Gemstar’s Patent Strategy Backfires

A complaint filed by Gemstar-TV Guide International Inc. to protect its patents backfired Friday, undermining the company’s ability to dominate the electronic programming arena.

An administrative law judge for the International Trade Commission ruled that the Pasadena-based company misused one of its patents. The judge also rejected a claim that Pioneer Electronics Inc., Scientific-Atlanta Inc. and EchoStar Communications Corp. had infringed three patents by importing set-top cable boxes using competing guide software.

The case brought by Gemstar in February 2001 revolved around technologies for navigating through program listings on television screens--the electronic equivalent of TV Guide.

“There has been no violation” of international trade regulations concerning patents, Administrative Law Judge Paul Luckern stated in his ruling.

The ramifications of the ruling were not immediately clear because only the conclusion of Luckern’s decision was made available, and it offered no details about how Gemstar misused its patent. The judge’s complete 461-page decision is expected to be released next week.

The five-member trade commission is scheduled to review Luckern’s recommendation and vote on the matter in October. But analysts said Luckern’s ruling on its own could seriously undermine one of Gemstar’s key growth strategies and hurt its ability to sign new contracts.

“The scope of the victory for the respondents is surprising,” said Lowell Singer, an analyst at Robertson Stephens. “This will impair Gemstar’s ability to compete and also raises questions about contracts signed with other cable companies.”

The company has become the dominant supplier of guide software to the cable and satellite industry on the strength of its more than 150 U.S. patents covering the on-screen guide technologies.

Gemstar’s interactive programming guide is available in about 15.7 million homes, including 8.2 million with cable set-top boxes and 7.5 million that have the guide incorporated in their TV sets. Its biggest cable customers include AT&T; Broadband, Comcast Corp. and Charter Communications Corp.

“We’re obviously disappointed,” said Jonathan Orlick, chief legal officer and general counsel for Gemstar.

“Today’s ruling will not detract from the company’s long-standing policy to assert patents against infringing parties.”

Although much of Gemstar’s $1.4 billion in annual revenue comes from its TV Guide magazine, the company’s future is based on licensing the electronic programming software to cable and satellite companies and selling advertising on that platform.

Analysts believe that consumers someday will get most of their information about what to watch on television from electronic rather than printed guides. Indeed, the circulation of TV Guide has steadily declined as the number of TV channels has grown.

Even before Friday’s ruling, Gemstar had been beset by a series of problems.

Relations with cable and satellite operators had been strained by Gemstar’s reputation for using its patents as a way to force potential customers to sign contracts for the guide.

Those that resisted risked being sued by Gemstar, which has several pending patent infringement cases in California and Georgia.

“This [victory] should have a very persuasive impact on those other cases,” said Paul Dempsey, president of business solutions at Pioneer, a manufacturer of set-top boxes. “We feel very vindicated.”

Singer said the judge’s decision made it less likely that Gemstar could sign deals with new customers including AOL Time Warner, Cox Communications, DirecTV, Scientific-Atlanta and EchoStar that account for more than 40 million households worldwide.

Gemstar shares are down 70% this year because of slower-than-expected deployment of digital set-top boxes that use its guides, questionable accounting practices by the company and a destabilizing feud between the company’s top two shareholders.

Gemstar shares rose 10 cents to $8.20 on Nasdaq on Friday. After-hours trading was halted before Luckern’s decision was issued.

Gemstar’s complaint sought to block imports of certain program-guide equipment and components from countries such as China, Japan, Malaysia and Mexico. It said rival companies were stealing Gemstar’s technology to challenge its dominance in an industry it helped create.

Gemstar had counted on winning the case. It was so confident, in fact, that it had booked about $114 million in revenue from Scientific-Atlanta, accrued since the set-top box manufacturer stopped paying license fees to Gemstar when its contract expired about two years ago.

The aggressive accounting maneuver created friction between Gemstar’s controlling shareholder and Chief Executive Henry Yuen and the company’s leading outside investor, News Corp., which owns about 42% of the company.

News Corp. chief Rupert Murdoch forced Yuen to disclose the accounting practice to investors when he learned about it in March, causing the stock to plunge and damaging the company’s credibility on Wall Street.

News Corp.’s holdings, valued at about $7.5 billion in 2000, after the company merged its TV Guide with Gemstar to become a major shareholder, are worth about $1.4 billion today.

Sources say the patent ruling will further fray relations between Murdoch and Yuen.