’t sign up for the possibility of profitability in a few years, but for lots of cash, now. They didn’t buy TiVo for the technology, but for the patents, and that’s now backfiring.