From IBD: investors.com
Date :03/17/2000
Author :Jonah Keri
Copyright :Investor?s Business Daily
Title :DEFENDING ITS TURF - Program-Guide Maker Gemstar Takes Patented Work Seriously
Gemstar International Group Ltd. boasts promising products, steady financials and prestigious partnerships with the likes of America Online Inc. and Microsoft Corp.
But it's also spending a lot of time in court these days protecting its turf.
Gemstar owns more than 150 patents for Guideplus, an interactive program guide designed to help TV viewers navigate a dizzying number of cable and satellite channels. Analysts see interactive program guides as hot advertising venues.
"The interface for all electronic programming will be the interactive guide," said Laurence Bloom, analyst for market researcher TechTrends Inc.
$4 Billion In Five Years
Gemstar just started nabbing program-guide ad revenue, getting $200,000 in 1999. Alan Gould, analyst for New York-based Gerard Klauer Mattison, expects the company's ad sales will exceed $4 billion in five years, though.
That's why Gemstar constantly stakes out its territory. The company has sued TiVo Inc., TV Guide Inc. and several cable set-top box makers, including Scientific-Atlanta Inc., claiming patent infringement.
TV Guide decided it would rather switch than fight, agreeing in October to merge with Gemstar. Gemstar hopes the TV Guide deal, to become final next quarter, will help the company spread its guides to more households.
TV Guide holds an exclusive relationship with AT&T Corp. and its emerging cable empire, which could yield as many as 15 million new customers. TV Guide is expected to continue working on other cable deals, which could bring in more new customers.
Scientific-Atlanta Inc., on the other hand, has countersued Gemstar, claiming the guide maker is infringing on its technology. The TiVo case is pending.
Keeping Microsoft In Line
Gemstar's patents are so far-reaching that even mighty rivals feel compelled to sign licensing deals or risk getting sued. Microsoft tried for years to create its own interactive program guide. After realizing it couldn't do that without violating Gemstar's patents, Microsoft relented. The software giant agreed to pay Gemstar $45 million in licensing fees, plus a large share of advertising and user fees.
"That made me convinced of the strength of intellectual property," Gould said. "(Microsoft) must have felt the intellectual property has merit and that they couldn't work their way around it. If there was a way around the patent, they would have done it."
AOL signed a similar deal with Gemstar last year, packaging a one-time payment of $25 million with ad revenue and a share of sales from AOL's TV subscribers.
Gemstar's current financial grounding comes mostly from its videocasette recorder business. VCRs let users record TV shows by punching in codes on a remote control. Though no longer a high-growth area, the product still offers healthy returns for Gemstar. The company needs these to support its program guide efforts.
Started With Buyouts
Gemstar got into the program guide business by acquiring two small guide makers, Star Site Telecast and Video Guide, in 1997. Any other media company could have made the purchase, but only Gemstar was willing to pull the trigger. It took the two companies' intellectual property and patented as much of their technology as it could.
Gemstar could be in trouble if it loses some pending lawsuits and consequently protection for its intellectual property. Rivals such as Source Media Inc. are trying to chip away at Gemstar's market share, with server-based program guides that bypass the company's patents.
More important for Gemstar will be getting more cable operators to carry its guides. Stephen Palley, Source Media's chairman and chief executive, says guide providers that eventually get the cable guys on board will reap the highest rewards.
"In two or three years, there will be 40 or 50 million homes, maybe more, that will have digital interactivity available to them," Palley said. "It has been a relatively slow process to date, but the momentum is increasing."
Key Thomson Deal
But Gemstar's protective strategy appears to be working so far. Thomson Multimedia, which owns a small stake in Gemstar, will ship 30 million RCA, General Electric and Proscan TV sets equipped with Gemstar guides over the next 10 years.
And Gemstar is trying to carve out cable pacts of its own. Cable companies are taking a hard-line stance, Gould says, figuring they're gatekeepers to customers' homes. But Gemstar doesn't look ready to agree to any deals that may compromise its intellectual property.
"The cable industry can't just sit and wait for Gemstar to go bankrupt, because it won't happen," Gould said. "The company has no debt, and its balance sheet gets stronger every quarter. If the cable industry puts boxes out that infringe on Gemstar's intellectual property, Gemstar could potentially win (triple) damages. This is one company that can afford to let things go to court."
In the fiscal third quarter ended Dec. 31, the company's sales rose 49% to $61.8 million. Earnings gained 63% to 13 cents a share. Analysts polled by First Call say earnings will grow 29% to 44 cents in fiscal 2000, 25% to 55 cents in 2001 and 49% to 82 cents in 2002. Gemstar trades as GMST near 82. |
