GMST--Gushing Front Page LA Times Article
With Merger, Interactive TV May Be a Click
Away
Technology: Final OK of Gemstar-TV Guide deal clears way for
ordering products by remote control.
By KAREN KAPLAN, Times Staff Writer
A Pasadena company cemented a deal Wednesday that gives it a
near-monopoly over critical technology for interactive TV program
guides that could be worth billions of dollars and will enable couch
potatoes with remote controls to surf TV listings, order movies
instantaneously and have pizza delivered to their door.
After a surprise ruling from the Justice Department cleared the
way, Gemstar International Group completed its $14.3-billion
purchase of longtime rival TV Guide Inc. The decision, made
Tuesday night after a lengthy government review, surprised some
cable TV executives and many Wall Street investors, who promptly
bid up shares of both companies.
As a result of the deal, by year's end 10 million U.S. households
could be using Gemstar's interactive on-screen program guide to sift
through scores of TV shows and buy all manner of products with a
few simple clicks of the remote control.
The merger will dramatically accelerate the introduction of
Internet-style features on TV screens. The convergence of televisions
and computers has been prophesied for years, but it has been slowed
by legal battles over crucial technology patents--mostly held by
Gemstar. But Wednesday's deal resolves many of these disputes.
Now the combined company, under Chief Executive Henry Yuen,
52, is poised to gain a monopoly over what some analysts believe
could become one of the most valuable media properties ever
created. The deal brings under one roof such products as TV Guide
magazine, Gemstar's VCR Plus system for recording television shows
and the two dominant brands of electronic books.
But the merger was really driven by the promise of interactive TV
program guides, known as IPGs.
"The IPG will be the tool of choice that consumers use to manage
the intersection of TV, the Internet, [Internet] telephony and a host of
other interactive services . . . delivered into the home," said John
Corcoran, a new-media analyst with CIBC World Markets in New
York. "Within a few years, the IPG will be as ubiquitous as the
remote control."
Electronic program guides are on-screen directories of TV shows
that can be organized by topic, channel or air time. Users can search
for specific shows and programs can be selected by pressing a few
TV remote control buttons. Because the guides keep track of which
shows viewers watch, they can also serve up targeted ads and
recommend other shows the viewer might want to see. And because
the guides rely on two-way communications, they also allow viewers
to play multiplayer video games and order products from their TV.
Aggressive Defense of Patents
Billions of dollars a year could now flow to Gemstar-TV Guide
because it controls IPG technology, analysts estimate. The company
will continue to make money by licensing its key patents to TV and
VCR manufacturers and to cable and satellite TV operators. But the
real growth will come from selling lucrative, targeted ads on the
interactive program guides, Corcoran said. The company will also be
in a position to earn a commission on any electronic commerce
transactions that occur on the guide, he said.
Last year, the two companies earned a combined profit of nearly
$86 million on combined revenue of $1.34 billion.
Gemstar-TV Guide's role in this field could grow even larger if TV
sets, armed with interactive program guides, become a major entry
way onto the Internet.
That kind of power prompted many powerful media companies to
oppose the deal on antitrust grounds. Cable companies in particular
complained that the merger would give Gemstar exclusive control
over too many critical patents and prevent others from creating
competing guides.
Under Yuen, a mathematician and lawyer, Gemstar has been
extremely aggressive about suing competitors if he believes they have
infringed his company's nearly 200 patents. Yuen's targets have
returned the favor with lawsuits of their own accusing Gemstar of
using its monopoly power to strong-arm them into unfavorable patent
licensing deals.
"Basically, they sue anyone who tries to compete with them," said
Linda Varoli, an analyst with Merger Insight in New York.
Some rivals have compared Yuen to Bill Gates for his aggressive
efforts to dominate an emerging industry. Forbes magazine pegs
Yuen's net worth at $1.3 billion.
Gemstar and TV Guide are the two leading makers of electronic
program guides. The software to operate Gemstar's guides is built
into televisions and VCRs, and the program data that is displayed on
the guides is carried over TV signals from the ABC, NBC, CBS,
Fox, UPN and PBS networks.
Since 1998 Gemstar, based in Pasadena, has licensed its IPG
technology to consumer electronics giants. Gemstar's interactive
program guides are now built into 2.5 million TV sets, analysts said.
TV Guide, by contrast, builds its electronic program guides into
the digital set-top boxes that cable companies put in their customers'
homes. Some 3.5 million of its guides are currently used.
TV Guide had strong ties to the cable industry. Liberty Media, a
subsidiary of AT&T, the country's largest cable operator, controlled
the company, along with Rupert Murdoch's News Corp. They will
each own 22% of the combined company, to be known as
Gemstar-TV Guide International.
A History of Bitter Rivalry
Gemstar and TV Guide have a long history as fierce rivals. The
two companies have battled each other in court over IPG patents for
years, holding down the stock prices of both companies and
prompting would-be customers to sit on the sidelines until the
disputes were resolved.
Gemstar and TV Guide thought they had resolved their differences
in late 1997, when they agreed on plans for a joint venture, but the
deal fell through. Then United Video Satellite Group, the company
that later bought TV Guide and adopted the name, launched a secret
bid to buy Gemstar. But Yuen rejected the offer, saying the price was
too low. The tables turned one year later, with Gemstar inking a deal
in October to buy TV Guide.
Executives from Gemstar and TV Guide said Wednesday that
they will begin to combine their program guides, which all will carry a
variant of the TV Guide name. Ads sold for the Gemstar guide will
soon be carried by the TV Guide IPG and vice versa, said Stacy
Bingler Forbes, a research analyst with Janco Partners in Englewood,
Colo.
Industry executives question whether Gemstar-TV Guide will
soften its bulldog demeanor. In a federal lawsuit filed last year, cable
set-top box maker Scientific Atlanta accused Gemstar of refusing to
allow the company to license any of its IPG patents unless it would
license "an entire bundle" of them. Gemstar also demanded a
$20-million royalty payment and a 70% commission on any ad
revenue Scientific Atlanta collected from its IPG, according to the
suit.
Neither company would comment on the lawsuit, but in court
filings Gemstar denied its behavior was anti-competitive and said it
was merely trying to enforce its patents.
Some analysts had expected Justice Department regulators to
require Gemstar and TV Guide to make commitments to license their
critical electronic program guide technologies on reasonable terms in
order to get their merger approved. At least one top cable industry
executive thought regulators would block the deal altogether.
Even though the deal is done, Gemstar will still be subject to
regulatory scrutiny. The Justice Department "will want to see that
interactive TV is being rolled out at a decent pace, and if it's not, that
may make them ask questions," said Tom Eagan, a cable analyst with
PaineWebber in New York.
Both companies' stocks soared in Nasdaq trading Wednesday
after word that the deal was closed. Gemstar shares rose 18% and
closed at $69.75, up $10.63, while TV Guide shares ballooned 27%
and closed at $45.63, up $9.63.
Under the terms of the deal, Gemstar will exchange 1.3146 shares
of its stock for each share of TV Guide stock, giving the deal a value
of $14.2 million based on Wednesday's closing prices. Gemstar will
also assume $670 million in TV Guide debt. |
