No self-respecting media mogul would be caught dead in these offices. The rented space in Pasadena, Calif., is miles from the action in Hollywood, Beverly Hills, or Santa Monica. Sitting seven floors above a Federal Express storefront, the offices have no young hotshots scurrying through the halls. No producers are taking meetings. No Evian water is being hustled to the elbow of a pampered star. As for the full-size movie posters that adorn most moguls' offices, forget it. Scores of wood-framed plaques that could be mistaken for awards from the local Rotary Club hang on these walls.
But the plaques represent power. As Michael D. Eisner, Barry Diller, or any other mogul will tell you, power is getting your phone calls taken. And no one is getting his calls taken faster these days than Henry C. Yuen, a onetime math professor who believes he holds the keys to the future of television. The plaques are patents for the technology Yuen says will be needed in the next few years to navigate the coming tsunami of TV, Internet, and other services about to hit TV sets everywhere. And his arsenal of nearly 200 patents is making Yuen and the company he heads, Gemstar-TV Guide International Inc. (GMST), the hottest--and perhaps the most controversial--player in the new world of interactive TV.
With his bowl haircut and owlish glasses, the slightly built Yuen, 52, looks more like a technology geek than a mogul. And until just a few years ago he was just that: a research scientist who, together with fellow Chinese-born students he had met in the game room at California Institute of Technology, came up with VCR Plus+. That technology, invented in 1989, is now present in nearly all VCRs, making it easier to program the recorders. The VCR Plus+ breakthrough made Yuen a multimillionaire, but it was just a warmup. In the early '90s, about the time cable-TV titan John Malone made his speech predicting a 500-channel world, Yuen already was working on ways to make the exploding TV world more user-friendly.
VAST POWER. Today, allied with Malone and News Corp. (NWS) Chairman Rupert Murdoch, Yuen wants nothing less than to control the first screen you see when you turn on your TV. The game plan is to make Gemstar's interactive program guide the portal to the TV universe, much as America Online Inc. (AOL) or MSN greets you as you log on to the Internet. If Yuen has his way, you'll be paying--indirectly through advertisements or through your cable bill--every time someone clicks on that guide. Gemstar is counting not only on licensing fees for the guide itself but also on a cut of all the advertising and commerce generated.
So how can one guy amass so much power from something so seemingly inconsequential as a programming guide? Because Yuen, Murdoch, Malone, and everyone else in the media world believe that the potential of interactivity via the TV, the world's most ubiquitous home appliance, is vast. According to statistics collected by Gemstar, U.S. TV viewers come back to the guide an average of four times an hour and surf through at least three screens of listings. If people watch TV an average of seven hours a day, that can mean a lot of time logged on to the guide. With the coming barrage of channels, they may spend even more time glued to the tube, analysts say. And the chances are that more viewers will be clicking to sort shows by category, record the news, buy a movie, or get on the Internet. Right now, to do just about anything from an interactive program guide requires a Gemstar patent. "A person can get through maybe 60, 70 channels without some help, but not 500," says Yuen. "And with all that confusion, we see great opportunity."
Most analysts agree. By 2005, they figure, the interactive-TV market will be huge, with nearly half of America's 102 million TV households using their TVs to click onto the Internet or order products. By then, interactive TV will be a $40 billion market, generating revnues on everything from advertising to subscriptions to video-on-demand, calculates ING Barings analyst Spencer Wang. With its "first-screen" strategy, Gemstar "controls the most important piece of real estate out there," says Merrill Lynch & Co. media analyst Jessica Reif Cohen.
No less a media figure than Murdoch, whose News Corp. owns a 43% stake in Gemstar, has made the company a key element in his own plans to create a worldwide satellite network. Yuen "is a brilliant strategist," says Murdoch. "And [he] has shown to have a novel way for thinking out of the box." For weeks, Murdoch's News Corp. has been negotiating to merge its Sky Global Network Inc. with General Motors Corp.'s DirecTV unit. Almost overnight, that would put Gemstar's guides on TVs in as many as 20 million homes worldwide.
"THE SMARTEST." Other media heavyweights have signed on with Yuen, too. William H. Gates III has licensed Yuen's technology for Microsoft Corp.'s new Ultimate TV, while Stephen Case has signed on for his company's just-released AOL TV. More than 100 cable companies license the technology. In all, the interactive guide today is seen in more than 10 million homes. "We think he may just be the smartest guy in television," says Robert R. "Dob" Bennett, president of Malone's Liberty Media Corp. (LMG.A) and a Gemstar board member. "His greatest strength is that he owns every idea he has."
With so much power in the nascent world of interactive TV, Yuen has his share of enemies. And many of them he has cultivated himself. Exhibiting a certain swagger about the coveted technology he owns, Yuen, who holds a law degree alongside his math PhD, has a penchant for suing his competitors over alleged patent infringement. That has earned him a reputation for being combative; a magazine article once described him as a "patent terrorist." To that charge, a composed Yuen scarcely reacts. "I am no terrorist," he says. "A terrorist is someone who breaks the law. I am only doing what the U.S. Congress and patent law allow." Still, Yuen has been a relentless litigant, with pending lawsuits against such companies as EchoStar (DISH) and TiVo (TIVO). Once a student of the Jackie Chan style of Chinese martial arts called Wing Chun, Yuen rarely backs off from a good fight. And he has never lost a lawsuit.
Yuen also exacts often onerous terms from partners for huge percentages of the advertising and commerce revenues that are generated on the guide. That, plus his courtroom track record, has hardened many of the TV world's players against Gemstar. "He scares the hell out of us," says one top cable executive who, like most of his peers, insisted on anonymity. "He can force his way onto our system because we need the guide, and he seems to be the only way to get one." Some cable guys, including Cox Communications Inc. (COX) and Comcast Corp. (CMCSK), were so turned off by the hardball tactics that they banded together to start a rival service, TVGateway. It's a fledgling effort so far, but the hope is that it will give them some leverage in talks with Gemstar in the meantime. Certain opponents, such as satellite service EchoStar Communications Corp. and set-top maker Scientific-Atlanta Inc., are countersuing, claiming Gemstar has a stranglehold on a crucial piece of the new world of digital TV. Even many that have signed with Gemstar have done so only after bruising negotiations.
The problem is that Yuen is upsetting the existing order in which cable and satellite operators have been able to offer viewers all sorts of choices. That's why most cable companies carry both HBO and Showtime, or ESPN and Fox Sports. "It is the Noah principle," says Lawrence F. Marcus, a venture capitalist with Walden VC who has worked with cable operators and interactive-TV companies. Cable and satellite companies "like to have two of everything so that one guy can't hold them up." So it would seem Yuen's business plan was built on alienating the companies he needed most as customers.
But Yuen appears to be softening his approach, realizing the importance of signing up holdout cable companies. He needs them if he is successfully to build a "national footprint" to sell advertising in every major market. By offering more favorable terms than he has done in the past, Yuen was able to ink a deal on Feb. 19 with billionaire investor Paul G. Allen's Charter Communications Inc., once a main foe. While the deal was seen by many as a big win for Gemstar, the cable operator is continuing to hedge its bets, keeping its partnership stake in rival TVGateway.
Even more important for Yuen are talks now under way with AOL Time Warner Inc., the country's No. 2 cable operator. If he can strike a deal with Time Warner Cable, once an adversary, Yuen will add nearly 13 million households, giving Gemstar a stronger footing in New York and other East Coast cities. Much of those negotiations are handled directly by hard-nosed Peter C. Boylan III, a onetime dealmaker for Malone and now one of three Gemstar co-presidents. It's no easy task. Time Warner Cable last year stripped from several of its cable systems Gemstar's ability to send signals that feed program information to its guides. Those signals were reinstated to help Time Warner win approval for its merger with America Online Inc. from federal regulators who questioned the combined companies' power to exclude programming it didn't own. But it's not clear what AOL Time Warner's next moves are. Officials declined to comment on the current talks with Gemstar.
Yet even before Gemstar was forced to become a kinder and gentler negotiator, it had important allies. Two of its biggest investors, Murdoch and Malone, agreed to merge their TV Guide Inc. holdings with Gemstar after their failed 1998 takeover attempt. Gemstar is also something of a Wall Street darling these days, winning a rush of new fans, with eight analysts putting out "buy" recommendations in the past two months. Richard J. Rosenstein, an analyst at Goldman, Sachs & Co., figures that by 2005, the company will generate nearly 80% of its projected $9.8 billion in revenues from its interactive unit. And the company, with a market cap of $21 billion, is outperforming the broader market. Since Gemstar and TV Guide completed their merger in July, shares are down 19%, to about $50, but that's compared with a 43% drop for the Nasdaq composite index.
LOW HURDLE. Wall Street also seems to like that Gemstar clearly overshadows tiny rival TVGateway. Unlike Gemstar's interactive service, which is based on software contained in the set-top box, TVGateway's service stores information about TV shows on a server located at the cable company's central office. The company says a new version is due out in mid-June. But it still is unlikely to include some basic features available on Gemstar's guide, such as searching for TV shows by title and the one-button recording of shows. But it does have one important feature, says Hal M. Krisberg, chairman and CEO of WorldGate Communications Inc., which developed TVGateway. It's designed to steer clear of Gemstar's patents and doesn't require cable operators to pay Yuen a penny. "The hurdle that my folks set wasn't particularly high," says Krisberg. "All they wanted was to make it Gemstar-proof."
Yuen waves off any threat by TVGateway, and Boylan suggests that despite claims to the contrary, it probably infringes the Gemstar patents. But Boylan says Gemstar won't bother suing because so far, TVGateway has been deployed by only a single service, New Hampshire's 35,000-subscriber MetroCast Cablevision. To date, according to MetroCast President Terry Hicks, it has been installed in little more than 100 households. Hicks picked TVGateway not so much for the cost, since he's paying the same monthly 35 cents a subscriber that Gemstar-TV Guide is likely to charge. Instead, he says, he wasn't particularly eager to share the revenues from ads or whatever new services he might add down the road to the program guide. "It's a real problem having a gatekeeper," says Hicks. "[Gemstar-]TV Guide is a gatekeeper."
The irony is that gatekeeper Yuen is setting out to capture a service of which he is at best a casual user. The Gemstar CEO tunes in his DirecTV satellite dish to take in the Fox sci-fi drama The X-Files or an occasional soccer game. His affinity for sports is an echo of his youth in Hong Kong, where he and his family moved when Yuen was 2. There, Yuen rose to become a high-scoring soccer player ranked one level below world-class. Tough-minded, he was quick on the field and scored often, recalls Daniel S. Kwoh, a Gemstar founder and friend who worked with Yuen at defense contractor TRW Inc. in the late 1980s. Their project then: studying wave motions in the ocean, useful in submarine detection.
It was that kind of scientific pursuit that seemed to drive Yuen at an early age. The son of a lawyer turned film producer, Yuen was not taken by the world of media. His father's films were mostly financial bombs, although the older Yuen was nominated in 1982 for a prize at the Cannes Film Festival for a film called The True Story of Ah Q. At 17, Yuen left Hong Kong for the U.S., where he got his bachelor's degree in math at the University of Wisconsin.
The turning point in Yuen's life came in 1988. A "long-suffering Boston Red Sox fan," as Yuen calls himself, he set his VCR to record a BoSox playoff game against the Oakland Athletics. Returning home from a weekend trip, he found he had recorded a screen full of snow. And so was born the idea for VCR Plus+, a nearly foolproof way of recording shows by plugging into a VCR numbers that correspond to the shows' listings in the local newspaper. The trick was getting newspapers to carry the numbers. Eventually, Gemstar executives persuaded The New York Times, then worried about falling newspaper readership, that carrying the listings was a service TV news couldn't offer. Other newspapers followed. VCR Plus+ also turned Yuen into a businessman. Even as he worked a full-time job at TRW, Yuen studied for a law degree at night. He started out by representing Chinese clients with U.S. business interests. One such client was Mary Lau, the younger sister of Hong Kong corporate raider Thomas L.H. Lau. Lau gave Yuen $50,000 to start a company to sell VCR Plus+.
Although early on it made remote controls that translated the VCR Plus+ codes into programming commands, Gemstar's goal from the beginning was the high-margin technology-licensing business. It collected fees from TV and VCR makers that wanted to incorporate VCR Plus+ into their products as a premium feature. It also got paid by newspapers that wanted to list the numerical codes. Yuen then realized the same model could work for programming guides. After some experimentation, Yuen and his friends hit on the notion of an onscreen directory, says Kwoh. Another company, StarSight, backed by media heavyweights such as Tribune Co., Viacom, and Cox Communications, had a two-year headstart. But Yuen went after StarSight for allegedly infringing a patent he already owned and in 1997 bought the money-losing company. A year earlier, Yuen had snapped up VideoGuide, which had other interactive TV patents.
In 1998, it was Yuen who was in someone else's sights, when Malone and Murdoch launched a $2.8 billion hostile takeover of Gemstar. At the time, TV Guide's own antiquated guide of upcoming programs was scrolling on more than 50 million cable homes in the U.S. The takeover bid was launched to get hold of Gemstar's patents, but Yuen mounted a ferocious defense, arguing to his shareholders that the company was worth far more than the bid. The market agreed, and with the spotlight of the takeover shining on it, Gemstar within months rose in value to nearly $10 billion. "He worked us over pretty well," recalls Gemstar board member and Thomson Multimedia Executive Vice-President James E. Meyer. Then Yuen turned the tables and sued TV Guide for alleged patent infringement, forcing Murdoch and Malone to the bargaining table. The result: a $7.9 billion stock merger. Says Boylan: "I told Rupert and John that we could litigate for 50 years with Henry, or get half the company."
RUSHING FORWARD. Gemstar is now run through a management structure designed to cater to all the power brokers involved. Under Yuen, three distinct co-presidents operate across the country. In Pasadena with Yuen is Chief Financial Officer Elsie Ma Leung, a longtime associate who oversees Gemstar's traditional VCR Plus+ business. Dealmaker Boylan, based in the Tulsa headquarters that once housed Malone's United Video, plays liaison to Wall Street and negotiator with cable companies. In New York, Joe Kiener, the smooth-talking media exec, watches over the TV Guide operations. Among those on the 12-member Gemstar board, which is split between Gemstar and News Corp. representatives, is Chase Carey, CEO of News Corp.'s Sky Global Network. Yuen, who has options to own nearly 10% of the company and is currently worth $1 billion, has the tie-breaking vote but has to prove himself worthy: As part of the Gemstar-TV Guide deal, Murdoch can fire the Gemstar CEO in five years.
That may be one reason why the Gemstar team is rushing to meet expectations--and pushing hard to sign up Time Warner. With the larger subscriber base, the upside would be potent indeed. Gemstar says it will sell more than $20 million worth of advertising this year and has signed up such name brand sponsors as Ford Motor, Domino's Pizza, and The Wall Street Journal.
The eventual lure for advertisers: With a single click of the remote, a company such as Ford, say, could send you information on one of its new models, especially since the cable company already has your address. By 2005, Gemstar could take in more than $8.5 billion in ad revenues yearly from its guide, estimates Goldman analyst Rosenstein.
Gemstar has a long way to go to match those projections. The recent deal with Charter aside, the mistrust among cable and satellite operators runs deep. EchoStar, which last year countersued Gemstar, claims in court papers that Yuen and Boylan are attempting to "coerce companies into long-term agreements, the duration of which may extend past the life of Gemstar patents." Boylan says the claims are untrue and are merely EchoStar's negotiating tactic. But even AT&T, Gemstar's largest single customer, is busily scrambling to secure its own revenue stream from digital TV. Its "walled garden" strategy assumes that it will be able to steer subscribers away from Gemstar's interactive guide to its own page, where viewers can buy movies, conduct e-commerce, and send e-mail messages. "We see this as a very robust business for us, too," says AT&T Senior Vice-President Richard Fickle, who heads the cable operator's interactive-TV business. "We have our own portal."
It is a delicate balancing act for Gemstar to work with its clients--at the same time that it stakes its claim to a channel that will compete against them. Eager to sign up new clients, Yuen & Co. showed the first inklings of compromise with Charter. Its deal allows the Paul Allen company to get the same advertising split it gave AT&T--with Gemstar getting 85% of ad revenues from the guide and Charter 15%, even though Charter, unlike AT&T, did not agree to roll the Gemstar guide out to all of its customers. Moreover, Gemstar agreed to reduce the fees it is charging Charter as the cable company increases the number of subscribers with the Gemstar guide. Boylan says he expects "a substantial majority" of Charter's subscribers will eventually have the Gemstar interactive guide.
Boylan may have to bend even more to cut a deal with Time Warner, which is currently covered by an earlier accord signed by Gemstar and Time Warner's new owner, AOL. That agreement pays Gemstar almost twice the 30 cents per subscriber that AT&T pays to use the channel, but it doesn't let Gemstar share in any of the advertising or commerce from the guide. Boylan will say only that the talks are continuing. But others say Gemstar may give AOL a bigger break on ad revenues to get a shot at the nearly 30 million AOL Internet and cable subscribers.
Even if those talks bog down, Gemstar has what Yuen believes is an ace up his sleeve: the TV-set makers. Thomson Multimedia is selling more than 3 million sets a year with the guide built in, under the RCA, GE, and ProScan brand names. Sony, Zenith, and others are likewise incorporating the guides. Right now, Gemstar has agreements with networks and local stations to reach those sets by embedding program listings into their signals. But because the cable companies can strip out such signals, Yuen signed a long-term deal with a small paging company, Paging Network Inc., that can send the listings over the air. By next year, some of the TV sets will be sending--and receiving--signals from Gemstar directly. That will enable Gemstar not only to send in commercials over the guide but also to receive orders for any merchandise in return. Yuen also holds key patents in the new world of e-books, which he hopes people will ultimately be able to download from the Gemstar guide (box).
If it all works, Henry Yuen could have the makings of his own virtual television network--a virtual empire for a virtual media executive. Sitting in his downscale office, Henry Yuen doesn't look very menacing, with his open-collar shirt and benevolent gaze. But he has power. It's all around him, hanging on the walls of his office. By Ronald Grover in Pasadena, Tom Lowry in New York, and Larry Armstrong in Los Angeles