Liberty Unit Buys OpenTV, ACTV

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Liberty Media Corp. essentially bought its way into the interactive-TV applications business last week.

It snapped up a controlling interest in OpenTV Corp. and bought ACTV Inc. outright for bargain prices, then installed cable veteran Peter Boylan III as head of a new ITV unit.

The move positions Liberty to become a player in the ITV content market. For OpenTV, it represents a shift away from middleware and toward applications.

Liberty Media last week said it tapped Boylan — the former Gemstar-TV Guide International Inc. co-president — as president and CEO of its new spin-off, Liberty Broadband Interactive Television Inc. (LBIT).

The subsidiary's first investment, also announced last Wednesday, is an agreement to take 87 percent voting control of middleware provider OpenTV Corp., as well as 43 percent ownership, through a stock purchase.

Amsterdam-based MIH Ltd. agreed to sell its interest in OpenTV for $185 million in cash and stock.

BUYING OPPORTUNITY

In a conference call with investors last Wednesday, Liberty Media chief operating officer Gary Howard called the OpenTV purchase and the creation of LBIT "a timing opportunity."

"The segment is clearly out of favor," he said. "You start to say maybe now is the time to try to get into this space and really use it to enhance the content side of our equation. So we see it as a good timing opportunity."

Boylan's availability — he left Gemstar in March — also played into the timing, Howard said.

Though some investors have lost faith in the ITV sector, others believe its low valuations present a strong buying opportunity.

"Buying low and selling high is always a good idea," Yankee Group analyst Adi Kishore said.

LBIT was attracted to OpenTV because of its customer base, technology, management team, customer service and portfolio of intellectual properties, Boylan said.

Liberty's relationships with multichannel video providers and programmers in the U.S. and abroad should help drive OpenTV's business, added OpenTV president James Ackerman said.

Boylan said LBIT plans to provide strategic guidance to OpenTV's management, as well as access to key relationships, "and then get out of the way."

But that doesn't mean OpenTV will stay the same within Liberty. Boylan indicated the company would focus more on applications than middleware.

"They have a great customer base, fantastic technology and a significant intellectual-property portfolio that will lay the groundwork to help us to change the business model over time, with a new and expanded focus on applications, interactive advertising and [television commerce]," Boylan said. "We think there is a real need and a void to be filled in assisting programmers and cable operators, satellite operators in terms of enhancing full-motion video in a way that is attractive to all of those parties."

Though middleware has been necessary to help developers write applications that will work across technology platforms — and is a good near-term business — Boylan left little doubt it would not be the new main focus.

"Having that type of foundation, where OpenTV has developed some powerful tools that allow application developers to design, build and write applications to those environments, gives OpenTV a real competitive advantage as it moves more aggressively into the applications area," he said.

WATCH FOR MORE

A content focus would clearly suit Liberty's wide-ranging media holdings. With investments in an array of content, distribution and technology assets, Liberty has its "fingers in a lot of pies, but hasn't used it in a synergistic fashion," said Kishore.

Industry observers would get a better sense of the company's overall strategy after LBIT "picks up a couple other companies," he said.

OpenTV's biggest U.S. client is direct-broadcast satellite provider EchoStar Communications Corp., which has deployed more than 4 million OpenTV-ready digital satellite receivers, Ackerman said. The company has also done significant work overseas, where ITV has been deployed more aggressively, across roughly 24 million set-tops.

Analysts suggested that OpenTV's long-term relationship with EchoStar is in question, given Vivendi Universal S.A.'s investment in the DBS company.

The Vivendi investment "changes the playing field for OpenTV," Kishore said. "It's not good news, at the very least."

If EchoStar's proposed merger with DirecTV Inc. parent Hughes Electronics Corp. goes through, Carmel Group analyst Sean Badding said, EchoStar CEO Charlie Ergen may come under pressure from Vivendi to use its Canal Plus Media Highway middleware on the joint DBS platform.

But there's still hope for OpenTV, Badding added.

"Even if you have an investment from a company, as a CEO, you have to use the best technology available," Badding said.

EchoStar spokesman Marc Lumpkin said OpenTV is available on nearly all of EchoStar's Dish Network receivers, except for the earliest models deployed in 1996 and 1997, as well as newer Dish model 6000 receivers. All models in the 301, 501, 3900 and 4900 lines are powered by OpenTV, Lumpkin said.

Dish is rolling out some of the newer OpenTV applications, including games, daily horoscopes and local theater listings, over the course of the spring and summer. Existing applications include an enhanced interactive programming guide and an interactive weather channel.

BUYING ACTV, TOO

On the cable side, most U.S. operators have been slow to deploy middleware, even technology such as OpenTV's, which can work on a thin-client architecture.

Kishore said that MSOs are focusing more on video-on-demand.

ACTV Inc. also said last Wednesday it has signed a letter of agreement with Liberty to sell all remaining shares in the digital media company that Liberty does not already own. The company has a 65-day negotiating period to work out a deal with ACTV, said Howard.

Liberty may contribute cash, its own stock or shares in affiliate companies to close a deal with ACTV.

Badding said there are still questions about ACTV's viability in the marketplace, although its ITV applications align with LBIT's strategy.

LBIT will continue to seek out other ITV investments, but Boylan said the company was not interested in investing in a conditional-access company.

To many ITV observers, there's little doubt that there will be more consolidation in the ITV space. Speculation on which company is the next takeover target could continue to drive up stock prices of companies such as Wink Communications Corp. and TiVo Inc.

While Wink would certainly fit within LBIT's vision for target companies, Kishore said, "I don't know that Wink is necessarily for sale."

Last week, Boylan was still looking for office space for LBIT in Tulsa, Okla., his home base. He said a small management team would run the company.

Boylan owns a 10-percent stake in the company, and Liberty owns the rest.

LBIT will not trade as its own public stock, at least not initially, Howard said.

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