Charter 2005 Annual Report Download - page 107

CHARTER COMMUNICATIONS, INC. 2005 FORM 10-K
carriage agreement provided that Digeo Interactive would other contract terms, no less favorable than those accorded to
provide to Charter a ‘‘portal’’ product, which would function as any other Digeo customer. Charter paid approximately $1 mil-
the television-based Internet portal (the initial point of entry to lion in license and maintenance fees in 2005.
the Internet) for Charter’s customers who received Internet In April 2004, we launched DVR service (using units
access from Charter. The agreement term was for 25 years and containing the Digeo software) in our Rochester, Minnesota
Charter agreed to use the Digeo portal exclusively for six years. market using a broadband media center that is an integrated set-
Before the portal product was delivered to Charter, Digeo top terminal with a cable converter, DVR hard drive and
terminated development of the portal product. connectivity to other consumer electronics devices (such as
On September 27, 2001, Charter and Digeo Interactive stereos, MP3 players, and digital cameras).
amended the broadband carriage agreement. According to the In May 2004, Charter Holdco entered into a binding term
amendment, Digeo Interactive would provide to Charter the sheet with Digeo Interactive for the development, testing and
content for enhanced ‘‘Wink’’ interactive television services, purchase of 70,000 Digeo PowerKey DVR units. The term sheet
known as Charter Interactive Channels (‘‘i-channels’’). In order provided that the parties would proceed in good faith to
to provide the i-channels, Digeo Interactive sublicensed certain negotiate, prior to year-end 2004, definitive agreements for the
Wink technologies to Charter. Charter is entitled to share in the development, testing and purchase of the DVR units and that
revenues generated by the i-channels. Currently, our digital the parties would enter into a license agreement for Digeo’s
video customers who receive i-channels receive the service at no proprietary software on terms substantially similar to the terms
additional charge. of the license agreement described above. In November 2004,
On September 28, 2002, Charter entered into a second Charter Holdco and Digeo Interactive executed the license
amendment to its broadband carriage agreement with Digeo agreement and in December 2004, the parties executed the
Interactive. This amendment superseded the amendment of purchase agreement, each on terms substantially similar to the
September 27, 2001. It provided for the development by Digeo binding term sheet. Total purchase price and license and
Interactive of future features to be included in the Basic i-TV maintenance fees during the term of the definitive agreements
service to be provided by Digeo and for Digeo’s development of are expected to be approximately $41 million. The definitive
an interactive ‘‘toolkit’’ to enable Charter to develop interactive agreements are terminable at no penalty to Charter in certain
local content. Furthermore, Charter could request that Digeo circumstances. Charter paid approximately $10 million for the
Interactive manage local content for a fee. The amendment year ended December 31, 2005 in capital purchases under this
provided for Charter to pay for development of the Basic i-TV agreement.
service as well as license fees for customers who would receive In late 2003, Microsoft filed suit against Digeo for $9 mil-
the service, and for Charter and Digeo to split certain revenues lion in a breach of contract action, involving an agreement that
earned from the service. In 2005, we paid Digeo Interactive Digeo and Microsoft had entered into in 2001. Digeo informed
approximately $3 million for customized development of the Charter that it believed it had an indemnification claim against
i-channels and the local content tool kit. This amendment Charter for half that amount. Digeo settled with Microsoft
expired pursuant to its terms on December 31, 2003. Digeo agreeing to make a cash payment and to purchase certain
Interactive is continuing to provide the Basic i-TV service on a amounts of Microsoft software products and consulting services
month-to-month basis. through 2008. In consideration of Digeo agreeing to release
On June 30, 2003, Charter Holdco entered into an Charter from its potential claim against Charter, after consulta-
agreement with Motorola, Inc. for the purchase of 100,000 tion with outside counsel Charter agreed, in June 2005, to
digital video recorder (‘‘DVR’’) units. The software for these purchase a total of $2.3 million in Microsoft consulting services
DVR units is being supplied by Digeo Interactive, LLC under a through 2008, a portion of which amounts Digeo has informed
license agreement entered into in April 2004. Under the license Charter will count against Digeo’s purchase obligations with
agreement Digeo Interactive granted to Charter Holdco the Microsoft.
right to use Digeo’s proprietary software for the number of In October 2005, Charter Holdco and Digeo Interactive
DVR units that Charter deployed from a maximum of entered into a binding term sheet for the test market deploy-
10 headends through year-end 2004. This maximum number of ment of the Moxi Entertainment Applications Pack (‘‘MEAP’’).
headends restriction was expanded and eventually eliminated The MEAP is an addition to the Moxi Client Software and will
through successive agreement amendments and the date for contain ten games (such as Video Poker and Blackjack), a photo
entering into license agreements for units deployed was application and jukebox application. The term sheet is limited to
extended. The license granted for each unit deployed under the a test market application of approximately 14,000 subscribers
agreement is valid for five years. In addition, Charter will pay and the aggregate value is not expected to exceed $0.1 million.
certain other fees including a per-headend license fee and In the event the test market proves successful, the companies
maintenance fees. Maximum license and maintenance fees will replace the term sheet with a long form agreement
during the term of the agreement are expected to be approxi- including a planned roll-out across additional markets. The term
mately $7 million. The agreement includes an ‘‘MFN clause’’ sheet expires on May 1, 2006.
pursuant to which Charter is entitled to receive contract terms, We believe that Vulcan Ventures, an entity controlled by
considered on the whole, and license fees, considered apart from Mr. Allen, owns an approximate 60% equity interest in Digeo,
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