Henry Yuen Wants to be Your TV Guide
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The onetime math teacher from China intends to build the Yahoo of television. He has the technology, he has the patents--and he's already outmaneuvered John Malone and Rupert Murdoch.
A couple of years ago Rupert Murdoch and John Malone set out to dominate the world of TV listings. With viewing choices exploding, they figured, whoever could build a gateway to television would hold sway over the vast TV audience.
Murdoch's News Corp. already owned TV Guide magazine. Malone's Liberty Media, through a company called United Video, controlled a cable channel that offered scrolling listings. They agreed to put them together and launch a $2.8 billion takeover bid for a small company called Gemstar, which possessed the last and most potent weapon they needed--an interactive program guide that threatened to make their old-fashioned TV listings obsolete.
It was an unfriendly takeover, but Murdoch and Malone figured they could overpower the one man who stood in their way: Henry Yuen, Gemstar's brilliant but quirky CEO. A Chinese immigrant, Yuen, now 52, had helped invent a gadget to make it easier to program VCRs. He was a mathematician, not a media guy, and he was unschooled in corporate warfare. What's more, Gemstar's biggest shareholder and Yuen's investment banks wanted to accept the bid, which initially represented nearly a 50% premium over the company's share price. If Las Vegas gave odds on takeover battles, Yuen would have been the longest of long shots.
Yuen, though, doesn't play the odds--or by anything resembling a conventional rulebook. The very fact that Murdoch and Malone coveted Gemstar reinforced his belief that he was building a valuable franchise; he knew they needed his technology, and he eventually persuaded his board not to sell. Then he turned the tables on Murdoch and Malone. Their bid--and Yuen's refusal to accept it--put a spotlight on Gemstar. Wall Street took notice, Gemstar's shares skyrocketed, and Yuen became a billionaire. Last October he persuaded Murdoch and Malone to sell him TV Guide Inc. for Gemstar stock then valued at $9.2 billion. "The prey devoured the hunters," says a Gemstar insider.
With the acquisition, Yuen takes over TV Guide, the top-selling weekly magazine in America, the scrolling TV Guide cable channel, and their ties to advertisers and TV-loving consumers. He also eliminates his biggest rival. The Justice Department's antitrust division scrutinized the merger for months before approving it, July 11; the deal closed the next morning, before any of Gemstar's enemies could try to block it in court. The result? Malone's Liberty Media and Murdoch's News Corp. each own about 19% of the combined enterprise, called Gemstar-TV Guide International. But Yuen, who himself owns about 10% of the stock and has an ironclad contract making him CEO, will run the show.
That's no surprise to those who have tangled with the little-known entrepreneur. "Henry Yuen is at the very, very top echelon of the smartest people in the world of the media and Internet and technology," says Tom Rogers, a former NBC executive who is now CEO of publisher Primedia.
Yuen intends to make Gemstar a big force in media by creating and controlling a TV portal--the first screen viewers will see when they turn on their TVs to navigate hundreds of choices. The Yahoo of television, it's been called. But Yuen argues that his TV portal will be bigger than Yahoo's Internet gateway because TV is far more pervasive than the Internet. The TV is on for seven hours a day in the typical American home, and Yuen predicts that viewers will click on his guide at least four times an hour, generating hundreds of millions of page-views if the guides proliferate. Right now, Gemstar's guides are built into nearly three million TVs, while TV Guide's own interactive guides, which are distributed over cable and satellite, reach another 3.5 million homes.
"My vision is to make the electronic program guide as commonplace as the remote control is today," says Yuen. Because Gemstar holds about 90 surprisingly broad patents covering the electronic program guides, or EPGs, Yuen says every TV manufacturer, cable operator, satellite TV provider, or Internet company that installs a guide in a TV or set-top box must obtain a license for his technology. Others vigorously disagree, but Yuen has struck licensing deals for his EPGs with Microsoft and America Online--both of which analyzed his patents closely before agreeing to pay him tens of millions of dollars in fees--along with RCA, Sony, Philips, and others.
With that intellectual property as the foundation, Yuen has begun to build an unusual media empire. To sell advertising on his EPGs--a business that analysts say could generate billions in revenues--Gemstar has formed a joint venture called @TV Media with NBC and France's Thomson, whose RCA TV sets are the biggest sellers in the U.S. He has also persuaded Thomson to equip a minimum of 30 million new TVs with two-way paging modules that will enable viewers to shop at home using their remote control. (Yuen calls that T-commerce and claims it will be profitable, unlike selling on the Internet.) And, as if he didn't have enough to do, Yuen in January acquired the two leading manufacturers of electronic books, NuvoMedia and Softbook, along with their patents. (He didn't tell either company he was buying the other until the last minute.) This fall, again with RCA's help, he'll go all-out to drive down the price of e-books and get 500,000 of them into the hands of consumers. That, too, could become a big business--an Andersen Consulting study predicts that 28 million people will be spending $2.3 billion annually on e-books by 2005.
Those two products--EPGs and e-books--represent the glittering promise of Gemstar-TV Guide and are the reason the company boasts a market capitalization of about $30 billion. "Even at its current market cap, Gemstar is one of the most underappreciated companies out there," says Michael Graham, an analyst with Robertson Stephens. "It's got the potential to be one of the biggest media companies ever. They have monumental, gargantuan prospects."
Note that last word: "prospects." Bullish analysts like Graham look ahead for a good reason: Gemstar's existing businesses are fading. This year Gemstar and TV Guide together will generate revenues of about $1.5 billion and operating income of about $400 million. (Yes, the company is valued at an eye-popping 20 times revenues and 75 times cash flow.) Yuen's biggest business, TV Guide magazine, has suffered from falling readership and profits for years; its circulation has dropped from 14 million to 11.8 million since the mid-1990s, while its operating income has slid from $203 million to $155 million. The prospects are no brighter for the clunky TV Guide cable channel. As Yuen himself says, "It really doesn't make sense for a print or scrolling guide to work anymore." Gemstar's original business, built around the device known as VCR Plus, has also matured.
So Gemstar is clearly a company about the future, a bet on Henry Yuen's ability to execute two big and unproven ideas: EPGs as portals, and e-books. Can he do it? Well, he has to be taken seriously because of his track record and his seemingly impregnable patent portfolio, which covers EPGs, e-books, the notion of equipping TVs with pagers, and goodness knows what else. To underscore their importance, framed patents decorate the halls of Gemstar's modest offices in Pasadena. "The secret of his success is that Henry owns every idea he has," says Perry Lerner, a New York investor and former Gemstar director. "He figures out ways to turn ideas into property."
Yuen, as a result, has some powerful enemies--and, it's safe to assume, a tall stack of legal bills. By agreeing to merge, Gemstar and TV Guide settled a six-year-old lawsuit over the patents for interactive guides; initial rulings favored Gemstar. Right now, Gemstar is battling in court with General Instrument (a unit of Motorola), Scientific Atlanta, and Pioneer Electronics, the major manufacturers of cable set-top boxes; they accuse Gemstar of abusing its patents, violating antitrust laws, and trying to monopolize the EPG business. Gemstar also sued the Silicon Valley company TiVo over its guide; that case is pending. And Gemstar has threatened to sue satellite TV provider Echostar too. The thing is, Yuen's track record in court is unblemished: He's never lost a major lawsuit, and he's collected big judgments from Scientific Atlanta and General Instrument that included punitive as well as compensatory damages.
Big cable operators don't like Gemstar either. Time Warner Cable (which, like FORTUNE's publisher, is a unit of Time Warner) went so far as to make Gemstar's guides useless in some cities by deploying technology that prevents Gemstar's TV listings from traveling through its cable wires. Federal regulators are being asked to untangle that dispute. Cable operators are reluctant to discuss Gemstar, but it is clear that they want to build TV portals of their own. Says one cable executive: "There's no way the cable industry is going to yield total control to Henry Yuen. We'll go with no guides at all before we'll do that."
The man in the middle of this maelstrom is a latecomer to the business world. He carries a backpack instead of a briefcase, often speaks like the college lecturer he once was, and seems to run all of Gemstar out of his own head. Born in Shanghai and raised in Hong Kong, Yuen came to the U.S. for college and earned a Ph.D. in applied math from Cal Tech. He worked for 18 years as a research scientist at TRW, where he specialized in the mathematical description of ocean waves. "I published over 70 papers on that strange little area," he says. Strange, but not insignificant--Yuen's work aided in global weather forecasting and has what he discreetly calls "defense implications." Always ambitious, he earned a law degree at night and built a part-time law practice representing Asian companies in the U.S. He started Gemstar with several grad-school friends when he turned 40--"It was a bit of a midlife crisis," he says--because they wanted to get into business.
"Science is like solving puzzles," Yuen explains. "I find law is a little more like playing chess. Business is the most exciting. There are no rules. It's a free-for-all."
After Yuen had difficulty programming his VCR to videotape a baseball game, he and his Gemstar friends came up with VCR Plus. The gizmo, still widely in use, enables TV viewers to record a show with their VCR by entering a mathematical code printed in the TV listings into their remote controls.
Technologically it's not complex, or so, at least, says Yuen, with his Ph.D. in math. But as a business proposition, VCR Plus presented a daunting chicken-and-egg problem: Gemstar needed to persuade publishers to print the numerical codes in their TV listings, consumer electronics outlets to carry the newfangled remotes, and TV viewers to buy them for about $60 apiece--all more or less simultaneously. "I was totally naive, and I was extremely energetic. It was a good combination," he said. "We got the bliss of ignorance." Somehow they got newspapers not just to print the codes but to pay for them--even though the VCR Plus business was utterly dependent on their distribution.
Naturally Yuen asked TV Guide to print his codes too. As part of the negotiations, he agreed to sell 20% of Gemstar for $5 million to News Corp. But Murdoch's people backed out at the last minute because their company faced a credit crunch. Big mistake. Gemstar was soon selling millions of VCR Plus remotes. "It was a great hit," Yuen says. Later, Yuen licensed the technology to VCR makers, which built it right into their machines; his profit margins soared past 40% because most licensing revenues drop to the bottom line. Today, Gemstar says, the VCR Plus system is used in about 80 million homes in 40 countries and is built into 60% of all VCRs sold.
From the beginning, Gemstar was an unconventional company. When the giant Consumer Electronics Show in Las Vegas tried to charge Gemstar what Yuen thought was an outrageous fee for a booth, his CFO and trusted aide Elsie Leung flew to Vegas and in one day bought a $500,000 house on a golf course. Ever since, Gemstar has shuttled customers to the house to show off its latest technology. "People enjoy going there, and we can actually do some business, instead of shouting over the din," Yuen says.
When Gemstar needed to diversify beyond VCR Plus, executives toyed with "a bunch of ideas, some of them even patented," Yuen recalled. "Why don't we make Toaster Plus? Coffee Plus?" Their next invention--software called Index Plus, which tracks shows recorded on videotape--never caught on, but it did lead Yuen into the world of interactive program guides, a labyrinth of technological complexity, legal pitfalls, and business machinations. It was the perfect arena for his set of talents. "I'm a puzzle solver," he says.
Gemstar was neither the first nor the biggest player in the EPG game. The early mover was a company called Starsight, a Silicon Valley firm backed by cable and media giants including Viacom, Tribune, and Thomson. Malone and Murdoch were working, together and separately, to develop guides, as were set-top box makers Scientific Atlanta and General Instrument. A tiny Boston startup called VideoGuide had a guide that used paging technology to deliver listings to TVs.
From his experience with VCR Plus, Yuen knew he needed patents. He took Gemstar public in 1995--the company was then valued at about $250 million--and went on an acquisition spree, buying both VideoGuide and Starsight; they had collectively lost more than $70 million because interactive TV was slow to develop. That made Yuen the biggest force in the business, along with Malone's United Video, and as they fought in court, each came to believe that he needed the other. Gemstar had the intellectual property, while Malone had the cable relationships and, after allying with Murdoch, the power of the TV Guide brand.
Yuen could have pocketed about $300 million by selling them Gemstar in 1998, but as he told everyone at the time, he didn't care. "I have very simple tastes," Yuen says. "I don't know how to spend money." Others, including his biggest investor, a Hong Kong real estate man named Thomas Lau, who owned 24% of the company, and Viacom and Thomson, which owned 6% each, wanted to cash out. Goldman Sachs and Morgan Stanley, which were advising Lau, also pushed for the deal. "We had lots of heated conversations about the value of the company," recalls Jim Meyer, a Gemstar director and the top U.S. executive of Thomson. "One of the hardest to convince was me." Only by lobbying relentlessly did Yuen convince the board that Gemstar, by rejecting the bid, would become even more valuable.
Last fall's merger negotiations with TV Guide were no easier, given the bad blood between the two companies. (Their talks began after a federal judge told them to try to settle their lawsuits.) This was a combination of old- and new-media companies without precedent; it raised thorny issues of valuation, as AOL's proposed merger with Time Warner would later. In both deals, new media triumphed: Although Gemstar will contribute about 20% of the revenues and 35% of the operating income of the combined company, its stockholders own about 55% of the equity because it is the growth engine.
To protect themselves, Murdoch and Malone's operatives held out for a corporate structure that's more like a confederation than a conventional company. Yuen, as CEO, will run Gemstar from Pasadena, with co-President and CFO Elsie Leung and executive vice president Steve Weiswasser, an experienced media executive. Joe Keiner, a former News Corp. executive, and Peter Boylan, a Liberty lieutenant, are also co-presidents. Keiner operates the magazine, the scrolling cable channel, and advertising sales from New York; and Boylan manages the cable-based interactive guide, a horse-racing channel, and other assets from his base in Tulsa. Keiner and Boylan have six-year employment contracts, and Yuen can't fire Keiner without the approval of News Corp., or Boylan without the consent of Liberty.
"I report to Henry," Boylan explains, "but Henry can't fire me or change my compensation or change my responsibilities without Liberty's approval." But he's quick to add, "Henry and I actually have a great relationship despite the incredible tension that existed in the past."
For his part, Yuen concedes the obvious--that the structure's not ideal. "That's probably the best management structure I can negotiate under the circumstances," he says. Culture clashes are all but certain, particularly because Yuen and Leung are extremely frugal. A single employee at Gemstar, for example, handles public relations and investor relations, and even the smallest expenditures must be approved by Yuen and Leung. "I have a headache having my budgets go through Elsie," Yuen says. "They're going to have to share the same headache."
For the merger to work, Yuen will have to share power, something he hasn't done in the past. Working seven days a week, he approves hires, reads legal contracts, and edits press releases. "I don't think there's a word for 'delegate' in Chinese," jokes Jack Healy, an executive with @TV, the Gemstar-Thomson-NBC joint venture. A boss who combines intellectual rigor with charm, Yuen is also intensely private. Senior staff at Gemstar don't seem to know where he lives or where he is at any given time; he's best reached by e-mail.
Personal quirks aside, Yuen is untested in the media big leagues. "He's going from a world of 100 people with $200 million of revenues to a huge world with, well, a lot more sharks in the water," says Gemstar director Jim Meyer. "Is he smart enough? Absolutely. Will he outwork anybody? Absolutely. The question is, Will he surround himself with the talent he needs to get the job done?"
One big job will be to refocus TV Guide magazine on its articles, not its listings. With free TV listings widely available, readers have defected and Wall Street has ceased to care about the print product. "The magazine is $600 million of revenue," Boylan says, "but in terms of valuation drivers, it's not material."
Another goal of Yuen's, albeit a tricky one, is to use the magazine to drive readers, and especially advertisers, to Gemstar's onscreen guides. You can also be sure that TV Guide will be made available on e-books, where readers will be able to search and annotate its listings. The magazine people might even cut back further on listings to push TV fans who want to plan their viewing toward Gemstar's high-growth, high-margin electronic products.
To build out his TV portal quickly, Yuen will also have to make peace with his cable industry foes. That'll be challenging because they don't want to pay for his patents and they don't like the fact that he's figured out ways to bypass cable gatekeepers. Gemstar's EPGs, remember, are built into TVs, and updated listings are delivered via broadcast signals. (In exchange for distributing his data, ABC and NBC get top billing on Gemstar guides. Another puzzle solved.) The two-way paging technology he's created with Thomson gives Gemstar another way to get around cable, and provides viewers with a way to buy products advertised on the guides.
No wonder the cable guys are distressed. They see the EPG as a valuable platform to promote their own channels, pay-per-view movies, telephony, and Internet access. "That guide is the gateway to the programming we're providing," says Lynne Elander, a Cox Cable executive. "We own the customer relationship, and it's important for us to have control."
Fortunately for Gemstar, TV Guide has built cable partnerships by agreeing to share branding and advertising revenues. AT&T, the biggest cable operator, has a ten-year exclusive agreement to carry TV Guide's interactive guide. And AOL, which is acquiring Time Warner and its cable systems, has good relations with TV Guide and Gemstar. Says Boylan: "It's impossible to have a situation where the parent company, AOL, has licensed patents and respected your intellectual property, and a wholly owned subsidiary, Time Warner Cable, is infringing it."
One of the odd things here is that everyone's fighting over a business that may or may not be worth the fuss. Is the idea of a TV portal real, or will people just click through the guide to get to their favorite show? Naturally Gemstar's people say the EPG is the next big thing. "This is a huge strategic, branding, merchandising, and promotional opportunity," says Bruce Maggin, a former ABC executive who now runs @TV. He argues that the TV portal, unlike any other channel, will be unavoidable because it pops up whenever viewers turn on the set. Besides that, he's building news, sports, and weather data into the guides, to make them as "sticky" as a popular Internet site. Jack Myers, chief economist for the Myers Report, calls the EPG "valuable real estate" and predicts that it will generate "significant revenues."
That's presuming that Yuen keeps his eye on the prize, while merging two companies and--don't forget--making e-books a hit, another big challenge that he's embraced with his usual fervor. He's been spending lots of time pushing Thomson to get e-books to market for the holiday season and lobbying publishers to make more titles available. Yes, it's another chicken-and-egg problem--not enough e-books out there and not enough content for them. No matter: Yuen's grand vision for e-books puts Gemstar at dead center--as licensor of the technology to manufacturers like RCA and Sony, as a distributor of magazines and e-books (and competitor to Amazon and other booksellers), and as a seller of advertising (think what Lands' End or Victoria's Secret might pay to have its catalogs downloaded). Yuen has told publishers that he'll spend $100 million promoting e-books along with the titles they make available. That's more than the trade book industry spent on advertising last year, he says. "We don't dabble," Yuen says. "When we get into something, we swing for the fences."
This is a funny kind of media company, when you think about it. Gemstar will never create a TV show or publish a novel, but Henry Yuen expects to make money every time anyone sits down to watch television or read an e-book. Provided he can solve a few more puzzles first.
FEEDBACK: mgunther@fortunemail.com
"There's no way the cable industry is going to yield total control to Yuen," a cable executive says.
E-books present a chicken-and-egg business problem--a kind that Yuen has resolved before.
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