MSOs Go Public With TVGateway

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WorldGate Communications Inc. finally removed the wrapping from its interactive-programming-guide joint venture with four MSOs last week, creating what could be the first serious IPG competitor to the Gemstar-TV Guide International Inc. juggernaut.

Partners in the joint venture, called TVGateway, are Comcast Corp., Cox Communications Inc., Adelphia Communications Corp., Charter Communications Inc. and WorldGate. The product, an IPG, is expected sometime in the fourth quarter.

In addition, the four MSOs said they would invest $24.5 million in WorldGate, and they agreed to roll out WorldGate's "Internet on Every TV" product in their systems.

The deal gives WorldGate what it has craved for years-access to major MSOs-and is another step toward solving a major headache for the operators: breaking the grip Gemstar-TV Guide has on the IPG market.

Gemstar-TV Guide's IPG product, TV Guide Interactive, is currently available to 6 million digital-cable subscribers in the United States, Canada and Mexico. The analog TV Guide Channel is available in 53 million U.S. households, and it is carried on 2,200 cable systems.

The MSOs essentially cut two separate deals with WorldGate. In the first deal, the MSOs will purchase about 500,000 shares each of WorldGate stock, and they agreed to deploy Internet on Every TV in a certain number of systems.

The MSOs will also receive warrants to purchase more WorldGate stock-about another 500,000 shares apiece-based on reaching certain deployment milestones. Together, the MSOs will own about 7 percent of WorldGate's stock, not including the warrants.

In the second deal, WorldGate will contribute some programming-guide technology to the TVGateway joint venture in return for a 35 percent stake. The MSOs will contribute about $1 million each to TVGateway, and they will have the right to use the product in their systems as they choose.

The MSOs will initially have 16.25 percent equity in the JV, but eventually, all five partners will have 20 percent shares, executives in the venture said.

Specifically, the venture will license WorldGate's patented "Channel HyperLinking" and "Ultra-Thin Client" technology, which can provide the back-office-infrastructure support needed for interactive advertising and programming on digital set-tops, the companies said.

TVGateway will also license application-launcher technology that lets multiple applications "be easily interchanged" in the set-top, the companies said.

WorldGate has been around since 1995, but so far, it has only managed to convince a handful of operators to roll out its Internet on Every TV service.

WorldGate is available in systems in the United States and Latin America with about 43,000 subscribers. Its largest domestic customer is Charter, which already owned equity in WorldGate before the current deals.

As of March 31, Charter had 6,100 customers that used WorldGate. Charter has deployed WorldGate in portions of the St. Louis market and five other systems, with plans to add four more systems during 2000, according to a recent securities filing.

Affiliations with Adelphia, Cox and Comcast and the Charter extension will sub-stantially increase WorldGate's potential footprint. Combined, the four MSOs have more than 26 million subscribers.

Cox executive vice president of business development David Woodrow said in an interview last week that tests of the TVGateway product could begin later this year, with deployment within the next 12 months. He added that Cox has not determined where those market tests will be conducted.

Woodrow said Cox is currently using a StarSight electronic program guide from Gemstar in some of its systems, but that agreement expires next year. He added that the deal does not mean Cox or the other partners would use TVGateway exclusively.

WorldGate chairman Hal Krisbergh said the deals were proof that cable operators are beginning to realize the potential of interactive services.

"The industry has digested modems, they've digested the digital box," he said. "What you see now is the industry saying that it's time for interactivity."

The IPG opportunity appears to be the real draw, though. TVGateway could help the operators to control an emerging new revenue stream: interactive TV.

According to Forrester Research Inc., interactive television could generate $25 billion in new annual revenue by 2005, including services offered via personal video recorders and digital-cable boxes.

A key to drawing consumers to those services will be an IPG-like the TVGateway product-that can act like an interactive navigator, allowing viewers to toggle between television programming and commerce sites.

Analysts said part of the appeal of owning equity in the IPG venture is that cable operators would have a large measure of control over such an important service.

Economics is also a factor. Gemstar-TV Guide's IPG terms include a monthly per-subscriber fee of between 38 cents and $1.10 and an 80 percent cut of guide-based advertising revenue from MSOs that use their product, according to sources.

TVGateway, in contrast, is offering its IPG for between 35 cents and 65 cents per subscriber. TVGateway officials have not disclosed any plans for advertising.

"In addition to the economics, [operators] want to make sure they have control over their own destiny," Salomon Smith Barney managing director Niraj Gupta said. "This makes sure they have control."

Some analysts have speculated that in addition to control, TVGateway could serve as an effective bargaining chip for the MSOs in negotiations with Gemstar-TV Guide.

Woodrow begged to differ. "I don't think it's a good use of our money to spend it just as a negotiating chit," he said. "I think the other vendors out there are going to negotiate hard for what they think their product is worth. They need distribution, we have distribution, and we need a product."

But he added that TVGateway does help to broaden the programming-guide field.

"We're not a big fan of having a sole-source provider in anything we do," Woodrow said. "We will continue to try to foster a vendor environment that is attractive and robust for [vendors], and that gives us the kind of product and service we're looking for and the flexibility we think we need."

But with control will come risk. Gemstar-TV Guide, with 125 issued patents and another 150 patents pending in program-guide space, is likely to see the new product as an infringement on its intellectual property.

"[Gemstar-TV Guide's] patent portfolio is a sizable one, and [Gemstar] has shown that it will strenuously litigate potential infringement by other companies," SG Cowen Securities Corp. analyst Gary Farber wrote in a research note. "We believe [WorldGate] and the cable operators have pursued substantial due diligence in this matter. That said, we would not be surprised to see potential litigation arise from it."

TVGateway believes it will avoid any potential patent litigation because its guide is server-based, instead of set-top based like the Gemstar-TV Guide product.

"We have an enormous respect for people's intellectual property," Krisbergh said. "We've done an extensive amount of work to make sure that we don't infringe on other people's intellectual property. We're not amateurs here. We know what we're doing."

Gupta said the Gemstar-TV Guide patents are so broad that skirting them would be extremely difficult.

"You have to take into consideration that Gemstar has been at this for a long time," he added. "WorldGate's involvement in the IPG arena has not been long-standing. Clearly, they don't have the intellectual property that Gemstar does."

Gemstar-TV Guide co-president and co-chief operating officer Joe Kiener said last week that any product from TV Gateway would be looked at carefully. "We're not going to tell the MSOs how to conduct themselves," he said, adding that Gemstar-TV Guide continues to negotiate with the cable operators.

Kiener also alluded that making the TVGateway product server-based may not be enough to avoid violating Gemstar-TV Guide's patents.

"In excess of 100 robust patents exist at Gemstar," Kiener said. "The server-based aspect is just one [aspect]. It will be interesting to see how their product will work out. Obviously, we will reserve our rights."

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