WHAT'S ON TV? ASK HENRY YUEN
His hot on-screen guide is made for the Digital Age--and patents virtually lock out rivals
Henry Yuen is building a portal. He doesn't call it a portal, the current buzzword of the Internet, where such familiar names as Yahoo! Inc. and America Online Inc. are vying to be consumers' preferred gateway to the World Wide Web. Rather, Yuen, president and CEO of little-known Gemstar International Group Ltd., has a far more mainstream frontier in mind for his invention: your television set.
Eight years ago, Yuen and his colleagues made one fortune by coming up with an easy way to record TV programs with their VCR Plus technology. Now Yuen is out to make a second one, developing and licensing to TV and VCR makers an electronic program guide that helps viewers easily sift through TV shows--a handy tool for the coming proliferation of digital channels.
The way Yuen figures it, the era of interactive television, including transactions, video-on-demand, and Internet access, will just add more entries in his electronic directory: Yahoo! and Netscape Communications Corp. become channels alongside Animal Planet and Home Box Office. "This technology gives you both a search engine and a delivery mechanism that can include broadcast, cable, satellite, and the Internet," says Gary Arlen, president of consultant Arlen Communications Inc. in Bethesda, Md. "That's about all you need in a digital world."
Moreover, Yuen has made a career out of gobbling up patents and defending them in court, making it virtually impossible to launch a guide without cutting a licensing deal with Gemstar. When its Guide Plus rolls out later this year, Gemstar will be poised to collect rich license fees from manufacturers whose TV sets or cable set-top boxes receive the guide, along with revenues from companies that want to advertise in it. Yuen has already acquired most of his competitors and signed lucrative deals with such industry giants as Microsoft Corp., NBC, and France's Thomson Consumer Electronics Inc., the leading TV maker in the U.S.
But Gemstar's success has created some sticky situations for the feisty Yuen, who holds a 12.4% stake. While he successfully rebuffed a recent takeover attempt by cable baron John C. Malone, he did so without the backing of chairman and 24%-owner Thomas L.H. Lau and other big shareholders such as Thomson and Viacom Inc. Yuen faces fresh challenges both within and outside his boardroom, including a shareholder suit launched against Gemstar's directors over the way they handled the takeover bid. Since July, Gemstar stock has drifted down to $33, from the $45-per-share bid Yuen and the majority of directors rejected, and few believe Malone has gone away for good.
With all the exciting possibilities for digital television and its plethora of channels, why all the fuss about an on-screen program guide? "The thing that people are after is capturing the viewer at the starting point--where the viewer will be making his choices," says Thomas S. Rogers, president of NBC Cable and Business Development. "It becomes a keenly effective way to direct people to your choices." NBC signed on as the guide's first advertiser in July and also sewed up a deal to provide a live-text feed of news from MSNBC and CNBC on some versions of the guide. "And we're thinking about a sports ticker," adds Yuen.REQUIRED READING? He is hoping to have Guide Plus installed in 2 million homes by the end of next year and figures viewers will look at three pages of the guide four times an hour. That comes to 168 million page views a day, "bigger than Yahoo! and Netscape combined," Yuen says. "We're launching on a seven-hour-a-day habit, vs. the typical 20-minute Internet session, and we're the only program guide on the box."
If it's starting to sound like an Internet portal, there's good reason. First, Guide Plus pops up automatically when the TV set is turned on. There's a reduced TV picture of the channel the set is tuned to in the upper left-hand corner. The bottom two-thirds of the screen is a listings grid from which viewers can sort programs by time or category--say, movies or sports. Couch potatoes can also preset the guide a week in advance to tune in and record shows. Each page has room for three ads. And within a few years, says Yuen, clicking on ads will initiate sales transactions.
Until now, Gemstar has made its money on license fees. Last year, the Pasadena (Calif.) company earned $39 million on revenues of $127 million, almost all of it by licensing VCR Plus to VCR makers. While Gemstar will still get a hefty license fee, now about $10 a unit, for its Guide Plus technology, advertising and a cut of transactions is where the real money is. Claims analyst Alan S. Gould of Gerard Klauer Mattison & Co.: "Whoever owns the advertising on this screen owns the most valuable piece of real estate on the TV."
It's little wonder, then, that everyone from William H. Gates III to Malone, chairman of Tele-Communications Inc., is pounding on Gemstar's door. Earlier this year, Microsoft and Gemstar struck a deal in which the software giant would pay $45 million for the rights to use the program-guide patents, of which Gemstar holds more than 60. In addition, it will pay Gemstar a royalty of about $10 for every guide it ships on WebTV and Windows CE systems embedded in cable-TV set-top boxes. "We wanted to create a similar experience across a wide range" of platforms for viewing TV, says Steven Guggenheimer, Microsoft group product manager for digital TV.
Microsoft and other companies have found they have little choice but to do business with Gemstar. Thomson, maker of RCA TVs, discovered this in 1994 when it created its own interactive guide, says Louis E. Lenzi, Thomson's vice-president for new media. "After we developed it, our lawyers told us that we had to take a license from [Gemstar]," he says.
Yuen has found Malone to be a much tougher customer. Tulsa-based United Video Satellite Group Inc., which is controlled by TCI, has tried to get its hands on Gemstar's technology, first with a failed joint venture, then with a takeover bid. United Video's Prevue Networks Inc. is currently the leader in on-screen TV listings, with 45 million of the countRy's 65 million cable-TV households. But Prevue's listings aren't interactive; they simply scroll by at an agonizingly slow pace for the digital world.
On July 2, United Video launched its unsolicited $2.8 billion bid for Gemstar. It had just agreed to pay $2 billion in cash and stock for News Corp.'s TV Guide properties to get a recognized brand name--all too aware that Yuen had already secured the rights to the name "TV Guide Plus."POISON PILL. Gemstar's board promptly adopted a poison pill. Later, it rejected the offer outright, and Malone pulled his bid, triggering the shareholder Lawsuit against the directors. Several days later, Gemstar sued United Video for copyright infringement when Prevue announced it had rolled out an interactive version of its program guide in 650,000 homes. Malone's options now include battling Yuen through the courts, negotiating a friendly deal, or launching a proxy fight with the support of Lau and other shareholders. Peter C. Boylan III, United Video's president, contends Malone doesn't need Gemstar. "I'm not sure we'll be back," he says. "We are off to the races building our business."
Whatever happens, Shanghai-born Yuen, 49, who emigrated from Hong Kong to the U.S. tO get a PhD from California Institute of Technology, has proved himself a master at bridging the gap between technology and technophobic consumers. He has also shown he can tangle with some of the media world's biggest guns and fend off critics. Some shareholders have grumbled about his new pay package, which awards bonuses based on earnings growth and could grow to $22 million in 2005. Counters Yuen: "I deserve every bit of it. For me to get all that, our investors would be very rich." No one seems to doubt that is going to happen.The only question is whether Yuen will be the man holding Gemstar's remote.By Larry Armstrong in PasadenaReturn to top