Investors Shy From Gemstar as Patent Dispute Clouds Earnings

Staff Reporter

The new year hasn't been kind to Gemstar-TV Guide International Inc. Its stock has fallen 29.5 percent, to $19.52 on Jan. 24, on concerns about the outcome of a patent dispute.

Gemstar is locked in a battle royale with EchoStar Communications Corp. over EchoStar set-top boxes that Gemstar alleges violate its patents to interactive program guides. The stakes are high, as Gemstar seeks a U.S. International Trade Commission ruling to block importation of EchoStar's boxes. EchoStar is counter-alleging patent misuse.

If Gemstar wins, it could force recalcitrant cable and satellite operators to license its IPG technology, analysts say; that would mean 16 million additional subscribers just from EchoStar and DirecTV alone. (DirecTV is owned by EchoStar's planned merger partner, Hughes Electronics Corp.) A loss, though, could reduce Gemstar's leverage to extract such fees, potentially endangering existing business. (Parallel litigation is proceeding in federal court.)

The two and a half week ITC hearing was completed Dec. 19, and an initial determination is due by March 21. Analysts have stepped in during the lull to handicap the proceedings.

Robertson Stephens analyst Lowell Singer, who attended the hearing, downgraded Gemstar in early January. EchoStar and its co-defendants (including set-top box makers Scientific Atlanta, Pioneer and SCI Systems) "presented a much stronger case than we had originally anticipated," Singer said. He noted that the ITC's staff attorney supported EchoStar's claims of patent misuse.

Taking the opposite view has been Rob Stone of SG Cowen. Stone, who rates Gemstar a "strong buy," has been recommending purchase of its shares during any weakness. He downplays the significance of the staff attorney's recommendation. "We have spoken to staff attorney Thomas Fusco, who admitted that the court sometimes follows his recommendations and sometimes does not," Stone wrote in a recent report.

Pasadena-based Gemstar's first major success was development of the VCR-Plus system, which allows viewers to easily record television shows onto tapes. It expanded into interactive program guides, such as those seen on cable TV sets. It owns more than 350 patents and guards them fiercely. Some companies, including EchoStar, claim Gemstar's lawyers have been overzealous.

A final decision by the ITC will be handed down in June. The ITC case will likely also influence the outcome of the federal litigation, paving the way for damages being awarded to the winners.

Neither company would comment on the case.

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