The Boob Tube's High-Tech Sherpa - finances of Gemstar—TV Guide International - Brief Article

Kiplinger's Personal Finance Magazine, Oct, 2001 by Mark McLaughlin, Christine Pulfrey

STOCKS | GEMSTAR-TV GUIDE seeks to control the technology of interactive TV.

YOU KNOW the old saying: If it sounds too good to be true, it probably is. But if you took that adage too literally, you might never even consider Gemstar-TV Guide International, whose own CEO admits that the company's business model may look a little too good to be true. And that could be a mistake.

Gemstar aims to be both the Sherpa and the sheriff of TV Land by controlling the technology of interactive TV. The company owns TV Guide magazine. But it's the highly profitable intellectual-property business of technology licensing that analysts say could turn the company into a media powerhouse. The driver of its strategy is interactive program guides, or IPGs, TV welcome screens that let you sort channels and record shows, and will eventually allow you to order movies and other products.

Hot to trot. Cable operators are so anxious for the guide that they are willing to sign lopsided deals that guarantee Gemstar an 85% cut of future national advertising and a 50% cut of revenues generated by future TV commerce, such as pay-per-view movie orders. Microsoft and AOL Time Warner are so hot on interactive TV that they paid Gemstar a combined $85 million to incorporate the guide technology into their services.

For broadcasters, the IPG is so valuable because ads are seen at the moment viewers decide what to watch. Analysts project that total revenue from the guide will jump from $100 million this year to more than $1 billion by the end of 2004, and perhaps to $10 billion by the end of the decade--all at a minimal cost to Gemstar once the systems are in place. "It has the potential to do billions of dollars of cash flow with almost no cost," says Mitch Rubin, manager of Baron iOpportunity fund.

Adds Gemstar CEO Henry Yuen: "We are not like other companies whose business models look good on spreadsheets. We are real. We are talking about an international, interactive platform without capital expenditure or inventory risk."

For now, Gemstar is focusing on expanding distribution, for its IPGs as well as its new electronic-book and TV horse-betting businesses. Its IPGs are in more than 13 million homes and should reach at least 46 million by the end of 2005, says Goldman Sachs. As it waits for IPG advertising to take off, the company receives licensing revenue from cable operators and certain manufacturers of VCRs, TVs, set-top boxes and electronic-book readers. But its greatest cash generator, TV Guide, is in decline because of rising costs and lagging sales.

Possible risks. Competition among IPGs may intensify. Already, set-top-box maker Scientific-Atlanta and TVGateway, an alliance of five companies, offer their own guides. Gemstar's distribution could be somewhat limited should it lose one of the patent-infringement and antitrust lawsuits now pending.

Perhaps the biggest concern is Gemstar's stock price. Despite a 60% decline over the past year, the shares, recently $34, still look expensive. With a market value of $14 billion, Gemstar, which is not yet profitable, sells at ten times revenues. Given investors' recent distaste for high-priced issues, the stock could fall into the $20s. But if shares drop any lower, get ready to click the buy button.

SPOTLIGHT | Gemstar--TV
Guide International

The company's products and
their reach at a glance

INTERACTIVE PROGRAM
GUIDES
13 million  homes

TV GUIDE
9.9 million weekly circulation

VCR PLUS 
Available in 40 countries

TVG NETWORK
6.9 million homes