Gemstar Softens Approach, but Wall Street Is Still Wary

By RiSHAWN BIDDLE

Staff Reporter

Under founder Henry Yuen, hardball tactics and patent litigation marked Gemstar-TV Guide International Inc.’s approach to dominating the market for on-screen television program guides.

But now Yuen has been ousted, and his biggest legal battle is with the Securities and Exchange Commission over a hefty severance package. And after a string of legal setbacks, Gemstar has been forced to use a different approach to dealmaking playing nice.

The company is rolling out user-friendly products for its cable system customers, and brainstorming with them on ways to help promote their interactive offerings. It’s even allowing cable operators to cull through its patents and select technologies they can use in developing their own program guides.

A deal struck last month with New York-based cable operator Insight Communications is illustrative of the change. Eschewing an all-or-nothing approach, Gemstar allowed Insight to integrate its own LocalSource entertainment software which sifts through restaurant and movie listings into Gemstar’s television guides. To seal the deal, Gemstar even agreed to license technology from Insight.

“We’ve had to take a partnership approach to running our business,” said TV Guide Television Group President Ian Aaron. “We just can’t knock down the doors and expect our customers to simply accept our technology because it just won’t work.”

Crucial segment

Expanding the program guide area has become important for Gemstar because it’s one of the few businesses with signs of future growth. While revenues from the cable division, which includes the television guide unit, declined 18 percent during the third quarter, the number of subscribers with electronic program guides actually went up.

During Yuen’s tenure, Gemstar used the courts to establish a foothold in the television guide market. (After a series of revenue restatements and a feud with News Corp. Chairman Rupert Murdoch, he was ousted in November 2002 and replaced by former News Corp. executive Jeff Shell.)

In the 1990s, Gemstar successfully sued Hughes Electronics Corp.’s DirecTV unit and Motorola Inc. for patent infringement, forcing both to fork over royalties whether or not they used Gemstar’s wares. Some Gemstar rivals, including then independent TV Guide, sold out, expanding Gemstar’s array of patents.

But the hardball strategy began to backfire with a string of courtroom defeats. In November 2002, a federal district judge ruled in a long-running suit that television guides developed by two competitors, set-top box manufacturer Scientific-Atlanta and consumer electronics maker Pioneer Electronics Corp., did not infringe on any of Gemstar’s patents.

Cable operators also complained that Gemstar’s guides couldn’t work on various platforms and that the company wouldn’t add on new technologies with features such as video-on-demand. They also didn’t like the idea of Gemstar’s ad-friendly guide, which forced them into a 50/50 split of ad revenues. A number of them, including the cable division of Time Warner Inc. struck out on their own.

Gemstar was forced to smooth over the bruised relationships left in the wake of Yuen’s departure. In May, it brought in Aaron, a former chief executive of pay-per-view outfit TVN Networks. He began meeting with cable operators to discuss Gemstar’s new offerings, and also improved customer service to make it easier to install Gemstar guides on their systems.

Now Gemstar is rolling out new software such as its “Blue” guide, which allows viewers to click on a program and start recording a show on a personal video recorder. Next April, it will introduce the I-Guide, which will limit the ad clutter and allow customers a sneak peak at a cable system’s video-on-demand offerings.

Meanwhile, Gemstar is looking to grow its business and co-op rivals Pioneer and Scientific-Atlanta with a long-term deal it struck last month with their customer, Time Warner. Instead of having to use the entire package, Time Warner will integrate some of Gemstar’s software into a program guide for its new Maestro set-top box.

But Gemstar may still need more than a change in attitude to keep it ahead of the pack.

Citigroup analyst Niraj Gupta expects Gemstar to spend another $50 million on litigation with rivals such as EchoStar Communications Corp., which have won several rounds in another patent litigation suit. Meanwhile, Microsoft Corp. is launching interactive television software that bundles television program guides with other wares.

“Gemstar is still a single-product company at a time when other firms are bundling interactive guides with other applications,” said Sean Badding, a senior analyst with the Carmel Group, a Monterey media consultancy. “They’ll have to develop new products, but they won’t be able to until they can raise new capital. And Wall Street isn’t exactly in love with Gemstar stock.”