Gemstar's Shell Looks Past Accounting Woes

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Overpromising has been a hallmark of interactive-television companies, but it would be hard to accuse new Gemstar-TV Guide International Inc. CEO Jeff Shell of hyping the ailing interactive program guide vendor.

Gemstar has been pummeled over the last year by accounting problems that have sparked a Securities and Exchange Commission investigation, legal setbacks that have weakened its once-mighty patent portfolio and a shake-up within its executive ranks. Former co-president Peter Boylan quit in March, while Gemstar founder Henry Yuen and longtime chief financial officer Elsie Leung recently stepped down under pressure from News Corp., which owns 43 percent of the company.

Pasadena, Calif.-based Gemstar's stock has plummeted 85 percent in the last 12 months. And Shell said he doesn't expect business at Gemstar — which distributes the passive TV Guide Channel scrolling guide, the TV Guide
print magazine and horse-racing network TV Games Channel, as well as the TV Guide Interactive IPG — to pick up anytime soon.

"When I say short term, nothing's really short term in this company," Shell said in a recent interview. "It's going to take a while to fix everything."

During the last few months, Shell said he's spent most of his time dealing with accounting issues and helping to prepare the company's financial statements. Gemstar, which blew the deadlines for filing its annual and quarterly reports with the SEC, finally submitted 10-K and 10-Q reports on Nov. 15.

In one of the many disclosures in its 10-Q, Gemstar said it had pumped up ad-revenue figures for its IPG by giving free units to TV Guide
magazine advertisers. It booked $5.5 million in IPG revenue from those deals, most of which was recorded in fourth-quarter 2001.

Gemstar's restated earnings reports also removed $113.5 million in revenue that had been booked from Scientific-Atlanta Inc. since January 2000.

That decision followed a loss in a patent-infringement case Gemstar had filed at the International Trade Commission against S-A, Pioneer Corp. and EchoStar Communications Corp., and legal setbacks Gemstar suffered in a separate federal patent suit it's waging against S-A.

Shell acknowledged that the accounting issues have distracted him from focusing on Gemstar's various business segments: "Unfortunately, I haven't spent as much time as I would have liked on the other pieces of the business, which I now need to get into."

While Shell will turn more of his attention to operations, much work remains to be done with accounting. Gemstar will devote much of its time during the next couple of months to a review of its financial statements by Ernst & Young LLP, said Shell, who described that process as "the enema of all audits." Gemstar dropped auditor KPMG LLP in October.
Shell, the former Fox Cable Networks Group CEO, has a three-year employment contract with Gemstar that pays him $750,000 annually, plus a minimum bonus of $250,000.

Growth opportunities

He said Gemstar plans to focus on its cash-generating units —TV Guide, TV Guide Channel and its C-Band satellite licensing business — over the next couple of years.

"The most immediate growth, or at least lessened decline, can come from really reorienting and fixing some of those businesses," Shell said.

Shell said TV Guide Channel, which Cablevision Systems Corp. recently dropped, will get a "fresh coat of paint" as soon as February.

Gemstar wants to improve the analog network's look, bringing its design closer to that of the TV Guide Interactive IPG, "so it's an almost noninteractive version of the guide," Shell explained.

Long-term, Gemstar sees the biggest growth opportunities with the TV Guide Interactive IPG, currently in fewer than 20 million digital-cable homes.

The Gemstar CEO also concedes that the IPG and its user interface need much improvement.

"I personally think the DirecTV [Inc.] guide is much better [than Gemstar's IPG]," added Shell.

Some improvements, Shell said, will come with the next version of the guide.

In January, Comcast Corp. is slated to become the first MSO to market on-demand services run by Gemstar's A17 — the latest iteration of its IPG.

Comcast vice president of digital television Mark Hess said the guide's user interface will contain a video window that will continually explain "why VOD is good, and a continual emphasis on how to make it work."

Hess said users won't see most of the improvements in A17, explaining that the work Gemstar did was largely "under the hood," integrating its product with systems from other interactive TV vendors, such as Concurrent Computer Corp., SeaChange International Inc. and WorldGate Communications Inc.

Gemstar has several MSOs locked into long-term carriage deals for TV Guide Interactive. Its most important agreement may be the 20-year deal Gemstar inked with Comcast Corp. in April 2001, which called for the MSO to offer TV Guide Interactive to the "majority" of its subscribers.

Comcast is also one of several MSOs that back the TVGateway IPG consortium, run by WorldGate. It has deployed TVGateway on a few systems in Georgia and Alabama.

Hess wouldn't discuss whether Comcast plans to renegotiate its Gemstar contract to reflect the recently acquired AT&T Broadband systems. But Shell said Gemstar expects Comcast to roll the guide out on former AT&T systems under the Comcast contract.

Gemstar also has long-term carriage deals with Charter Communications Inc., Adelphia Communications Corp. and Mediacom Communications Corp.

Gemstar's biggest distribution holes: Time Warner Cable, Cox Communications Inc. and Cablevision.

Cox: Still 'open'

While Cablevision uses a native IPG on its iO: Interactive Optimum digital service, Cox's IPG deployments are split between Pioneer's Passport IPG and S-A's SARA guide, said Dallas Clement, the MSO's senior vice president of strategy and development.

A few acquired systems run TV Guide Interactive, but Cox, "in all likelihood" would replace the TV Guide Interactive IPG on those systems with Pioneer's IPG, Clement said.

Yet the company is still open to doing a deal with Gemstar, Clement said.

"TV Guide, under the leadership of Jeff Shell, has indicated a willingness to work with the MSOs," Clement said. "People will be making the decision to change guides — I wouldn't say frequently — but it would not be surprising to me that Cox in the next five years may find ourselves making tough decisions again."

Gemstar appears to be amenable to working with operators to adjust the guide's advertising-revenue splits, which now stand at about 15 percent, according to Shell.

"I think that we'll be looking at a lot of other deal models in the coming years, and we may have to go back more toward an even split with the operators to make sure that we're both incented to build the business together," Shell said.

Most of the advertising for TV Guide Interactive is sold in bulk. In hopes of boosting the guide's ad sales, Shell said Gemstar would shift its sales strategy to a "scarcity model." That would allow a TV network to buy time on the guide for a show just minutes before it's scheduled to begin.

"We need to get the distribution … and I think separately, we need to work on the product to get the vehicle to more [of] something that the advertisers can buy into," Shell added.

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