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With Merger, Interactive TV May Be a Click Away

Technology: Final OK of Gemstar-TV Guide deal clears way for ordering products by remote control.

July 13, 2000|KAREN KAPLAN | TIMES STAFF WRITER

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.

For the Record
Los Angeles Times Friday July 14, 2000 Home Edition Part A Part A Page 3 Metro Desk 1 inches; 32 words Type of Material: Correction
Gemstar deal--Shareholders of TV Guide received 0.6573 shares of Gemstar stock for each TV Guide share they owned. A Times story Thursday about Gemstar's acquisition of TV Guide incorrectly stated the exchange ratio for the deal.

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.

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