Gemstar Holds The Remote Control

The company's patents could reshape e-commerce

To hear his critics tell it, Henry C. Yuen may be the most feared guy in television. Slight and bespectacled, the 49-year-old former mathematician heads Gemstar International Group, a tiny company in Pasadena, Calif., with barely 200 people on its payroll. But what Gemstar has is a portfolio of more than 90 patents covering most of the ways that clickable information and shopping opportunities can be presented on a TV screen.

Over the next five years, TVs will morph into interactive terminals for entertainment and e-commerce that viewers will negotiate using souped-up remote-control devices. As broadcasters, cable operators, and satellite companies begin deploying a Web-like panoply of hyperlinks, hot buttons, and ad banners, they'll run smack into Henry Yuen and his patents. "The TV industry is soon going to find out that it has a problem with one company having so much dominance," predicts Seth H. Ostrow, a New York patent attorney familiar with Gemstar.

TSUNAMI. Some companies already see Gemstar as a threat. For two years, Scientific Atlanta Inc. has been spearheading an antitrust assault on Gemstar. In recent weeks, it has been joined by Time Warner Cable Inc., which has taken the unusual step of stripping Gemstar's programming listing information from the signals it delivers over the cable. And in Washington, the Justice Dept.'s Antitrust Div. is reviewing Gemstar's planned $9.2 billion merger with TV Guide Inc. Justice's action was prompted by a warning from a Senate subcommittee that the pairing "may decrease competition" as TV sets converge with the Internet. A ruling is expected in June.

Why all the fuss? As the broadband tsunami sweeps over television, viewers will start clicking their way through electronic program guides that not only list upcoming shows but also allow folks to order movies, make purchases, and record TV programs. Some of these amenities are available now on digital satellite systems such as DirecTV Inc.--a Gemstar licensee. But by 2005, as many as 80 million U.S. homes will be outfitted with some electronic program guides, generating $23 billion in advertising revenue and $13 billion in commerce, according to Josh Bernoff, a TV analyst for Internet consultant Forrester Research Inc. "Gemstar will get a cut from just about every dollar," he says.

That's quite a leap for Gemstar. Last year, the company generated most of its $166.4 million in revenue from royalties on the VCR Plus+ technology it licenses to TV-set makers. This technology helps people record shows based on numbers listed in the newspaper. But Gemstar offers much more than that. Want to put TV shows or advertising on the same screen as the program listings? Talk to Yuen. How about sorting TV shows by subject, or personalizing a program guide for each viewer, or letting viewers record movies and TV shows with a single push of an electronic button? Gemstar has already licensed those features to most major consumer-product manufacturers, including Sony, Zenith, and Sharp, along with satellite companies such as DirecTV and most cable operators. Microsoft Corp., for one, paid Gemstar $45 million in license fees for the program guide used in WebTV. What's more, it forks over to Gemstar an estimated 30% of the revenues generated by the guide.

As powerful as that makes Gemstar appear, it's nothing compared with the clout Gemstar will soon acquire if its merger with TV Guide is approved. The deal would combine Gemstar with its last remaining major competitor. Indeed, right up to the signing of their agreement last October, the two companies were locked in legal battles over the issue of whether TV Guide's own interactive program guide infringed upon Gemstar's patents. The merger grew out of settlement talks between the two.

Along with TV Guide's strong brand name, the merger would give Gemstar access to the 34 million readers who currently receive TV Guide magazine and the 50 million homes who see the TV Guide program listing scroll across their screen. Allowing the two companies to merge "will diminish Gemstar's incentive to license its technology to other competitors," the Senate antitrust subcommittee wrote to the Justice Dept. in March, urging it to scrutinize the deal carefully.

Time Warner, meanwhile, has taken matters into its own hands. In April, it ordered its cable systems in California, Maine, and North Carolina to strip out the program listing data that Gemstar transmits, unseen, in a portion of the signal that is broadcast by several TV stations in each area. A Time Warner spokesman says the company pulled the signal because it couldn't reach an agreement with Gemstar on its license renewal. Instead, Time Warner says it will create its own program guide with set-top-box-maker Scientific-Atlanta. Gemstar wheeled around and hauled Time Warner before the Federal Communications Commission. It demands to be put back on their systems under FCC "must carry" rules, which require cable operators to carry "program-related" signals--such as closed-captioning--along with the channel.

OMNIVOROUS. While the two sides argue over whether program listings are "program-related," Time Warner's set-top box supplier, Scientific-Atlanta, is pressing its federal antitrust battle against Gemstar. In fact, Scientific-Atlanta has filed two lawsuits seeking to void Gemstar's merger with TV Guide. The company declines to discuss the case. But in court documents, its lawyers argued that "Gemstar has embarked on a calculated plan to monopolize the U.S. market for the licensing of interactive electronic program guide technology." Scientific-Atlanta charges that Gemstar has systematically bought up or merged with companies that hold competing patents, including not only TV Guide but Video Guide Inc. in 1996 and Starsight Telecast Inc. in 1997. The suit alleges that Gemstar used its market power to force Scientific-Atlanta to pay for licenses Scientific doesn't need in order to get those it does need. Gemstar denies the claims and has filed its own suit charging that its patents have been violated by the program guides embedded in the Scientific-Atlanta set-top boxes.

In fact, suing to protect its patents has become a fine art at Gemstar. "We are a patent company, and patents are our lifeblood," says Gemstar Executive Vice-President Stephen A. Weisswasser. "You have to protect your assets." And protect they do. In recent years, Yuen, trained as a lawyer, has filed breach-of-contract and patent-violation suits against a half-dozen companies, including General Instrument, Pioneer Electronic Group, and Tele-Communications.

The question is, how much more powerful will Gemstar become if it merges with TV Guide and wins its current legal tussle with Scientific-Atlanta? The merger will unite Yuen with media heavyweights John C. Malone and Rupert Murdoch, whose corporations control TV Guide and will each own 21.5% of the new company. More important, the merger will give Gemstar access to the more than 14 million AT&T cable homes allied with Malone's Liberty Media Corp. as well as content from Murdoch's News Corp. empire.

FORMIDABLE. And Yuen seems to have big plans of his own. Gemstar already has agreements with Sony to be the only electronic program guide on its TV sets. Yuen aims to sell media space on its guides under a joint advertising company it created with Thomson Multimedia SA and NBC. More recently, Gemstar purchased a small wireless paging company, giving it the ability to bypass cable and satellite operators, if necessary, to serve up program listings and ads and to receive orders from consumers. "I don't know if that's a big business for us, but it's one we might be forced to use if Time Warner makes us," says Weisswasser.

Internet startups may have even more to fear from Yuen than the established players. Take tiny Gist Communications Inc. It claims to have the largest TV-listing service on the Internet, with 2.4 million unique viewers of its service on clients such as Yahoo!, MSN, and AltaVista. Gist would dearly like to add its listings to a TV screen. But the company will probably have to pay Yuen for the privilege--or find some way around him. And as many others have discovered, getting around Gemstar and Henry Yuen is no easy feat.

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