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URL:  https://boards.fool.com/gorilla-analysis-gmst-12206901.aspx

Subject:  Gorilla Analysis: GMST Date:  3/15/2000  11:22 AM
Author:  InvestorAlan Number:  1571 of 8780

Well, I recently finished the Gorilla Game book and decided to do some research in the Interactive TV area. What began as a broad market analysis, became focused on a unique company, Gemstar Intl. This is a very long post.

OVERVIEW

Gemstar is a leading provider of electronic program guide services (EPG), which allows users to view a television program guide on screen, obtain details about a show, sort shows by themes or categories, and select shows for tuning or recording, all through the remote control. In the United States, data for Gemstar's electronic program guide services are carried on the ABC, Fox, CBS, NBC, UPN and PBS networks. Gemstar's electronic program guide has been built into a number of models of new televisions, VCRs and TV/VCR combination units. Gemstar's electronic program guide is also licensed to cable, telco and MMDS service providers, and has been integrated into direct broadcast satellite receivers, digital and advanced analog cable set-top boxes, PCTV and other Internet devices and computer operating systems such as Windows 98, Web TV, and the upcoming AOL TV.

The Company's VCR Plus+ instant programming system is now a defacto standard for VCR programming. VCR Plus+ allows a user to record a television program simply by entering a number - the PlusCode number printed in television program guides. Gemstar complements VCR Plus+ with its Gemstar Guide Technology for interactive programming guides that allow users to review onscreen TV listings and use them to program their VCRs or TVs.

Gemstar will buy TV Guide, Inc. in mid 2000 and change its name to TV Guide.

Gemstar has acquired an eBook company. They plan to make electronic books affordable. See http://biz.yahoo.com/prnews/000314/in_thomson_1.html for details.

MARKET DESCRIPTION

Every TV and every set top box is the potential market for EPGs.

Here's a snippet from a post on the Motley Fool (http://boards.fool.com/message.asp?id=1120020000085000), posted by “isay”…

“Interactive Television Will Generate $20 Billion in Revenues by 2004, According to Forrester
CAMBRIDGE, Mass.--(BUSINESS WIRE)--Aug. 4, 1999--Television networks, cable and satellite operators, producers, and advertisers agree -- interactive television (ITV) is inevitable. ITV will be the next wave of the interactive commerce gold rush, according to a new Report from Forrester Research, Inc. (Nasdaq:FORR - news) that estimates that interactive TV will generate $11 billion in advertising, $7 billion in commerce, and $2 billion in subscription revenues by 2004. The prime beneficiary of these cash flows will be the early movers -- cable and satellite operators. “

“Three applications will transform ITV's revenue stream into a torrent: electronic program guides (EPGs), enhanced broadcasts, and TV-based Internet access. EPGs will be the vanguard of ITV, reaching 55 million homes by 2004. Advertisers will rush to reach viewers through EPG banner ads, info pages, and buttons, generating $3.2 billion in advertising and $1.1 billion in commerce within 5 years. “

CUSTOMERS

Gemstar's technology and intellectual property are licensed to major companies in the consumer electronics, satellite, cable and personal computer industries, including Aiwa, Akai, America Online (AOL), Americast, Cox, Daewoo, Funai, GTE, Hitachi, Hughes Network Systems, JVC, LG Electronics (Goldstar), Matsushita (Panasonic, Quasar), Microsoft Corp., Mitsubishi, Orion, Philips (Magnavox, Philips), Quadravision, Samsung, Sanyo, Sharp, Shintom, Sony, Thomson Multimedia (GE, Proscan, RCA, Thomson), Toshiba, Uniden, US West and Zenith.

COMPETITORS
I sure can't find any. Gemstar has patented and successfully defended their patents in court. I have read they are currently defending against Tivo.


THE VALUE CHAIN
Gemstar's VCR Plus+ product is well-established and making money. The Electronic Programming Guide (EPG) is what holds great potential for Gemstar. TV and set top box manufactures include Gemstar software. Broadcasters are sending the program directory information. The value chain is established.

Moore said, “Continuity plus discontinuity creates the tornado.” The continuity for consumers is obvious. Gemstar's software is well integrated into TV and set top boxes. Click a button and the program directory appears. Select a program and watch. The alternative is to haul out a printed guide or cycle through the channels until a program is found. Convenience sells.

What is the discontinuity on the supplier's end? Well, EPG is a new application. It replaces program listings in the newspapers and TV Guides and is better integrated than program listings on the Internet.

FINANCIAL INFORMATION
As of March 13, 2000 -
Price : 94 5/16
30-Day Avg. Volume : 2,714,000
Market Cap : 18.86B
P/E : 219
EPS : 0.43
Market share : I can't find hard data but given the near monopoly…

From Dec 1999 report

Price/Sales : 87.31
4Q Revenue : 61,820K
Gross Margin (TTM) : 80%
Profit Margin (TTM) : 48.8%
Long term debt : 0

The company collects per unit license revenue for VCR Plus+ and Gemstar Guide Technologies. In the future, they will also collect revenue from sponsorships, advertising, and placement in the EPG.

GORILLA CHARACTERISTICS

Is there a discontinuous innovation or a proprietary open architecture?

Gemstar's EPG and VCR Plus+ are proprietary and patented. There is nothing open about it. Gemstar has more than 85 issued U.S. patents in the general area of audio-visual technologies containing 1,850 claims and more than 90 issued foreign patents. The Company continues to pursue a worldwide patent prosecution program and has more than 110 pending U.S. patent applications and more than 300 pending foreign patent applications.

Does it have the potential to grow into a mass-market phenomenon, become a standard?

VCR Plus+ is already a standard. Gemstar's EPG will quickly become a standard as new Televisions and set top boxes are purchased by consumers.

Are there high barriers to entry and high switching costs?

Data for Gemstar's electronic program guide services are carried on the ABC, Fox, CBS, NBC, UPN and PBS networks. Gemstar EPG software, which uses the broadcast information, is built into most major brand TVs, VCR's, and set top boxes.

Patents will prevent many players from entering the market and manufactures from rolling their own and using Gemstar's format.

Have Value Chains developed, and have they crossed the chasm?

The value chain is established and the EPG product is hitting the mass market as we speak.

SUMMARY & ANALYSIS

Even though Gemstar's VCR Plus+ system is currently the major source of revenue, I am most excited about the EPG and merger with TV Guide. To me, it seems like a brilliant move that will further Gemstar's lead. TV Guide will give Gemstar a well-known brand name, program ratings, and a wealth of content. When you add to this the gathering Interactive TV and Internet/TV convergence storm, Gemstar has the potential to link the program guide with a lot of interesting content. This will also open up advertising opportunities.

The market for EPG is huge and mostly untapped. There are over 200 million TV's in the US alone. Gemstar may be able to collect fees for every one of them.

I believe EPG market is past the bowling alley and entering the tornado. I have it on my satellite receiver. Integrating with TV Guide content and making it interactive is still on the horizon but not too far away. One of the bowling pins to knock down here is getting Interactive TV and TV/Internet technology in place. That is quickly developing now and will probably hit the mass market late this year.

REFERENCES AND ADDITIONAL INFORMATION

Gemstar and THOMSON multimedia to Pursue Electronic Program Guide Opportunities in Europe
http://quote.fool.com/news/news.asp?symbols=GMST&currticker=GMST&search=gmst&range=3&action=gs&pos=10&sid=027p9343

Gemstar International Group Limited Reports Third Quarter Financial Results
http://quote.fool.com/news/news.asp?symbols=GMST&currticker=GMST&search=gmst&range=3&action=gs&pos=6&sid=040b6068

Gemstar wants it's ITV
http://www.hoovers.com/cgi-bin/offsite?url=http%3A%2F%2Fwww%2Eredherring%2Ecom%2Finsider%2F1999%2F1015%2Fvc%2Dtelecruz%2Ehtml&frames=yes&esc=yes

Company summary from Hoover's
http://www.hoovers.com/co/capsule/1/0,2163,47041,00.html

For what it's worth, there are seven analysts covering GMST. All have strong buys http://quicken.excite.com/investments/estimates/?symbol=GMST

Interactive TV: The $20 billion revolution
http://www.zdnet.com/zdnn/stories/news/0,4586,2440672-1,00.html

A boob tube with brains
http://www.usnews.com/usnews/issue/000313/webtv.htm

AOL Will Use Gemstar Program Guide In Interactive-TV Service http://dowjones.wsj.com/archive/gx.cgi/AppLogic+retrieve?id=ON-CO-19990525-000977.djml&d2hconverter=display-d2h


DISCLOSURE

After completing this research yesterday, I clicked over to my online broker and bought GMST.

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