Gemstar Signs 20-Year Deal With Comcast

Gemstar-TV Guide International on Friday took a giant step toward its goal of controlling the way millions of couch potatoes watch television by signing a 20-year deal to supply interactive program guides to Comcast Cable Communications, the country’s third-largest cable operator.

The Comcast agreement gives Pasadena-based Gemstar pacts with three of the nation’s top five cable operators, which serve half of all U.S. cable households. Analysts expect deals with the remaining cable heavyweights to follow in a matter of months.

The agreement with Comcast, known for driving the hardest bargain in the cable industry, is a setback for the nascent movement among cable operators to develop a competing technology that would keep Gemstar from becoming a Microsoft-like monopoly.

The company, formed in July by the merger of Gemstar International and TV Guide, controls more than 100 critical patents for the guides that allow viewers to display program listings on their TV sets and navigate them with a remote control. Those guides are expected to become a major source of advertising revenue as the number of homes with access to digital TV services multiplies.

“Fast-forward five years and everyone’s got a guide,” said John Corcoran, a new-media analyst with CIBC World Markets in New York. “It’s like power windows on a late-model car.”

The Comcast deal came none too soon for Gemstar, which had seen its stock plummet 28% in the last week to a 52-week low amid investor concerns about a slowdown in advertising spending and general weakness among technology stocks.

On Friday, Gemstar shares rose $6.25 to close at $35.19 in Nasdaq trading, a gain of nearly 22%. Comcast Corp.’s Class A shares eased $1.69 to $38.06, also on Nasdaq.

As the number of TV channels expands into the hundreds, Gemstar’s interactive program guide technology becomes an increasingly critical tool for sifting through thousands of listings. The interactive guides can sort shows according to a viewer’s tastes, placing reality shows, baseball games, or anything else at the top of the screen. The technology also can keep track of the shows a viewer likes and recommend similar programs.

But it is the advertising potential of the guides that makes investors salivate. They can serve up targeted ads based upon the interests of the viewer so that fans of the Food Network see offers for cookbooks, while those addicted to CNBC are pitched subscriptions to business books. In the future, they also will allow consumers to order pizzas and other products with a few simple clicks of their remote controls.

Gemstar typically keeps 85% of the advertising revenue it earns from the guides and forwards the remaining 15% to its cable partners. Revenue from sales generated by the guides is split 50-50. In addition, Gemstar usually receives a monthly licensing payment from the cable operators of about 50 cents per user.

Last year Gemstar earned nearly $23.2 million from advertising on interactive program guides, and most analysts believe that number will top $100 million in 2001.

Comcast and Charter were two of the four cable companies backing TVGateway, an effort to create an interactive program guide that could compete with Gemstar. The 8-month-old joint venture has shipped 400 systems that currently offer the guide to more than 100,000 cable customers.

Analysts view TVGateway as little more than a bargaining chip for cable firms to wield in their negotiations with Gemstar, and they said the leverage it offers diminishes with each passing deal.

But Hal Krisbergh, chief executive of WorldGate Communications, the company that manages the TVGateway partnership, disagreed. He said the rival guide has enabled Comcast and Charter to negotiate favorable contract terms with Gemstar, and will continue to do so.

Gemstar already has struck deals with top cable operator AT&T; and No. 5 Charter Communications. The company is currently negotiating with No. 2 AOL Time Warner, No. 4 Cox Communications and No. 6 Adelphia Communications.

“This will help accelerate negotiations with other [cable companies],” said Stacy Bingler Forbes, a research analyst with Janco Partners in Englewood, Colo. “They know every time someone signs, the prices go up.”

Gemstar’s talks with AOL Time Warner could be particularly thorny.

Prior to its merger with Time Warner, America Online had struck licensing deals to put Gemstar’s guide on AOLTV and to make TV Guide’s offering available on the AOL online service. Now Gemstar-TV Guide says those licenses should automatically extend to Time Warner’s vast cable systems, a position Time Warner is resisting. But analysts said the companies are trying to hammer out a deal.