Patently dominant

Dec 3, 2001  •  Post A Comment

If it weren’t for his passion for baseball, Henry Yuen might still be teaching college math instead of helping couch potatoes revolutionize their television viewing and program selection.
His frustration with not having an easy, surefire way to record a Boston Red Sox baseball playoff game he missed in 1989 led Mr. Yuen and a Caltech classmate to devise video recording technology that has since become universal to television sets and videocassette recorders. That same VCR Plus+ technology today remains a solid revenue generator and is the reason Mr. Yuen doesn’t miss an episode of his favorite TV series, “The X Files.”
Some 12 years and 186 technology patents later, the 53-year-old Chinese-born chairman and CEO of Gemstar-TV Guide International has become one of the most powerful men in media without ever having produced or distributed a single network TV show. His next feat will be to provide consumers and advertisers with a first-screen portal that will help them navigate program choices and interactive services in a 500-channel digital TV world.
Key to his power is the fact that companies wanting to do anything in the interactive universe will need to license some of Gemstar’s patented technology, which is the company’s high-margin core business.
“There is great opportunity in all the confusion that will be caused by having hundreds of programming channels to wade through,” said the unassuming Mr. Yuen, who prefers a knapsack to a briefcase and a nondescript rented headquarters in Pasadena, Calif., above a Federal Express storefront to more glamorous Hollywood trappings. But don’t let the wrinkled shirts, windbreakers and pocket protectors fool you.
Focus, precision, speed
His responses are lightning fast–and as much finance-oriented as they are tech-savvy. His precise choice of words and intense focus are evidence of the law school training he received in the evenings while working days as a research scientist before founding Gemstar in 1986 in response to what he calls “a midlife crisis.”
Within 18 months, Mr. Yuen wants to have his interactive program guide technology embedded in new digital cable, satellite and consumer electronics devices in the United States and much of the world, creating what industry analysts say will be a new mass-market advertising platform.
Consumers will use a remote control pad to seek and sample programs, and will drill down into layers of additional information about shows, stars and subjects. Participating advertisers will use the technology to provide viewers with levels of additional product and service information that, ultimately, can lead to transactions. Unlike its static scrolling electronic program guide on most cable systems now, Gemstar could receive fees for virtually every consumer and advertiser click-through on its interactive program guide.
“Using patents, brands and open technology licensing and revenue-sharing, Gemstar’s IPG is likely to become the worldwide standard for a new interactive advertising platform,” said Merrill Lynch analyst Jessica Reif Cohen. Gemstar’s IPG “will be the only advertising-supported TV channel helped by digital television’s expanding channel capacity and audience fragmentation.”
Picking up stragglers
Claiming a dominant 55 percent market share with his static, scrolling electronic program guide, Mr. Yuen is feverishly negotiating to license his gatekeeper technology to still noncompliant cable operators, such as Cox Communications and Cablevision Systems, and domestic satellite rivals EchoStar Communications and DirecTV, which are soon to merge. Mr. Yuen also is negotiating with AOL Time Warner to expand an existing AOL licensing agreement to more fully include Time Warner’s cable systems.
Bringing such stragglers into the fold willingly, rather than through the endless patent infringement lawsuits that have defined and consumed his company, is critical to making Gemstar’s interactive program guide dominant. The closest thing to a rival has been TV Gateway, a half-hearted server-based interactive guide effort backed by a handful of cable operators and interactive TV service provider WorldGate Communications.
Comcast Corp. and Charter Communications are among the operators who feel strongly about keeping a viable IPG competitor alive, although the TV Gateway service is in the definite minority. Despite its talk of competition, more than 2 million Comcast subscribers are serviced by Gemstar, compared with only 100,000 of its system homes using TV Gateway.
Gemstar’s starter base of 12 million homes is expected to swell to 20 million installed devices by year’s end. That should more than double in 2002, on its way to penetrating more than 70 percent of all U.S. TV households by 2006, according to Forrester Research. Such mass-market availability will grow program guide advertising from $83 million today to nearly $1.5 billion within five years.
Mr. Yuen’s relentless pursuit of those numbers and hard-nosed, litigious negotiating style have gained him a reputation as “the Bill Gates of TV.”
“He [Mr. Yuen] has the hold on the basic interactive guidance technology for interactive TV the way Gates provided the fundamental guidance software for the PC. They’re both geniuses and smart businessmen,” said one Wall Street observer.
Mr. Yuen has so far been victorious in rigorously defending alleged infringement of Gemstar’s patents in more than 4,000 lawsuits and claims against everyone from small foreign start-ups to competing electronic guide and recording system suppliers such as TiVo to major cable set-top box manufacturers such as General Instruments and Scientific-Atlanta.
Defending the franchise
Gemstar’s claims essentially accuse others of using its electronic and interactive program guide technology without paying for it. In turn, Pioneer and EchoStar sued Gemstar, charging it with restraint of trade and antitrust violations.
Mr. Yuen, who works with a team of technicians to brainstorm most of the patents, calls such charges “nonsense.” His biggest victory came last year in an out-of-court settlement with Motorola after Gemstar sued the electronics giant for unlawful use of its patented interactive service technology. The outcome: a longer-term licensing agreement involving interactive services and the use of each other’s products and technology.
However, EchoStar Chairman and CEO Charlie Ergen may prove to be his most formidable foe yet as their companies go to the legal mat Dec. 3 in a landmark 10-day trial at the International Trade Commission in Washington. Gemstar has accused EchoStar, Scientific-Atlanta and Pioneer Electronics of infringing on patents covering Gemstar’s IPG. The commission only has the power to issue an injunction barring the sale of infringing products in direct-broadcast-satellite receivers, set-top boxes and other devices. But such a ruling, which is expected by March, could weigh heavily on separate patent-infringement suits pending against the same companies in Atlanta’s U.S. District Court.
“We feel confident that we will prevail on the merits and that the judge and others will not be fooled or dazzled by slick tactics such as the last-minute downloading of a revised IPG,” Mr. Yuen said.
Transforming foes into fans is something the tenacious Mr. Yuen has succeeded at with the likes of Liberty Media Chairman John Malone and News Corp. Chairman Rupert Murdoch. Their joint unsolicited buyout offer for Gemstar in 1998 through a company called United Video, which controlled a cable channel providing scrolled listings, gave way to their becoming major shareholders and supporters of Mr. Yuen.
At the time, Gemstar had sued United Video for unlawfully using its interactive program guide technology. Mr. Yuen fended off pressure from his investment banks to accept the $2.8 billion takeover bid, which subsequently boosted Gemstar’s stock price. In a classic about-face, Mr. Yuen demonstrated his business savvy by convincing the duo to sell him United Video and Mr. Murdoch’s TV Guide–his biggest rival–in exchange for Gemstar stock.
As a result of ano
ther tough negotiation, Microsoft Chairman Bill Gates agreed to pay Mr. Yuen a $45 million upfront fee, $10 to $30 a box, and 75 percent of advertising and commerce revenues generated by Gemstar’s IPG on Microsoft’s WebTV and Ultimate TV set-top boxes. Gemstar’s other weighty allies include manufacturers Thomson Multimedia and Zenith.
Little wonder that Liberty’s Mr. Malone and Dob Bennett, both Gemstar board members, openly refer to Mr. Yuen as “the smartest guy in television” because he owns every idea he has, and he has great ideas. “He got it before anyone else did,” Mr. Malone said. Even former adversary Mr. Murdoch calls him “a brilliant strategist.”
Mr. Yuen and Gemstar now have their sights set on Mr. Ergen and EchoStar in what promises to be an even more contentious battle. Gemstar-TV Guide co-President Peter Boylan III, formerly a deal-maker for Mr. Malone, gave analysts a taste of what’s to come during a recent earnings conference call.
“We’re fully prepared to keep coming at him until we prevail,” Mr. Boylan told analysts. “There’s no way he can evade the strength of our patents and the breadth of our portfolio. … You can run and you can hide, and we’re determined to smoke you out wherever you might be.”
Mr. Ergen, Mr. Boylan and Mr. Yuen have declined further comment on the matter.
Satellite woes
The legal wrangling has been complicated by EchoStar’s unexpected emergence as the victor in the heated bidding for Hughes Electronics’ DirecTV, defeating News Corp. Now a 43 percent owner of Gemstar, News Corp. could have ensured placement of Gemstar’s IPG platform in DirecTV’s 10 million domestic satellite households and 20 million satellite homes worldwide.
Having been a breath away from an upgraded licensing agreement with DirecTV, Gemstar has hinted it may seek legal means of securing licensing revenues from DirecTV and EchoStar, now that they will be under close antitrust scrutiny. But Mr. Yuen, himself a DirecTV subscriber, concedes there isn’t much chance of signing a new IPG licensing agreement with DirecTV without its new owner, EchoStar, in tow.
The importance of licensing its IPG technology to U.S. satellite providers cannot be overstated. Gemstar lost billions of dollars of value after the EchoStar-DirecTV merger announcement, falling to a three-year low of $16 a share after trading at a high of $50 in July. Gemstar has lost half its market value in the past year.
“If News Corp. had won DirecTV, then that would have been a fast track for us,” Mr. Yuen said. “The fact that EchoStar now wins DirecTV is not as good as News Corp. getting it–but infinitely better than the uncertainty we have been under. The hard barrier of being able to do a deal will be removed with each of the companies involved. It’s a matter of climbing back on their priority list.”
Niraj Gupta, analyst at SalomonSmithBarney, estimates an IPG licensing deal with DirecTV alone could generate $20 million annually. “While such deals are likely, the timing could be significantly delayed,” he said.
Still, there is nagging concern on Wall Street that at least another year of sticky litigation, the absence of a domestic satellite licensing agreement and the slowdown in consumer and advertiser demand for digital services in a weak economy will impede the broad rollout of Gemstar’s IPG, to which 65 percent of the company’s $11 billion market capitalization is attached.
Pure profit
Industry analysts remain bullish on Gemstar-TV Guide’s prospects for 20 percent annual growth in 2002 to $630 million in earnings before interest, taxes, depreciation and amortization on revenues of $1.6 billion, with its IPG platform generating pure profit.Gemstar recently announced plans to launch its IPG in Japan next year to 46 million TV households, which are early technology adopters, primarily through consumer electronics rather than through service providers. But Gemstar has yet to finalize long-standing negotiations with News Corp. for the IPG on its dominant satellite platforms abroad such as BSkyB in the United Kingdom. Talks between Gemstar and News Corp. resumed in earnest last week, and an agreement is expected soon. Mr. Murdoch has said he views Gemstar’s IPG as a centerpiece of his Sky Global satellite platform because it will assist consumers in identifying and manipulating program channels and advertiser products.
Key to Gemstar’s broad rollout is securing IPG licensing agreements with several remaining cable operators, including Cox Communications and Cablevision, to secure a national footprint to sell to advertisers, commerce partners and others at a higher premium and better terms.
Cable operators generally have resisted yielding gateway control to Gemstar. Talks with Cox and Cablevision have been complicated by their launch of competing interactive program guides created in-house, which Gemstar is eyeing for potential patent infringement challenges. Gemstar generally seeks half of all the advertising revenue generated and 85 percent of the t-commerce (or television commerce) that eventually will be generated off of its IPG.
Dealing with AOL Time Warner
Another critical hurdle for Gemstar is modifying its existing 12-year agreement with AOL, which was extended to include Time Warner Cable when AOL and Time Warner merged earlier this year. While Time Warner Cable uses Gemstar’s technology under the pact, Gemstar would like to modify the contract to reflect financial and operational terms similar to those it has with other major cable operators.
“We do have an electronic commerce concept we would like to do with them,” Mr. Yuen said.
But the sticking point has been the aggressive percentages of advertising and commerce revenues that Mr. Yuen traditionally seeks from contract clients. Gemstar generally charges a service fee that covers data and tech support, patent rights, and provisions for sharing advertising and commerce revenues generated by its IPG. However, Gemstar is likely to give AOL Time Warner a break on the percentage of advertising revenues generated by its IPG in exchange for a clear shot at the company’s second-largest base of cable homes in the country.
Under the current pact, AOL pays Gemstar twice the 30-cents-per-subscriber fee paid by AT&T Broadband but doesn’t allow Gemstar to share in any of the advertising and commerce revenues generated by its own program guide.
Without a cable licensing pact that more closely resembles the ones secured with Comcast Corp. and Charter Communications, Gemstar said it will continue to charge higher fees to Time Warner Cable, which would continue to control all the IPG advertising revenues. “I’m not sure how it benefits either of us,” Mr. Yuen said.
Aimed at advertisers
The purpose of creating this national IPG network isn’t just to help consumers figure out when their favorite TV shows are on. There’s a bigger target: advertisers.
Theoretically, advertisers will pay Gemstar a premium fee for access to viewers who interactively request more information on their products and services or engage in an ultimate transaction. In addition to conventional ad time sales and sponsorships, there are subscription and licensing fees from cable operators.
Gemstar’s IPG will be a filter for the new interactive video games, video-on-demand movies and interactive home shopping that are among digital television’s initial offerings. With viewers already resorting to Gemstar’s static scrolling program guide an average of four times per hour, the click-through revenues of an interactive program guide can be enormous, analysts say.
“In-home entertainment generally holds up in these kinds of economic times,” Mr. Yuen said. “When we can establish value and become a routine and traditional platform, scale will become more important.”
If forecasts hold, 10 million households could be using Gemstar’s IPG service to the tune of 300 billion page views annually. Gemstar-TV Guide would be central to what could be a $40 billion interactive TV business by 2005. By then, more than 80 percent of Gemstar’s projected $10 billion in revenues wil
l be generated from its interactive operations, analysts estimated.
“Our biggest challenge is going down the tricky path of educating advertisers and getting some of the outstanding deals done with DirecTV, EchoStar and AOL Time Warner,” Mr. Yuen said.
This week, Gemstar will announce a new round of major advertiser support for its IPG platform from companies such as Best Buy, Maybelline, Olympus and Cuisinart. They join big-name advertisers such as Sears, Ford Motor Co., Clorox, MasterCard, Johnson & Johnson, American Express, Time-Life, Motorola, AT&T and Century 21, which already consider the IPG a “must-buy” as part of Gemstar’s Plus Platform, which bundles its IPG, TV Guide Channel, the print TV Guide and other platforms for marketers.
Media giants on board
Gemstar also has secured IPG advertising support from media companies such as NBC, Fox, ABC, Warner Bros., Sci-Fi Channel, E! Entertainment and Showtime.
“These companies don’t advertise with us just because they have some extra money. They advertise on the IPG because they know how the connection with interactive TV viewers can work for them. So our advertising business doesn’t go up as fast, but we don’t get hit as hard as others in the down times,” Mr. Yuen said.

Even as his IPG rolls out, Mr. Yuen is developing other surefire profit centers.
Television Games, a 24-hour network featuring horse racing that allows 13 million subscribers in 13 states to electronically wager on races where legal, represents a lucrative new business model for electronic media. It is supported by six revenue streams–license fees from service providers, a percentage of every dollar wagered, transaction fees, float and breakage of the deposits, statistics and information sales, and advertising sales–which totals an average of $70 per month per DTV account. At least $10 of that is shared with MSOs such as Comcast, and none of it overlaps with existing digital and advanced service spending. It’s all new business.
But not all of Mr. Yuen’s ideas have worked. An enthusiastic reader of mystery and science fiction, Mr. Yuen has made a lukewarm foray into electronic book publishing, canceling plans last year to align with Barnes & Noble on the advice of Mr. Murdoch. Inventions like his Index Plus, which tracks programs recorded on videotape, went nowhere.
A year after the TV Guide buyout, Mr. Yuen gets high marks from Wall Street analysts and investors for making it work under less than ideal circumstances–internally and externally. Under the 2000 buyout agreement that joined Gemstar and TV Guide, Mr. Yuen remains autonomous as the company’s CEO for five years. However, he cannot fire Mr. Boylan, who has a six-year employment contract, without Liberty’s consent. Despite such mandates, the management group appears to be in sync, analysts say.
Growing the business
Mr. Yuen says he will continue to aggressively reinvest most of the growing cash flow in the company’s intellectual properties and technologies, and international expansion, which he expects to achieve through strategic equity alliances rather than acquisitions.
There has been talk about the power that would come from joining Gemstar’s assets with those of a home shopping leader such as USA Networks’ HSN and Comcast-Liberty’s QVC. Gemstar recently acquired SkyMall, an electronic catalog distribution business for major retailers, and has had some initial discussions with USA Networks and QVC, sources say.
“I think we have all the elements we need to make ourselves successful,” Mr. Yuen said. “I don’t think we have a whole lot of acquisition or plans for being acquired in our near terms. Strategic alliances are a win-win way of getting there faster.”
In fact, he views a lot about his business and life as only a statistician can: as a puzzle to be solved.
“I started out in technology and I saw the challenges like working on a puzzle: There is an answer somewhere and you are trying to find it. Then I went into law, and that’s when I saw challenges like a chess game. There are two parties; one may win and one may lose, but you play within some kind of rules,” Mr. Yuen said.
“In business, where I am right now, the only rules that exist are the ones you make. It has taken the degree of challenge to a much higher level.”