Gemstar's Rising Fortunes Take a Tumble.

Rub your eyes. Gemstar-TV Guide International Inc., a cocky fighter in the media world, was decked this month by investors who sold the stock in a pique over a sketchy earnings report. It was a rare comeuppance for a company that is accustomed to calling the shots.

Gemstar, the largest distributor of interactive-television program guides, owns an arsenal of patents that torments competitors and has given the Pasadena-based company an aura of invincibility.

But Gemstar's stock fell after the company disclosed only its revenue and cash flow in an eight-page press release. The selloff was a rebuke by Wall Street, which expects more guidance from a company with a $20 billion market capitalization and major shareholders such as News Corp. and AT&T's Liberty Media Corp. (each with 21 percent).

Gemstar Chairman Henry Yuen defended the initial omission of per-share results because, he said, large write-offs associated with its $14.9 billion purchase of TV Guide Inc. in July would "swamp the type of operating income that we would be able to post."

After the plunge, Gemstar filed a more conventional quarterly report with the Securities and Exchange Commission, reporting a net loss of $115.8 million for the three months ended Sept. 30. The company also took the unusual step of holding a second conference call, to provide more details about its operations.

Gemstar is that odd mixture of a little-known company behind a nearly ubiquitous product: VCR Plus, which enables consumers to program their VCRs by entering four digits on a remote control for devices equipped with its technology.

With the 1997 acquisition of StarSight Telecast Inc., which owned key patents in the interactive program guide business, Gemstar became an aggressive litigant. Among the companies sued by Gemstar for alleged patent infringement: General Instrument Corp., Pioneer Electronic Corp., Scientific-Atlanta Inc., TiVo Inc. and, last month, EchoStar Communications Corp.

When a lawsuit is settled, the terms look advantageous for Gemstar. Last month, Gemstar received $190 million from General Instrument's parent, Motorola Inc., to settle its legal dispute and enter a long-term license agreement for Gemstar's interactive program guide technology.

Gemstar settled a lawsuit against TV Guide, its chief competitor, with its acquisition of the publisher in July. Although the purchase drew opposition, it cleared U.S. Justice Department scrutiny for antitrust problems.

Admiring market clout

"The fact is, a patent is legalized monopoly," said Josh Bernoff, a television analyst with Forrester Research Inc. in Cambridge, Mass.

Wall Street has appreciated Gemstar's market clout and its highly profitable results. In the quarter just prior to the TV Guide merger, Gemstar reported net income of $28.9 million on revenue of $63.2 million.

The company's stock is on the recommended list of at least 10 analysts, although CIBC World Markets Inc. analyst John Corcoran recently cut his rating to "buy" from "strong buy."

Explaining his move, Corcoran said "a lot of investors were looking... for hand-holding and guidance going forward, and they just didn't give any on that conference call." In a report, the analyst also said, "several parts of the business are developing more slowly than we anticipated."

Gemstar's newest venture, electronic-book publishing, was started just last month. So investors have focused more attention on the tantalizing prospects of Gemstar's interactive program guide in a TV universe of hundreds of channels. According to Gemstar, it has a patented system for displaying advertising on such guides, and it reported almost $6.6 million in ad revenue in the quarter ended Sept. 30.

Profit potential

What's the potential ad revenue for electronic program guides? Forrester Research estimates $1.9 billion in 2005, up from $27 million in 2000. There is a risk, however, that, "if you start piling a whole lot of ads in these guides, consumers will resist," Bernoff said.

Also, Gemstar hasn't reached long-term agreements with many cable TV operators, to provide its interactive guide or determine how to split the revenue. Gemstar does have a 10-year agreement with AT&T, the nation's largest cable operator, but its relations with some other cable companies have been testy, at best.

In March, Gemstar aired a feud with Time Warner Inc. in a petition filed at the Federal Communications Commission. Gemstar said that some Time Warner cable systems deliberately blocked the signals of VCR Plus, which are embedded in local TV station signals, from retransmission to cable subscribers. Time Warner protested that Gemstar has no right to expect retransmission of its data for free.

In April, Gemstar asked the FCC to impose conditions on the merger because of Time Warner's "anticompetitive behavior" in blocking its free VCR Plus service to consumers. In June, Time Warner called a truce, promising to suspend its blockade until the FCC could review the matter.

Who blinked? Not Gemstar.

Editor's note: Reports surfaced last week that Gemstar has been in preliminary talks with Barnes & Noble about combining their businesses.