Summary Business:

Entertainment technology and media




Henry Yuen

Market Cap:

$8.2 billion Dividend Yield: N/A

Total Liabilities:

$2.35 billion P/E Ratio: N/A

Long-Term Debt:

$332.2 million

Gemstar-TV Guide International Inc. does not pay dividends

The selection of EchoStar Communications Corp. as the winning bidder for Hughes Electronics Corp. stunned many on Wall Street, but none were more surprised than shareholders of Pasadena-based Gemstar-TV Guide International Inc.

After the deal was announced Oct. 28, Gemstar shares fell more than $3 further than EchoStar, further than Hughes and further than losing bidder News Corp., whose hopes to enter the U.S. satellite broadcasting market via Hughes' unit DirecTV were dashed.

By Wed., Oct. 31, Gemstar's had firmed to $20.27, down $2.92, or 13 percent, from where it last traded before the contract was announced.

Why did Gemstar get hit so hard?

Because News Corp. was expected to win Hughes, and if it did, Gemstar stood to reap a substantial windfall, in the form of a potential licensing agreement with DirecTV.

Instead, DirecTV is poised to land in the hands of EchoStar, which has refused to license Gemstar's interactive programming guide technologies. Gemstar has sued EchoStar (along with others) alleging patent infringement, and EchoStar has countersued with an antitrust claim.

However the dispute eventually winds up, Gemstar's chances of getting its IPG in front of DirecTV's 10 million subscribers have been set back.

"They've been indicating to the Street that DirecTV was about to sign a deal, but now you have a sworn enemy" poised to take control of Hughes, said Rob Martin, an analyst with Friedman Billings Ramsey & Co.

Some of the set-top box manufacturers DirecTV uses pay licensing fees to Gemstar, but DirecTV has been resistant to signing a broader IPG contract one that could bring Gemstar 50 cents per month per subscriber.

"It seems as if there had been ongoing talks about it," said Josh Bernoff, a Forrester Research Inc. analyst. "Because of the News Corp. bid for Hughes I think there was a desire not to make it a case."

Gemstar officials declined to comment.

News Corp. owns 38 percent of Gemstar. If it controlled Hughes as well, the common wisdom went, an IPG deal between Gemstar and DirecTV would be short work. Now, the picture has changed.

Martin lowered his projection for Gemstar's subscriber growth by 5 million, to 35 million by the end of 2002. (Gemstar's subscriber base stood at 12 million in July.) He also lowered estimates for corresponding revenue from advertising on the guides, due to the expected lower subscriber count and the deteriorating advertising market.

Lower revenue estimates

Overall, Martin cut Gemstar revenue estimates by $70 million in 2002, to $1.44 billion. It's not a large amount, but because those revenues generate high profit margins, nearly all of the loss passes through to Gemstar's EBITDA line. Martin cut his 2002 estimates for EBITDA, or earnings before interest, taxes, depreciation and amortization, to $1.17 a share from $1.31.

The key to Gemstar's success has been its intellectual property portfolio, which it wields like a weapon in dealings with potential customers and competitors.

Gemstar owns more than 180 U.S. and 190 foreign patents and has another 300 U.S. and 800 foreign patents pending. Its technology and licensing division, with expected 2001 revenues of $325 million, is devoted to "developing, licensing and protecting the company's intellectual property and technology," according to the company's own description.

With such a strong patent position, Gemstar has used legal action to nudge recalcitrant cable broadcasters and set-top box makers into signing up.

Subscriber base rises

The results have been impressive. Subscribers have tripled over the past year, and Adelphia Communications Corp., Charter Communications Inc. and Comcast Corp. have all signed on as they rolled out their digital cable platforms even though all those companies backed a rival, open-standards IPG joint venture called TV Gateway.

Gemstar has made little progress in the satellite sphere, where EchoStar and DirecTV are the dominant U.S. players, and BSkyB, another News Corp. affiliate, is a major player in Europe.

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