Gemstar-TV Guide Focus of Justice Dept. Probe

Gemstar-TV Guide International is under investigation by the Justice Department for possible antitrust violations in the interactive television programming market that it dominates, according to sources familiar with the probe.

News of the investigation, reported Friday by Reuters, comes nearly a year after the Justice Department’s antitrust unit cleared Gemstar’s $14-billion purchase of TV Guide Inc.--a controversial deal that created a powerhouse in electronic programming guides.

As part of the merger review, potential customers--especially cable companies--complained to regulators that the combined company would have unrivaled powers and patents over a technology predicted to become as key to television viewing in the future as search engines are to the Internet today.

Critics of the deal, including cable and satellite TV providers as well as television software makers, were stunned when the Gemstar-TV Guide merger gained approval without any conditions.

The new investigation began shortly after the deal was approved, sources told Reuters.

Officials in the antitrust division considered suing to block the Gemstar merger, according to one source, but concluded it would be a difficult case to win, especially when the division was devoting a big chunk of its resources to the landmark antitrust case against Microsoft Corp.

It’s unclear whether the new investigation will result in any charges against Gemstar, especially with the Justice Department likely to get a new chief less willing to intervene in commercial markets.

A spokeswoman for Gemstar declined to comment, citing a policy against responding to speculation. Officials at the Justice Department would not comment on reports of a new investigation. Gemstar shares closed down $1.10 to $38.90 in Nasdaq trading.

The focus of the probe is the market for interactive programming guides. The guides, which are built into today’s televisions and set-top boxes, function as on-screen directories that help television viewers use their remote controls to navigate among hundreds of channels.

Gemstar estimates that its programming guide “platform” reaches more than 12 million TV households in the U.S.

Industry experts say the interactive guide technology will eventually become a key gateway to services ranging from video on demand to one-click shopping. The technology’s promise has kept the spotlight on Gemstar, which holds nearly 100 critical patents on the technology and has a long history of suing companies for patent infringement.

Before buying TV Guide, the two companies were locked in a fierce battle over patents that stretched for several years before the merger made the dispute moot. The fighting kept many potential customers on the sidelines, slowing adoption of the technology.

In February, Gemstar filed a complaint with the International Trade Commission, a division of the Commerce Department, to stop imports of four television set-top boxes, charging that the boxes infringe Gemstar patents. Critics of Gemstar often refer to its chairman, Henry Yuen, as a “patent terrorist.”

Gemstar’s aggressive defense of its patents has led competitors to charge that the company uses its “monopoly” power to coerce would-be licensees. In court filings, Gemstar said it is trying to enforce valid patents and denied that its behavior is anti-competitive.

Cable companies, anxious to develop an alternative to Gemstar’s technology, are pressing ahead with their interactive guide called TVGateway. They say their system sidesteps Gemstar’s patents.

But some cable companies, including Charter Communications Inc. and Comcast Corp., have recently cut licensing deals with Gemstar. Others have filed suit.

Scientific-Atlanta Inc., a set-top box maker and a major Gemstar competitor, sued Gemstar in federal court in 1999, accusing the company of refusing them a license for any of its patents unless Scientific licensed “an entire bundle” of patents.

More recently, satellite company EchoStar Communications Corp. and set-top box maker Pioneer Corp. filed separate suits against Gemstar alleging similar complaints.

The new wave of lawsuits between Gemstar and its rivals helped renew the Justice Department’s interest in the case, according to a cable source who was contacted by the Justice Department after the merger went through.

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Staff writers Elizabeth Douglass and Sallie Hofmeister contributed to this report.