Henry Yuen interview as posted by e gmc on Yahoo:
Valuable insight into GMST from interview w/Henry Yuen (I have condensed the transcript and posted the main points) - Wall Street Transcript Corporation:
The cable area is where we have the biggest resistance. We generally collect a license fee in about 40% of the cable boxes shipped every year, but we are presently in litigation with a number of cable box manufacturers and cable operators and guide suppliers, such as TV Guide, to straighten out the intellectual property position.
TWST: Why is there resistance?
Mr. Yuen: If you'll allow me to give you a two-minute story, it's actually quite interesting. About five or six years ago, there was a company called StarSight. It was eventually acquired by Gemstar. But at that time, StarSight was a competitor of Gemstar's and was for cused in the cable sector. In fact, it was formed by some major cable companies such as Viacom, Times Mirror, Providence Journal, and Cox. Based on the strength of their relationship with cable operators, StarSight entered into two agreements, one with General Instruments ('GI') and one with Scientific Atlanta. The agreements were virtually identical. Both GI and SA ('SA') were to exclusively deploy StarSight's EPG. They did not have to pay StarSight a fee, but StarSight would get to charge the cable operators if they wanted that EPG feature. Now StarSight at that time was at its very height since GI and SA added together control about 90% plus of the cable box market. However, a couple of years later StarSight discovered that both companies breached their agreement blatantly. In fact, both of them took StarSight's technology, put it in their own boxes, and gave it away for free in order to sell more boxes. So ironically, StarSight changed from securing a 90% plus channel of distribution to having 90% of the distribution channel competing with them, and worse still, the competitors were not selling products, they were giving away the very same product they appropriated from StarSight for free. Their giving it away for free had the further effect of poisoning the well. As you know, even if there's a valuable proposition, if you are accustomed to receiving it for free, or at least apparently free, it becomes affronting if somebody comes in and says 'pay me' for this same thing. Take as an example, if from the very start, we had to pay $1 a month for the free TV, I bet you everybody would be willing to do so. However, if today ABC or NBC comes in and says 'give me a buck for my programming,' you would think they're crazy. The problem of the past five years of this 'give away' is that the cable industry adopted a point of view that any payment or concession would be unreasonable, and therefore the only way for us to be able to do this is to convince them that there is not right, that they had no right to the free EPG, and that this is really something that they would need from us. That is why there is the litigation.
TWST: You were talking about I think, cable in terms of your business.
Mr. Yuen: That's right, and that is also why all the other sectors, which do not have such a legacy issue, had signed up with us. They don't have much of a resistance, don't have much of a history of this type.
TWST: How do you think your R&D expenditures will change in the future?
Mr. Yuen: We have some very good teams. We have a team that is focused on getting CE products out which is located in Boston, and we have a team that is focused on supporting cable and satellite and other set top boxes located in Fremont. A third technical team focused on supporting worldwide technology is located in Hong Kong. We believe in steady building, so unless we make acquisitions, I think our R&D would be pretty steadily growing, but it would not be jumping around, because most of our development work has been done already.
TWST: What are the most significant trends, developments or changes you anticipate in your markets over the next several years?
Mr. Yuen: Well, in the next several years I think that there is definitely a trend of convergence. I also think that there will be continued emphasis on interaction and response, etc. And Oour technical direction is to meet those needs from the standpoint of a television viewer. We think people do not want their television to turn into a supercomputer overnight. On the other hand, a lot of people would like to be able to have slightly better control of their TV to get find and select programs they like, and to retrieve information when they want it, and maybe at times to respond to something. This is the direction we are moving toward. In year 2000 we will begin to deploy 900 megahertz wireless communication technology to supply data to our TVs. This allows us to put out time-urgent services such as breaking news, sports scores, etc., maybe even stock quotes. Then in the following year, 2001, we plan to make this communication two-way, using the two-way paging technology based on the same 900-MHz frequency. When that happens, when you are watching TV and you see something you are interested in potentially buying, or signing up, or voting on, or whatever, you can use your remote control and push one button.
TWST: Is there a chain of events or a particular scenario that would lead Gemstar to substantially exceed expectations in the future?
Mr. Yuen: One uncertainty is the outcome of the various litigationslitigation's we have in the cable industry. Even though the cable sector really represents less than 10% of our business potential, it has a lot of visibility. A lot of expectation has been built up on the Wall Street, in part because the litigations involve a fair amount of past due license fees.
Mr. Yen (cont'd): So I would say that if we are able to resolve the cable situation satisfactorily, our stock would probably see a near-term boost. In the longer term, the much more important thing is that our EPG in the consumer electronics sector are well received, so that we can build up this interactive advertising business which we are very excited about, and which also paves the way for response and real time services.
TWST: You touched on this, but what are the major concerns or risks that Gemstar faces now and will face in the future?
Mr. Yuen: I think right now people are paying excessive attention to the our disputes in the cable industry. So if we do suffer a near-term setback ... And I emphasize near-term because we really only have about three or four patents in play in the entire set of cable litigations (we still have about 60 patents in reserve, and another 180 in applications, so I don't think it will ever translate to a long-term setback) these near-term setbacks may disappoint people, and that's one. Secondly, of course, our plans to build a good advertising business is still in its infant stage. There is still a lot to learn. We need to understand the response to this new form of data and interactivity on TV, and I think we may make a few false starts become we can do it right. If we have too many false starts, it would of course being another disappointment.
TWST: What are Gemstar's competitive advantages? What sets the company apart from your competition?
Mr. Yuen: I think we basically have five competitive advantages that we over the years have integrated into our strategy. Number one, I think we only get into business where there is a need, so we try to distinguish ourselves from many Silicon Valley companies that would say, 'Here's a solution, but where is the problem?' We want to make sure we start with a known problem. The second advantage is that we do a lot of homework to protect our solutions so that the big boys don't come in and say, 'Hello, it's our time to take over.' This explains why we protect our intellectual property vigorously. Third, because we are in the consumer business, and since the U.S. consumers are known to be the most demanding, we believe that whatever we could do in the U.S. can be translated to the world market. We have demonstrated this principle with VCR Plus. and we're going to do it again with Guide. Fourth is that we have a very lightweight company. We only have 250 people. We are focused on technology and system development and licensing, so we do not really have inventory risk or expense risks that go out of control. And finally, as we are hoping to prove that the proprietary system that we are laying down will give us a valuable platform to leverage for the generation of recurring income from.
TWST: What are your plans for further international expansion?
Mr. Yuen: Actually we are in the midst of completing our expansion in Japan. We have already launched in Japan, but only in about 70% of the country. We want to complete our launch by expanding the coverage to 100%, and secure our position in the digital arena. We have already launched in Canada and Taiwan. We are working very hard to get ourselves up and running in Europe, probably starting with Germany and the United Kingdom.
TWST: What are your specific goals for the company over the next several years?
Mr. Yuen: We very much want to be what I would characterize as the kindergarten and pre-school of in-home interactivity through the television. We want to be the gateway where people change over from passive entertainment into something that they can control and interact with. We do not intend to become high speed, broadband, or a highly interactive service, but we do intend to become the opening window, or 'portal', for people who begin to start to use their TV not only for passive viewing of video, but also active retrieval of data. And we want to do that on a ubiquitous basis worldwide.
TWST: How do you feel about your current stock price?
Mr. Yuen: I think it is a fair reflection of our current business and our future potential. I think our growth will depend on whether we can realize our goals and whether we can demonstrate to the Street that our plans are solid and well thought out. And we hope that we can continue to do so.
TWST: Thank you.
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