Gemstar's Boylan: High on T-Commerce


Gemstar-TV Guide International Inc. was built on dozens of program-guide patents, countless lawsuits, a failed hostile takeover of Gemstar by United Video Satellite Group and, finally, last year's successful Gemstar-TV Guide merger. Co-president and chief operating officer Peter Boylan III has been at the center of it all.

While COO of United Video, Boylan battled Gemstar in the courtroom and the marketplace and — at one point — disparaged the Gemstar patents he now staunchly defends.

Much of the cable industry watched the Gemstar-TV Guide battle from the sidelines, waiting until the companies dropped their lawsuits and merged before choosing which interactive program guide to buy. Boylan's job is to strike long-term deals with MSOs for the guide, and to stave off competition from new entrants like the TVGateway MSO consortium. Gemstar is also waging several patent-infringement suits and recently recruited the International Trade Commission in hopes of blocking EchoStar Communications Corp., Scientific-Atlanta Inc. and Pioneer New Media Technologies from importing set-tops that it claims violate Gemstar patents. The company also owns TV Games Network, a service that allows users to bet on horse racing which Boylan hopes to expand.
Multichannel News national editor Steve Donohue caught up with Boylan to get the latest from the battlefront. An edited transcript follows.

MCN: How would you say your relationship with cable operators has changed in the last couple of years? A lot of people would say that you've had a somewhat acrimonious relationship with the industry.

I think our relationship is excellent with the majority of the cable industry, notwithstanding the fact that obviously there was a three-year period of time with a tremendous amount of uncertainty and frustration for all involved. Because prior to our merger, and prior to completing deals, you had two companies in litigation with each other, and cable and satellite operators unwilling to make a deal with either one for fear of ending up in litigation with the other.

That was quite frustrating for everybody, because it wasn't clear which way to go. And once the merger got completed, then of course the concern was: 'OK, at least now I don't have to worry about picking the wrong one.' But now I have to worry about, 'Can we make a deal that makes good business sense for our shareholders as well as Gemstar-TV Guide?' And we have proved beyond any question that the answer is absolutely yes, and that's why we now have over 110 — just in the United States — long-term licensees.

MCN: What kind of an impact has the emergence of competition — namely that TVGateway consortium — had on your business?

A total nonevent.

MCN: What about just the fact that you're striking nonexclusive deals now?

That's nothing new. We have always been willing to license our technology on open, flexible terms, and the customer gets to decide which way they want to go. In AT&T's case, they opted to take advantage of every discount that we offered and over 100 percent penetration, which is tantamount to exclusivity, to get the very best discount.

MCN: Would you expect that TVGateway is here to stay, and that the MSOs will continue to fund it in order to leave a Gemstar competitor in the market?

I can't speak for TVGateway, but what I would say is we don't consider their IPG technology to be a viable alternative for a service provider. Secondly, I think the fact that Comcast [Corp.] and Charter [Communications Inc.], two of the primary backers, entered into the agreements with us says a lot about how they feel about WorldGate [Communications Inc.] as a viable IPG alternative.

Would the cable industry like to see them stick around to have, quote, an alternative? Sure, all things being equal, people like alternatives. But does anybody consider WorldGate a viable IPG alternative? I think the answer is a resounding no, [as] evidenced by their lack of commitments by any major MSOs, including the ones that invested.

MCN: In marketing TVGateway, they've positioned the guide as a product that the operator can control and integrate with any other interactive-television service. Gemstar has been criticized for not being willing to integrate with other ITV services. Do you think that's a fair criticism, and what can you say to show that you are willing to integrate with other companies?

It's absolutely not a fair criticism, and in fact it's plainly not true, as evidenced by the fact that Charter and Comcast and 100 others signed long-term agreements with us. Charter and Comcast would have never signed 10- and 20-year agreements with us if we were not willing to fully integrate and support their interactive-television needs. So the whole integration nonsense was something fabricated by our wanna-be competitors in an effort to try and create paranoia and concern with our potential customers. And we have proven those myths to be completely unfounded.

MCN: Everyone seems to be talking about control of the first screen or the portal. Do you expect that TV Guide Interactive will be that first screen that subscribers see?

The facts have been the same for years, and they're quite simple. The cable operator is going to decide what the first screen is, not Gemstar-TV Guide and not the consumer. The consumer, once the cable operator decides, is obviously going to respond positively or negatively depending upon the experience.

MCN: If there is going to be any forced tuning, are you trying to position Gemstar to have a presence on that home page?

We give our customers sole discretion as to how they choose to do that. If they'd like us to be the first page, we're happy to be the first page. If they want their walled garden to be the first page, that's fine by us. All we ask is that the consumer is given a seamless, easy-to-use ability to get to the guide.

MCN: News Corp. recently increased its stake in Gemstar. Do you think that'll bring good things to the company?


MCN: Anything else that you're working on that you'll do differently, now that News Corp. owns a larger stake?

I think [News Corp. chairman] Rupert [Murdoch] sees phenomenal promise in Gemstar-TV Guide, and particularly with three areas, the interactive program guide and its related advertising and [television-commerce] franchise.

Second is [electronic] books and how it can fundamentally change the publishing side of his business in a positive way, in addition to being a very exciting killer app for broadband television. And then the third is Television Games Network, and interactive wagering on racing is a very significant new revenue stream for broadband television.

So I think those three areas are probably at the top of the list of things that Gemstar-TV Guide is working on that fit beautifully within News Corp's global DTH [direct-to-home] strategy.

MCN: You're now generating advertising and licensing revenue. What potential do you see in generating t-commerce revenue?

I actually personally believe that t-commerce is going to be much bigger than interactive advertising four or five years from now. And the reason I believe that is the simple fundamental aspect of consumer behavior is [that] people buy on impulse. You know: When you walk into the grocery store to get a loaf of bread, you come out with five other things in your grocery cart.

One of those [TV Guide] advertising panels is selling a new CD that Sony Records just came out with, and with a click of a button I can buy it. I may not have had any intention when I sat down to see what was on TV tonight to buy a CD. But boom, that Mariah Carey or whomever it happens to be [on the] CD is sitting there, and I just heard that song driving home from work, and it strikes my fancy, and I hit click and order. And let's say we did a deal with the record company where we pay them $7 wholesale price and we sold it for $10.

That $3 profit we split 50-50 with our service-provider partners, so that becomes attractive found money. Now that's not to say that the service provider won't have their own e-commerce business in their home page. That's their business, and we have no problem with that.

MCN: Did you say you would seek 50 percent of the transaction?

Well, we have a well-known pricing business model with service providers and depending on the commitment they make to us, they can earn up to 50 percent of that profit.

MCN: Shouldn't the operator get the majority of the gross transaction?

We're talking about t-commerce and the IPG? Absolutely not, because we have the patents that cover it, so they couldn't do anything. Arguably, we could keep 100 percent of it.

MCN: On the video-on-demand side, you sell advertising through the guide, but you haven't asked for a cut of the actual pay-per-view buy yet. Will that change?

No. For everybody that's under contract, we have agreed that we will not take a piece of the buy. Will we change our point of view on people who have not yet signed a contract? Maybe. We don't have any current plans to do so, but we have intellectual property that covers ordering things like a movie through an IPG.

There's nothing to preclude us form doing so in the future. But with all of our existing 110 customers, we have agreed not to take any compensation.

MCN: Why introduce longer programming on TV Guide Channel?

Consumers are overwhelmed with choice right now, because virtually every cable system in the country is now offering digital. So there are hundreds of channels available and our consumers are telling us they need help, they need guidance in determining what's worth watching because with so many choices, it's hard to weed through a lot of that.

MCN: The International Trade Commission set a target date of June 15, 2002 for completing the investigation into EchoStar, Pioneer and the other companies to which you brought the complaint. Is that going to take longer than you expected?

No. One of the reasons we brought the complaint, [in addition] to the existing patent-infringement litigation, is patent-infringement litigation can take multiple years. We litigated just one patent for seven years with StarSight-Gemstar. So we are obviously highly confident of our position in the patent infringement, but the ITC is attractive as an additional venue because you get an expedited resolution. And so it's not simply Gemstar-TV Guide suing these parties, the United States government has joined in as an additional plaintiff.

And they only did so after reviewing the case and coming to the conclusion that our claim appears to have some merit. So we like the fact that unlike a seven-year patent infringement trial, this has certainty in the schedule that you just described.

MCN: Do you expect to settle with these litigants before the case draws to a conclusion?

We know all three of them would like to settle, notwithstanding the rhetoric.

MCN: Are there settlement discussions going on?

Yes. But having said that, as you know, we're business people. And Motorola [Corp.] was a perfect example. Gemstar has been in litigation with them for many years and shortly after we completed the merger [Motorola Broadband Communications Sector chairman] Ed [Breen] and I started negotiating a deal and we worked out a win-win deal that to this day both of us feel great about.

MCN: Are all the companies named in the ITC complaint discussing a settlement?

I believe they are.

MCN: How soon do you think you may reach a settlement with all or one of them?

Impossible to predict. We know exactly what we believe damages to be, and as you know Motorola paid us $200 million, and they didn't even offer an IPG in their digital cable set-top boxes. They were good boys relative to what S-A and Pioneer have done. And [EchoStar chairman] Charlie [Ergen] has not paid us a penny dating back to 1994 on every one of his boxes. In contrast, DirecTV [Inc.], every one of their boxes we've been paid to make and sell licenses on. So you get the sense of what the damages look like and it's kind of impossible to predict.

We're in the business of building this new media platform called an IPG. And we'd like to have our technology deployed everywhere to get on with making money for everybody, including those defendants. But it's impossible to predict.

MCN: You said that you're in active talks with AOL Time Warner Inc. about whether the license AOL signed in 1999 would apply to Time Warner Cable systems. What do you think of that deal they did with Tribune Media Services as these talks were going on? It wasn't for an IPG, but it was for a passive guide.

There is as always a lot of misinformation out there. And as we understand it from AOL Time Warner directly, they have made no commitments at all in terms of carriage. It's simply a hunting license whereby like any channel, they negotiate a deal and then they decide system by system whether they want to carry that channel or not. Needless to say, we know Zap2It or whatever it's called is not TV Guide and it'll never be TV Guide. And no matter what they choose to do in terms of price, et cetera, consumers love and trust the TV Guide brand and you can just see what's happened to our ratings ever since we changed it from the Prevue Channel to TV Guide Channel. They've gone up substantially. And it's a significant driver of pay-per-view and premium services. So somebody would be pursuing at pretty great risk to alienate the consumer by dropping TV Guide Channel and then thinking that the consumer is going to turn to some no-name Zap2It to seek guidance on what's worth watching.

MCN: Would you still describe those talks with Time Warner Cable as good-faith negotiations, and how soon do you think you may be able to reach a deal to deploy TV Guide Interactive on their digital-cable systems?

Well the first question, absolutely. And the second question, I can't predict. But the conversations and the negotiations are taking place at the very highest levels.

MCN: In July 1998, while you were still at United Video Satellite Group, you were quoted in a press release discussing United Video's trial against Gemstar. In describing the StarSight patent, you said "the StarSight patent at issue in the case is invalid and unenforceable." EchoStar brought that up in its counter-suit in December. Did that hurt your case?

I haven't heard whatever rhetoric [EchoStar CEO] Charlie [Ergen] is telling investors, so I can't speak to it specifically. As Charlie knows, obviously, when you're in litigation with somebody, you certainly — if you believe you are not infringing — do what to maintain that you're not infringing. But anything that I would have said accurately or inaccurately is going to have no bearing, no relevance in our litigation with him.

MCN: Is it awkward for you when someone goes and looks at that old quote where you're saying something negative about the patents that you staunchly defend now?

No, I think it's a total nonevent. It's amusing that [Ergen] spends so much time trying to make it a point.

MCN: You take a very different approach to discussing Time Warner Cable and EchoStar. It just seems like an unusual situation.

I think you've got three different extremes — it's really not that unusual. In the case of AOL Time Warner, there is a license. It's got words on paper, black and white — what it covers, what it doesn't cover. Maybe there is some debate as to what those words mean, but it's not like you're starting from scratch, right?

Then on the other extreme you've got somebody like Pioneer, where there is no relationship, there is no contract, there are no words. And really, their only customer is Time Warner Cable. And you've got this EchoStar bucket, which is a totally different bucket — no contract, no relationship, no words on a page — somebody who has been a staunch adversary of Murdoch and [Liberty Media chairman] John Malone, who sued Murdoch for $5 billion before, who is fiercely independent. Just last week, in his shareholders meeting [he] was telling everybody that he may put in a competitive offer to the General Motors [Corp.] board [to acquire DirecTV], even though they've decided they want to negotiate exclusively with Rupert.

So he will do anything to fight with anything that Rupert or John are involved in. And then you've got us, where he's clearly infringing our IPG patents. We have sued him as a result of that infringement, and so it's a complicated series of relationships.

MCN: Does any bad blood between News Corp. and EchoStar have an impact on this litigation and your prospects of reaching a settlement with EchoStar?

At the end of the day, I'd like to think that Charlie Ergen got where he's gotten because he's a smart, shrewd successful businessman, not an emotional, irrational human being. And we certainly have proven to be the same. Who would have ever dreamed that we would merge with Gemstar and [Gemstar-TV Guide CEO] Henry [Yuen] and, ultimately, that Rupert would become our largest shareholder?

But at the end of the day, we're business people and we put a deal together not withstanding seven years of litigation and all of that that makes sense for everybody involved. So I'm optimistic the same will happen. But clearly there are dynamics that we've discussed.