From TV Guide to Tolstoy?
It may seem a big leap to some, but not for Henry Yuen, chairman and chief executive of Gemstar-TV Guide International Group Inc.
With Gemstar’s launch this month of a new line of e-books, Yuen aims to fundamentally change the way people buy and read books. Before scoffing, note that this is the same guy who has amassed a $1.2 billion personal fortune (based on Gemstar’s stock price late last week) by being at the forefront of revolutionizing the way we watch television.
In January, Gemstar acquired the two leading manufacturers of electronic books, NuvoMedia and Softbook, both of Northern California, for a combined $400 million. That deal failed to grab headlines, following as it did on the heels of the company’s $9.2 billion takeover bid for TV Guide. However, it might soon be viewed as another masterstroke by Yuen because he has positioned the company to take a major bite out of the $100 billion U.S. publishing industry in the years to come.
At this point, Gemstar has the proprietary technology, a consumer electronics giant, and most major publishing houses lined up for its new line of e-books. The big unknown is whether consumers will also line up to buy the gadgets.
“The stakes are huge and the goal we’re aiming for is very high,” said Tom Morrow, spokesman for Gemstar’s Softbook division. (Yuen was unavailable for comment last week.) “It’s not going to be a slam dunk by any means, but we believe that the transition to digital is going to be as natural in reading as it has been in music and movies.”
By some estimates, Gemstar could generate as much as $10 billion in annual sales within five years by licensing its technology to manufacturers of e-books and by serving as a reseller of content books and magazines to end users.
What’s an e-book? Simply a portable electronic device with a medium-sized, high-quality screen and the capacity to store thousands of pages of text and graphics. Books or magazines can be downloaded directly using a dial-up modem or Ethernet port.
To reach that $10 billion sales figure, Yuen first has to solve the same kind of problem that he successfully tackled when he developed VCR Plus, the now-ubiquitous technology used to program VCRs by typing in a simple numeric code. That is, he has to convince manufacturers and publishers that there is a market out there for the product, while at the same time convincing consumers that they want to buy it.
“It is the chicken-and-egg problem,” said John Corcoran, a new-media analyst with CIBC World Markets. “Without the content (downloadable books), there is no market for the product (e-book devices), and if you don’t have a market, you can’t get the content.”
Grabbing the technology
By acquiring NuvoMedia and Softbook (on the same day, and with neither company knowing that the other was also being acquired), Yuen got his hands on the intellectual property that will form the core of Gemstar’s e-books business.
Although NuvoMedia and Softbook at this point still build their own e-books, their devices will be phased out in the near future because Gemstar’s forte is licensing its proprietary technology to manufacturers, not manufacturing products itself.
That has been the key to the success of VCR Plus, and the same strategy is expected to be used for Gemstar’s other new venture, the electronic programming guide (EPG) technology. Through a slew of patents, Gemstar has made it virtually impossible for manufacturers of consumer electronics and cable operators to circumvent Gemstar’s proprietary EPG technology.
Thus far, Gemstar’s e-books technology patents have not produced the same kind of prolonged legal battles as its patents on EPG technology, but that may be in part because Gemstar has only one among a number of competing platforms for electronic reading.
Microsoft Corp., for one, in conjunction with Hewlett-Packard Co., has developed the Microsoft Reader platform, which allows consumers to download books electronically at a bookstore, for example and read them on their PCs.
The Gemstar platform, however, is different in that the e-book is a standalone device, dedicated solely to downloading and reading books and magazines, and cannot be used for e-mail or to download other software. This has the advantage for publishers of providing users with less opportunity to pirate books, Morrow said.
“Publishers don’t want to be in the same situation as the music industry, where there is no copyright control on the Internet,” he said. “We want them to look at e-books in the same way as audio books, as an expansion of the market, rather than as cannibalizing their existing market.”
At the same time, the existence of competing formats for electronic books raises the question of whether one format will become the accepted standard, as VHS did in videotapes, while the failed formats go the route of Betamax.
“It remains to be seen which platform the public will embrace,” said Adam Rothberg, a spokesman for Simon & Schuster Inc. “As publishers, we want to distribute our books through as many channels as possible, as long as there are sufficient guarantees of copyright protection, and we don’t have a preference for one platform or another.”
Testing the market
Earlier this year, Simon & Schuster published the first installment of the Stephen King novel “Riding the Bullet” exclusively online, selling 500,000 copies, through all available electronic platforms. Other major publishers, Penguin Putnam Inc., Random House Inc. and Time Warner Inc., are also gearing up to distribute books electronically.
The coming months will give the first indication whether Gemstar’s e-books will prove to be best sellers. Thomson Multimedia, which manufactures RCA and Thomson electronic products, is the first major consumer electronics manufacturer to adopt Gemstar’s e-book platform. At the end of this month, Thomson will unveil its new RCA e-books, as well as a list of books, magazines and newspapers that will be available through this platform.
Analyst Corcoran said that Yuen is aiming to sell as many as 500,000 of these RCA e-books this Christmas season (a number Morrow declined to confirm) and that a massive marketing campaign is in the making. The NuvoMedia and Softbook e-books sold thus far, according to Morrow, number in the tens of thousands.
Initially, Gemstar will focus its marketing efforts on consumers, but lurking behind is the vast potential of business clients, and also the education market.
“At first glance, the education market looks extremely promising, but it will take some time to get there,” Morrow said. “The logistics are very complex because it involves so many different textbooks and school systems that it’s going to be a lot of work for all the publishers to digitalize their content.”
Still, if the e-book catches on with consumers, book distribution could be just the tip of the iceberg for Gemstar. The company could make even more money by distributing sales catalogues, electronically, for retailers such as Victoria’s Secret and The Sharper Image.
“Realistically, we could talk about anywhere between $5 billion and $40 billion (in annual e-book revenues for Gemstar),” analyst Corcoran estimated.
