Prospect of News Corp. flexing its muscle raises Gemstar expectations. (Up Front).

With management of Gemstar-TV Guide International Inc. expected to come under the sway of former News Corp. executive Jeff Shell, expectations of better performance and a re-energized business strategy are running high among Gemstar partners, investors and analysts.

If Shell assumes control, he will waste no time focusing on the company's mature cash business, including TV Guide magazine, which, with a circulation of 9 million, generates more than $100 million in annual revenues.

In parallel, any new management must work fast to rebuild relationships with key cable and satellite customers in order to better position the company for growth in an increasingly competitive electronic guide market.

Gemstar critics argue that embattled founder and Chief Executive Henry Yuen has largely ignored the TV Guide business in favor of a technology patent protection and licensing strategy. Gemstar develops and licenses technology for interactive on-screen programming guides, a business that in the longer term has the potential to provide higher revenue growth than the traditional and declining magazine business.

When the magazine was merged with Gemstar two years ago, News Corp., which owned TV Guide, took a 42 percent stake in the resulting company. Until recently, News Corp. Chairman Rupert Murdoch has been stymied in his attempts to wield the type of influence at Gemstar that he enjoys elsewhere.

Yuen, who owns 8 percent of the company's shares, signed a five-year contract at the time of the merger, giving him the right to remain chairman and chief executive until July 2005 "unless he dies, resigns or is terminated for disability."

The deal can be changed only with the approval of nine of the 12 board members; Yuen and Murdoch each have the right to appoint six, with Yuen casting the tiebreaker.

Pressure builds

Since the merger, Murdoch has seen his investment decline in value by about $8 billion. On Aug. 14, the company announced it was restating its 2001 revenues, reassessing its accounting for the 2002 second quarter results, and reviewing a management restructuring proposal, including a change of leadership.

The company, trading as high as $35 per share a year ago, closed at $4.24 Aug. 21. On Aug. 16, following reports of the potential management shakeup, shares spiked up by 31 percent, to close at $4.65.

Murdoch has been stepping up his role in the company -- and no doubt his influence on the other board members he does not control. In May he pushed Yuen to remove co-president Peter Boylan, who had poor relationships with cable operators, inserting the 36-year-old Shell to begin repairing the damage.

Shell, co-president and co-chief operating officer, declined to be interviewed.

If negotiations don't break down in the coming weeks and Yuen agrees to step aside as chief executive, Murdoch will be freer to pursue a strategy that focuses on cost-cutting, rebuilding circulation at TV Guide and exploring ways to use the interactive guide technology to expand the Fox channels.

Put simply, a Murdoch-controlled Gemstar will start to look more like a traditional media company.

Balancing old and new media streams has proved a tricky business for the global media houses, one made even more so for Gemstar due to Yuen's antagonistic business style. To defend his patents, Yuen has favored litigation over negotiation, creating a company culture that discouraged potential partners, specifically cable and satellite operators, from doing business with it.

Cox Communications Inc., the Atlanta-based cable operator, found doing business with Gemstar just too hard. Cox was a customer of Yuen's pre-merger company, Starsight. When the contract to license Starsight's (now Gemstar's) electronic program guide software expired in April, it was not renewed.

Cox instead turned to Pioneer Electric Corp. to be the software supplier of choice for the bulk of its 1.6 million digital cable customers. Cox also supplies set-top boxes that come with Scientific Atlanta Inc. software.

"Gemstar's product was too expensive, feature-limited and the terms and conditions were extremely onerous," said Dallas Clement, Cox's senior vice president for strategy and development.

Yuen's dependence on the patent strategy backfired in June when a U.S. International Trade Commission judge ruled that competitors like Pioneer Electric and Scientific-Atlanta had not infringed on Gemstar's patents. Although Yuen says he will appeal, it was a big setback for the company and his already damaged credibility.

The ITC patent ruling means Gemstar must compete on a newly leveled playing field at a time when there are several new entrants in the market. Aside from Pioneer and Scientific-Atlanta, Microsoft Corp. is nearing completion of its own electronic guide software, as is TV Gateway Inc. Several smaller companies are also entering the fray.

Whoever takes the reins at Gemstar will preside over the company at a time when TV Guide's circulation is falling and competitors in the electronic guide market are increasing.

"It's likely that there is room at Gemstar for trimming fat and getting more for the dollar," said Kevin Mayer, head of global media for L.A.-based LEK Consulting. "Focusing on making the TV Guide magazine publishing business stronger will buy more time to rebuild relationships in the electronic business."

Gemstar's overarching strategy of integrating old media and new technology to dominate the program guide business still makes sense, according to analysts. TV Guide is one of America's best-known brands and Gemstar is the dominant supplier of electronic guide software.

"The challenge for new management is to create a well-rounded strategy that gets the best from both the old and the new revenue generators," said John Tinker, an analyst with Blaylock & Partners LP, a boutique New York investment bank and research firm. "Murdoch has lost so much money on the company at this point I think he'll put his choice of management in there, along with a little bit more money and eventually he may get some back."

Others say it is not so clear-cut. "As the electronic guide business becomes more competitive, it's going to take a lot more than (new) management at Gemstar," said Clement.

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