Gemstar to Ops: Let's Be Buddies

Cable World, Feb 26, 2001 by Richard Cole

Sometimes you eat the bear. Sometimes the bear eats you. And the cable industry is still trying to sort out who ate whom in Gemstar TV Guide's deal with Charter Communications.

The 10-year pact to put its interactive program guide on Charter's digital system is Gemstar's first with a top MSO since it merged with TV Guide last July. A pre-merger deal with TCI, now AT&T Broadband, gives Gemstar long-term contracts with two of the top four cable systems -- and more deals are on the way, according to both the company and UBS Warburg analyst Thomas Eagan.

To that end, Henry Yuen, chairman/ CEO of Gemstar, is eager to shed his self-confessed image of a litigious patent terrorist and make nice with cable companies.

"Gemstar is here to do business with the cable industry, not to do battle," he said in a conference call last week.

The question for cable providers is not only what financial terms Charter and Gemstar reached, but how the agreement affects the future of interactive television and who controls the viewer's entry into the ITV experience.

Even Hal Krisbergh, chairman of Gemstar's rival, Worldgate Communications' TV Gateway, expects Gemstar to pick up steam now.

"To the extent that TV Guide is a good actor, they will be a player in the industry as they always sought," he says.

The question for TV Gateway is how much of its MSO partners' business it can hang onto.

Charter Communications SVP Steve Schumm, who handled negotiations with Gemstar, insists the MSO held on firmly to the ITV gateway, which will be across the Digeo digital cable platform developed with Charter owner Paul Allen's Vulcan Ventures.

"We're still going to have the portal," he says. "The IPG is going to be a component that would be the primary launching pad relative to traditional video viewing, but TV is morphing into this traditional television combined with the PC, and we view our portal that's being developed by Digeo as really the centerpiece of that experience."

The splits

While TV Guide's IPG will probably direct viewers to video-on-demand for Charter, that will be part of a fee service, and Gemstar will not share in VOD revenue, Schumm notes. Charter will share T-commerce revenue on a 50-50 basis, in contrast to a 15% split for Charter from Gemstar's national ad revenue.

Schumm cautions that debating control of the portal may be premature because no one knows how ITV will develop. One of the key negotiating issues for the tech-savvy Allen's company wasn't simply splitting revenue, but allowing the MSO to maintain technological flexibility as it moves into the brave new world of convergence.

A key issue for Gemstar, on the other hand, was exclusivity, and in that they were rebuffed. TV Gateway by Charter, Adelphia Communications, Cox Communications and Comcast, as an alternative to TV Guide, will continue on Charter systems, at least those having Scientific-Atlanta set-tops. TV Guide already serves 600,000 digital Charter customers with Motorola boxes.

Schumm says Charter's deal with TV Guide in no way signals the death knell for TV Gateway.

"We have rolled it out, and we plan to continue supporting multiple guides," Schumm says.

He shrugs off questions about whether that hurts Charter's efforts to build economies of scale.

"Maybe. Probably," he says. "But the offset is that it is stimulating innovation and creativity and providing multiple alternatives."

Whither TV Gateway?

Some executives in the industry say such comments are a fig leaf and that TV Gateway's days are numbered. They also wonder what the deal does for the viability of Worldgate, one of a number of interactive television companies who have suffered from slow rollouts from MSOs and competition from bigger companies.

Gemstar co-president Peter Boylan expects to serve most of Charter's estimated 2 million digital customers by the end of this year.

"The agreement has significant financial incentives for Charter to deploy TV Guide in the substantial majority of their homes, and we believe, based on our conversations, that's what they intend to do," Boylan says.

And de facto exclusivity is the only way to practice economy of scale, says Michael Goodman, senior analyst for The Yankee Group.

"It doesn't make sense that you're going to use multiple guides," the analyst says. "You want to standardize across the system. You don't want one guide on one system and another guide on another system."

The Charter deal also represents a technological victory for Gemstar over TV Gateway, by assuaging some of the concerns in the cable industry that TV Guide's IPG would not work well with VOD and other interactive television services.

"Charter has investments in [VOD service provider] Diva Systems and WorldGate's TV Gateway, which are two companies that are engaged in developing IPGs that compete with Gemstar," says UBS Warburg's Eagan. "Charter has clearly now thrown its weight behind Gemstar's proven product and patent portfolio."

That said, most analysts believe that TV Gateway will remain alive for now, "I've never seen it as an either/or proposition," says Paul Kagan of Paul Kagan Associates. "There have always been multiple suppliers in every arena in the cable industry, and I don't think this means the end of TV Gateway."