News

GUIDE GIANTS LINK UP

7/16/2000 8:00 PM Eastern

The two giants of the interactive-programming-guide space finally got married last week, amid rumblings that a competing guide offering was being developed with the backing of some cable operators.

Gemstar International Group Ltd. and TV Guide Inc. completed their $14.8 billion merger last Wednesday, creating Gemstar-TV Guide International Inc., a powerhouse in the IPG and publishing sectors with $1.5 billion in combined annual revenue and $400 million in cash flow.

Gemstar first announced its acquisition of TV Guide in October, and there were some fears the deal wouldn't get done because of concerns about regulatory approval.

Gemstar and TV Guide are the two largest players in the on-screen programming-guide space-together, they own most of the patents for electronic programming guides and IPG products-and some feared that the merger would create a monopoly.

Those fears apparently didn't pose problems for the merger. The U.S. Department of Justice notified both companies last week that it would not oppose the merger, paving the way for the closing.

Meanwhile, sources said, some MSOs are working with WorldGate Communications Inc. to create a competing guide product called "TV Gateway." With WorldGate involved, the guide might also be expected to include Internet access.

Gemstar and TV Guide stock skyrocketed after the closing. Gemstar closed at $69.75 per share, up $10.63, or 17.9 percent. TV Guide shares roared up $9.63, or 26.7 percent, to $45.63.

The new company can now focus on growth, co-president and co-chief operating officer Peter C. Boylan III said.

Boylan cited growing the EPG and IPG businesses, as well as its interactive-television, Internet and electronic-publishing businesses. He added that agreements with MSOs regarding IPGs could come in the "near future."

He said that while licensing IPGs to cable operators is an important part of the business, it is a small one considering the combined company's other segments.

TV Guide's IPG product, "TV Guide Interactive," is currently available to 3.2 million digital-cable subscribers in the U.S., Canada and Mexico. According to the company, it is growing by 10,000 subscribers per week.

The EPG product, "TV Guide Channel," is available in 53 million U.S. households, and it is carried on 2,200 cable systems. Boylan said the company already has a deal with AT & T Broadband, and it hopes to continue negotiations with other MSOs soon.

WorldGate CEO Hal Krisbergh declined to comment on TV Gateway. But Janney Montomery Scott LLC analyst Jim Meyer called TV Gateway a consortium involving WorldGate, Charter Communications Inc., Cox Communications Inc., Comcast Corp. and Adelphia Communications Corp. He declined to say who briefed him on the product.

Cox spokeswoman Amy Cohn confirmed that MSO is part of the TV Gateway consortium. "We're just exploring what our options might be with the electronic program guide," Cohn said, declining further comment.

Charter spokeswoman Anita Lamont said her MSO has been talking to TV Guide since their contract expired "and there are others that we are talking to as well." She said she had no specific comment on TV Gateway. Comcast and Adelphia representatives could not be reached at press time.

Analyst Meyer said TV Gateway was "essentially a common interactive-content offering" that would offer TV listing information, similar to the TV Guide/ Gemstar offering. Adelphia, Charter, Cox and Comcast hope to use the product as an alternative to TV Guide, he said.

It's still not clear if the companies will be able to launch the product without licensing IPG intellectual property owned by TV Guide-Gemstar, Meyer said.

"The principal barrier right now is probably the legal issues," Meyer said.

Rumors have persisted for months that cable operators-unhappy about the price the combined Gemstar and TV Guide wanted for their product-were seeking an alternative product that they could use as leverage in negotiations.

Meyer recently put out a research note that addressed the consortium. "We believe that progress is ongoing and that WorldGate has the superior technology solution. Timing of implementation will continue to relate to legal issues and a degree of priority of the various MSOs," Meyer wrote.

Janney Montgomery Scott helped underwrite WorldGate's initial public offering last spring.

If TV Gateway does emerge as a new rival, it would likely not do so unless the vendor and operators were confident about their legal standing.

Gemstar has built a reputation as a vigorous defender of its patents over the years, and currently has litigation pending against Scientific-Atlanta Inc., claiming that S-A's native guide infringes on its patents.

With TV Guide, the combined company picks up another 80 patents, making it an even more formidable litigation force.

According to some published reports, Gemstar-TV Guide is charging a maximum of $1.10 per subscriber to a minimum of 38 cents per subscriber if all inducements are taken-more than twice many network rate cards.

Boylan would not talk about the new company's rates, adding that TV Guide's and Gemstar's rates have changed several times since the companies have been offering their respective guide services. And he said that now that the merger is completed, the new company may be able to offer MSOs more favorable terms.

"When we were two different companies, the price of providing a customer with the TV Guide brand and the Gemstar patent was price-prohibitive," Boylan said. "By merging and completing this transaction, we now no longer have that problem. We think we can offer operators the best of all worlds-the best brands, the best intellectual property and the best terms and conditions. Certainly, we have offered them better terms and conditions than Gemstar alone was charging."

Dan Mulvenon, vice president of the National Cable Television Cooperative Inc.-which represents small independent cable operators with a total of more than 10 million subscribers across the country-said the jury is still out as to how the merger will affect his constituency.

"It does leave small operators very vulnerable in terms of pricing and product choice," Mulvenon said.

Although there are some alternatives for EPG and IPG services-including Source Media Inc.'s "SourceGuide" and Tribune Media Services' "OnCable" and "Zap2it" products-those services can have high upfront costs. In the case of Source Media, it can cost up to $15,000 per headend to offer the service.

Mulvenon said small operators are particularly vulnerable because as they begin to spend capital to roll out digital cable, programming guides become a necessity of doing business.

True competition is so far relatively light for the combined Gemstar-TV Guide. Although large companies like Microsoft Corp. and Sony Corp. have competing guides, they are licensing their technology from Gemstar.

That leaves upstarts like Tribune Media, but its Zap2it guide is currently available on the Internet only. The company plans to begin beta-testing an EPG in the summer, with an IPG to follow.

"I think it's interesting that this [merger] passed muster," Tribune Media CEO David Williams said. "We're going to press on with our products. We strongly believe that intuitively, customers want competition."

Boylan, who could not be reached after the TV Gateway news emerged, acknowledged Microsoft and Sony as formidable competition. But he said Gemstar would receive patent-license fees from those two companies. And he doesn't appear to be too threatened by his smaller competitors.

"Somebody like Tribune entering the space, we'll just have to watch and see how they think they can do it, entering the game with no intellectual property," he added.

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