With Merger, Interactive TV May Be a Click Away

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.