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The New Television: Gemstar emperor wears new clothes

Oct 14, 2002  •  Post A Comment

Gemstar, the embattled Electronic Programming Guide (EPG) company, just hired a new executive VP to improve relations with the cable and satellite TV industries. That’s like Kenneth Lay’s hiring someone to mend fences with the Enron workforce. Gemstar has stepped on more toes than a first-time student at Arthur Murray’s School of Dance.
“This company has had somewhat of a difficult time with our relationship with cable companies in the past,” acknowledged Gemstar Co-President Jeff Shell, in announcing the hiring of ex-News Corp. exec Ray Hopkins.
In fact, things are so bad that Gemstar recently posted a $954 million loss for the second quarter. But don’t blame Shell. Gemstar has gone from powerhouse to laughing stock because of the wrong-headed strategies of Gemstar’s founder, Henry Yuen.
Gun to the head
Yuen, who last week was forced out as Gemstar’s president, either sued or threatened to sue any company that would deploy an on-screen guide without paying a licensing fee. Gemstar, which holds several EPG patents, tried to use the patents as a weapon, bullying cable and satellite operators to deploy Gemstar’s TV Guide EPG. (The EPG permits viewers to search for programming info from hundreds of channels.) However, the gun-to-your-head strategy backfired over the summer, when the International Trade Commission and a federal court ruled that Gemstar’s patent infringement claims against four companies were without merit.
After hearing the rulings on the EPG, Yuen probably went in for an EKG. The company’s stock dropped more than 80 percent (shares have been trading at under $3); NASDAQ has issued a delisting notice; and Rupert Murdoch’s News Corp., which owns 43 percent of Gemstar, forced Yuen to hire former News Corp. exec Shell as co-president. (Shell has replaced Yuen as president; Yuen becomes executive chairman, a non-performing position). Once considered the most powerful and feared executive in Interactive TV, Yuen has become the star of a modern-day version of “The Emperor’s New Clothes.” How could an executive who seemed so shrewd leave his company so exposed?
Yuen started the company in 1989 to market the VCR Plus, a recording device he co-invented. But Gemstar reached new heights in 1999 when it purchased TV Guide from United Video, which was owned by Murdoch and John Malone. (Murdoch received 43 percent of Gemstar in the deal.)
Yuen didn’t buy TV Guide because he liked the magazine’s “Cheers and Jeers” column; he wanted the TV Guide-branded EPG. Yuen believed that the on-screen guide would become the Home Page of The New Television. With hundreds of channels to choose from, Yuen surmised, viewers would refer to the EPG several times a day, which would make it an advertising magnet.
However, Gemstar needed to persuade cable and satellite TV operators to use TV Guide’s EPG. Waving the patents in the air like they were loaded pistols, Yuen made them an offer they couldn’t refuse. Several cable operators caved and the TV Guide EPG was soon in approximately 16 million homes.
However, EchoStar, which is run by the equally stubborn Charlie Ergen, resisted the pressure. So did Pioneer and cable set-top maker Scientific-Atlanta. They called Yuen’s bluff and developed their own on-screen guides.
Using the lure of the TV Guide brand, Yuen might have been able to negotiate a compromise. However, emboldened by his successful bullying of the cable operators, Yuen calculated that he could win in court. In fact, he was so confident of victory that he reported $107 million in Scientific-Atlanta “licensing fees” as Gemstar revenue even before the rulings were announced.
“This is a company that sued customers rather than make friends of them,” Murdoch said in a conference call after the ITC ruling.
Now Gemstar is the Mike Tyson of Interactive TV. The seemingly indestructible bully has been defeated; new EPG companies are lining up to get in the ring. And cable and satellite operators are exploring new options. In fact, Cablevision, an early Gemstar-TV Guide supporter, last week dropped it for Zap2It, Tribune’s on-screen guide.
Getting bumped
Can Gemstar come back?
Murdoch said last week that he would not seek a controlling interest in Gemstar, but he doesn’t need to; he has his guy (Shell) running it.
Under Murdoch’s leadership, I predict that Gemstar will turn things around. The company still owns the TV Guide brand (the print magazine has 9 million readers), a colorful and easy-to-navigate on-screen guide, and the TVG Network, the interactive wagering service and horse racing channel. But Gemstar could be riding high today if Yuen had only heeded the advice of a former U.S. president:
Speak softly and carry a big stick.
Phillip Swann is president and publisher of TVPredictions.com. He can be reached at swann@TVPredictions.com.