Gemstar Shares Get Active on Hopes
for Interactive TV
By George Mannes
Staff Reporter
12/1/99 10:13 AM ET
Gemstar International Group (GMST:Nasdaq), the
electronic TV-listings company, may be a good bet for
investors gambling on the future of interactive TV.
The Pasadena, Calif., company, which plans to merge
with TV Guide (TVGIA:Nasdaq), has seen its share
price more than triple since March to 112 3/4 Tuesday
as the perceived value of the company's onscreen
programming guide business has grown. Institutional
shareholders insist the stock still has huge potential if
and when people start interacting with their TVs.
"Investors have barely pieced together the power of the
TV as an interactive platform and the importance of the
program guide," says Larry Marcus, a senior analyst
covering digital television and Internet media for
Deutsche Banc Alex. Brown, which hasn't done
recent underwriting for the company. Marcus rates
shares of the company strong buy, his firm's highest
rating.
"I think this is a $200 stock," says Mark Greenberg, the
portfolio manager of the Invesco Leisure fund. Gemstar
and TV Guide amount to 6.5% of Greenberg's portfolio,
and Invesco has bought Gemstar as recently as the
past two weeks. "In another five years, most homes in
the country are going to have the Gemstar guide in one
form or another."
With Gemstar's technology, which analysts expect will
be available in 5 million homes by the middle of next
year, viewers can scroll through listings at their own
pace, search by type of program, record shows with the
touch of a button or check the schedule for VH-1 while
watching MTV.
Though more than 99% of Gemstar's revenue comes
from licensing its technology for TVs, set-top boxes and
other consumer devices, analysts and investors are
expecting that once enough Gemstar guides are in use,
the company's ad revenue will take off. NBC and Arts &
Entertainment already advertise with Gemstar, which
sold $400,000 worth of advertising on the guide in the
quarter ended Sept. 30. Marcus estimates ad revenue of
$4.6 million for the full fiscal year.
That may just be the beginning. Right now, people who
watch TV pretty much just sit there. Some people think
Gemstar's product could get couch potatoes to interact
more with their TV sets -- clicking on their remotes to
order a pizza or pressing a button to set up a test drive
of the Lexus they just saw.
"People have to get used to the idea that TV is
interactive," says Brad Garlinghouse, a general partner
of CMGI's (CMGI:Nasdaq) venture capital affiliate
@Ventures. "The interactive program guide will act as a
Trojan horse to demonstrate to people what is possible
in the interactive [TV] world."
Gemstar CEO Henry Yuen readily acknowledges that
TV viewing is "relatively passive," and that it's slow to
change. But, he says, that will change over the next five
to 10 years. In part, that's because he thinks there's a
natural progression from getting program information on
the set to getting other types of information, and from
there to making transactions. "The younger generation
is far more ready to interact with the TV than even with
their parents," he says. "I wouldn't rule out changes just
because the generations are different."
If all goes well, the programming guide would be the
gateway to the TV, just the way a portal's home page is
a starting point for going online. With the number of
channels on cable TV systems regularly surpassing 100
and with some homes receiving four different feeds of
HBO, it's hard to figure out what's on just by flipping
through the channels.
"The programming guide really becomes your user
interface for navigation," says Barry Schuler, president
of the AOL Interactive Services Group at America
Online (AOL:NYSE), which has licensed Gemstar's
technology.
As bullish as this picture looks, it's tough to quantify
Gemstar's opportunity. The company could eventually
have revenue of $100 million a year from every million
guides in use, according to Marcus, who expects the
first 5 million to be in place by mid-2000. That's a big
jump from the less than $5 million in advertising that
Marcus is predicting for this fiscal year.
And to open up rudimentary e-commerce and other
transactions, the company will need programming
guides to send signals, not just receive them, Yuen
cautions. That probably won't happen until 2001, he
says. Even Gemstar bulls aren't predicting what
e-commerce and other revenue could be. "I've already
got an ice cream sundae" with Gemstar's ad revenue,
says Invesco's Greenberg. "The interactivity is an extra
scoop and whipped cream."
Gemstar does seem to have secured the necessary
intellectual property to be a portal player. Last month,
the company won an arbitration agreement in a licensing
dispute with General Instrument (GIC:NYSE) over
Gemstar's technology -- a decision worth at least $37.5
million in damages. The company's expected acquisition
of TV Guide will end another major litigation battle.
But Yuen points out the company faces competition
from the companies to which it has licensed its
technology -- not just AOL, for example, but Microsoft
(MSFT:Nasdaq), too. "We continue to see this as a
highly competitive field," he says.
All Gemstar has to do is hope the interactive
opportunities don't melt away.
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