The Yahoo! of Television?
By Paul R. La Monica
BRUCE SPRINGSTEEN wrote a song a couple of years ago called "57
Channels (and Nothin' on)." The song is a bit of an anachronism now.
As technology has progressed, many couch potatoes are now faced
with hundreds of stations to choose from. And that raises an
interesting question. How on earth do you find what you really want to
see?
Sounds like someone needs to make a search engine for the old boob
tube. Well, someone has. Gemstar (GMST), which is probably best
known for helping clueless VCR owners tape their favorite shows with
its VCR Plus+ product, has something called Guide Plus+, an
interactive, electronic program guide. The guide allows viewers to sort
through channels to find shows, click on panels for more program
information and automatically set up the VCR to record shows.
Gemstar has licensing agreements with most of the major consumer
electronics makers to include the product in new televisions. "This is
not an Internet company but Gemstar's electronic guide could be like a
portal on a television set," says Alan Gould, an analyst with Gerard
Klauer Mattison.
A TV portal? Sounds like an advertising opportunity. In fact, the first
ads (commercials for NBC television series) started to appear on Gemstar's electronic guides last week. NBC,
the network-television affiliate owned by General Electric (GE), intends to have more ads on the guide. And
what's more, Gemstar and NBC are two of three members in a joint venture to sell advertising on Guide Plus+.
The other member is French consumer-electronics giant Thomson Multimedia, which makes the RCA brand of
products. Big partners for a company with just $163 million in revenue and a market cap of just $3.1 billion.
Gemstar may not be an Internet stock but it's certainly behaving like one. Its
shares are up more than 80% since September. Such strong price movement has
helped place Gemstar on our CANSLIM Screen, a stock-picking method designed
to look for companies with strong sales and earnings growth as well as price
momentum. This screen yields some admittedly volatile stocks. But because of
their explosive growth potential, they can be worth the higher valuations -- if you
can stomach the risk.
The excitement for Gemstar is clearly in the advertising potential for the electronic
guide. Gould estimates that in its next fiscal year, Gemstar will generate just $3
million in advertising revenues. But he believes that will balloon to $25 million in
2001. And he concedes that his estimates are likely very conservative. By 2001, there should be about 7.5 million
televisions with Gemstar's guide in it so $25 million in revenues works out to only about $3 in advertising revenue
per set.
Joe Arsenio, an analyst with Hambrecht & Quist, says he sees the potential for dramatic increases in
advertising-revenue growth as far out as 2008 before leveling off. So it seems that there is a lot of money to be
made in advertising over an extended period of time. And unfortunately that's why Gemstar has been involved in
several lawsuits.
Gemstar's main rival is United Video Satellite Group (UVSGA) whose Prevue subsidiary has its own interactive
guide. United Video has a pending deal to buy TV Guide. The two companies have been suing each other for the
last few years. Complicating matters is the fact that United Video's majority owner is cable company
Tele-Communications (TCI), which in turn is in the process of being acquired by AT&T (T). Once the TV Guide
deal closes, its current owner, News Corp. (NWS), will have a 40% stake in United Video. So there are plenty of
big guns involved. In addition, Gemstar is being sued for patent infringement by electronics-components maker
Scientific-Atlanta (SFA). Gemstar has sued Scientific-Atlanta and other component makers General
Instrument (GIC) and Pioneer Electronic (PIO). The main issue in all these cases is whether or not Gemstar's
practices are monopolistic. Not only does everyone want a piece of advertising revenue but cable companies and
electronics makers that would be purchasing Gemstar products are afraid of how little competition in this area
would jack up the licensing fees Gemstar charges.
But putting all the legal mumbo jumbo aside, analysts don't think Gemstar is in danger of losing its advantage in
the guide area. To that end, Gemstar has already won a small victory over United Video. Earlier this week, a court
in Tulsa, Okla., ruled that one of its patents for electronic programming guides is enforceable. Arsenio says
Gemstar management has been incredibly savvy over the last several years as the company either filed its own
patents for guide technology or bought companies that had filed existing patents. Gemstar bought StarSight, a
company that developed most of the technology for Gemstar's Guide Plus+, in 1997.
Arsenio says Gemstar CEO Henry Yuen had the foresight to recognize years ago that an electronic guide could
be a useful product and only now as other companies have realized the potential for big advertising sales are
competitors crying about monopolistic practices. Arsenio says that he thinks ultimately most parties will come to
terms with Gemstar and cut deals rather than drag things out in court.
And once you get past the excitement of the potential for huge gains in advertising revenue and take a look at the
company's financials, you have even more to be happy about. Gemstar has no debt, return on equity of 56% and
net margins of 43%. Earnings for fiscal 1999 (ending March) are expected to be 33% higher than fiscal 1998. And
analysts are predicting earnings growth of 27% in fiscal 2000. It's no wonder then that the company trades at 37
times fiscal 2000 estimates of $1.67 a share.
So the next time you can't remember if that movie you've been dying to catch is on one of the eight premium
movie channels, the plethora of basic cable stations or just plain old network TV, then think of how handy an easy
to use electronic guide would be. Then watch for more and more advertising. Gemstar clearly hopes you will. |
