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Gemstar's New Template

Long criticized by cable operators for using its patent portfolio to drive pricey and rigid licensing deals, Gemstar-TV Guide International Inc. now says it's willing to yield some control of its interactive program guide — at the right price.

Gemstar signed Time Warner Cable to a 10-year license deal last week that contains terms markedly different from agreements it has with other MSOs. Time Warner agreed to pay Gemstar a license fee for each digital subscriber, whether or not that subscriber uses Gemstar's TV Guide Interactive IPG or a guide from another vendor.

Time Warner, with about 10.8 million subscribers overall, reported 4.1 million digital customers in July.

Can pick, choose

The deal also allows Time Warner to incorporate Gemstar's IPG technology into guides that it has deployed from vendors such as Scientific-Atlanta Inc. and Pioneer Corp., provided those guides display the TV Guide brand and content, Gemstar CEO Jeff Shell said.

"They [Time Warner] don't have to worry about trying to engineer around our patents to get their product to the consumer," Shell said. "They can go freely and go create the best product they want, integrating pieces of us into their guide, or take our guide."

If Time Warner Cable and Gemstar agree to sell advertising on the guide, they'll split the ad revenue evenly, Shell added.

Those deal terms are a first for Gemstar, which historically offered cable operators just 15% of ad revenue generated by TV Guide Interactive.

In the past, Gemstar has charged such operators as Comcast Corp. 5 cents per subscriber for every customer who receives the guide, and Gemstar maintained strict control of the guide.

Gemstar and Time Warner Cable officials declined to disclose the license fee that Time Warner will pay, but Shell said that the deal "will be material to our financial results in the first quarter."

Goldman Sachs analyst Richard Rothstein estimated in a report last Wednesday Time Warner will pay Gemstar about $3 million per quarter for the IPG license.

Shell said Gemstar would consider cutting new deals with MSOs similar to the model achieved with Time Warner.

"Clearly, we'd love to transition some of our other deals into this structure, but it's all about economics," Shell said. "Obviously, in exchange for giving up some of the ad revenue control and percentage, we need to get paid a higher license fee.

"So that will be a discussion that we will have with Comcast and others, and the question will be: Does the attractiveness of the structure to them offset the more difficult licensing economics to them?"

MSO holdouts

Time Warner Cable was one of a few big MSOs Gemstar hadn't signed to a long-term IPG deal.

Time Warner has been using guides supplied by Pioneer Electronics and by set-top vendor Scientific-Atlanta Inc. In July it announced plans to test an IPG from Microsoft Corp. in Beaumont, Texas.

Gemstar signed a 20-year IPG deal with Comcast and a 10-year agreement with Charter Communications Inc. in 2001.

Though Gemstar dominates the IPG business, it lacks agreements with Cablevision Systems Corp., Cox Communications Inc. and Insight Communications Co.

Cox uses IPGs from Pioneer and S-A; Insight uses its own Source Guide IPG; Cablevision developed an IPG for its digital iO: Interactive Optimum platform.

Time Warner Cable and Gemstar executives had debated for the last few years over whether a license agreement America Online Inc. signed with Gemstar in 1999 — before its merger with Time Warner Inc. — would compel Time Warner Cable to use Gemstar's IPG.

Shell said last week Gemstar didn't use the AOL license as leverage, but the agreement "does resolve that issue."

Time Warner Cable spokesman Keith Cocozza said Time Warner Cable will begin rolling out either TV Guide Interactive or IPGs using Gemstar technology early next year. Another source said it could take up to a year for the MSO to deploy the guides to all of its digital subscribers nationwide.

Asked why Time Warner Cable cut the Gemstar deal, rather than sticking with its current IPGs from Scientific-Atlanta and Pioneer, Cocozza said the MSO strives to work with a variety of vendors to give it options for its hardware and software needs.

"This helps us keep costs down and quality and ingenuity of the products high," he added.

The Gemstar-Time Warner agreement gives Time Warner the option to deploy a customized version of TV Guide Interactive. The MSO could also incorporate TV Guide content into the guide, including a service called TV Guide On-Demand, which will contain video previews and reviews of programs, in addition to recommendations.

Time Warner's deal gives it the flexibility to incorporate pieces of TV Guide Interactive into its existing guides in some markets, and the MSO could also choose to switch out guides from Pioneer and S-A in some markets and replace them with TV Guide Interactive.

The latest version of Gemstar's IPG, which the company calls the "Blue Guide," is supposed to roll out this quarter. Compatible only with Motorola Inc. set-tops, the guide supports digital video recorders, video-on-demand and HDTV. It also contains a genre-search function and allows users to select the guide's background colors.

This spring, Gemstar plans to roll out its i-Guide. Gemstar says the "integrated" guide will be its fastest IPG yet, and will offer new marketing capabilities for VOD content, in addition to other features.

Integration issues

The deal may see prompt Gemstar to work with two of its bitter rivals — Scientific-Atlanta and Pioneer, both of which Gemstar has sued for alleged patent infringement.

Time Warner's Gemstar agreement lets the MSO integrate Gemstar's intellectual property and technology with guides from S-A, but it's not clear if those companies will cooperate and help with the integration.

Scientific-Atlanta spokeswoman Sara Stutzenstein declined to comment when asked if S-A would cooperate with Gemstar if Time Warner asked the company to do so. Pioneer marketing director Dan Ward didn't return calls last week.

Bob Gold, who handles media relations for Pioneer, said Pioneer executives were unavailable for comment.

Shell suggested the Time Warner agreement could help mend Gemstar's relationships with Pioneer and Scientific-Atlanta — and the Gemstar CEO extended an olive branch.

"Ultimately it's crazy that we are in litigation with Pioneer and Scientific-Atlanta, because they are fundamentally in different businesses than we are now," he said. "They should be partners with us, in the sense that they're out of the guidance business and the intellectual property business; they're in the software and set-top box business."