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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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No. of Recommendations: 6
Alan,

Terrific report! I've got just one quibble that I caught as I quickly glanced through your stuff.

Gemstar's EPG and VCR Plus+ are proprietary and patented. There is nothing open about it.

I disagree. All those companies that build the technologies into their televisions, set-top boxes, and VCRs along with all the content providers that plug their data into the Gemstar's software are able to do so only because Gemstar has made the products "open."

The open concept is confusing at times because it's not consistent with traditional, non-gaming concept of open. In gaming context, it's open if the manufacturer provides the specs needed to hook up to it. That's exactly what the Gem has always done and that's why they have so many partners making up their value chain.

Frankly, if the products were "closed," I'm not sure why you would have wanted to invest in the company. It's the combination of being both proprietary and open that increases the power of a product in its quest to become the Gorilla.

--Mike Buckley
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Yes, I agree that Gemstar's EPG integrates well with other software in TVs and set top boxes. I'm sure they provide a robust API that allows for this integration. However, I'll wager a bet that their API is proprietary and not open (published). If it is a standard published API, competitors would be able to "drop" their EPG software into the box and it would work.

I'll also bet the data sent by the broadcast networks is in Gemstar's proprietary format and not an open standard format. I'm not quite as sure about point, though.

I think our disagreement is how we define "open". My definition of open in this context is published and available for use by others.

- Alan
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I realize I'm quibbling about the term "open" and this is kind of silly...

After I submitted my reply to your reply, I opened the book and read the section about proprietary open architectures. In one paragraph, it says "It is open if its interfaces are published and other vendors are encouraged to integrate their products with the gorilla product to create a whole product for a target customer."

That describes Gemstar.

Another paragraph says "If closed, the secrets of the architecture are closely guarded, and only licensed vendors can build products using the architecture."

Nope, that's not their model. Mike Buckley is correct. They have an open architecture.

- Alan
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Alan,

You bring up an interesting point. I hope you know a hell of a lot more about technology than I do. :)

If it is a standard published API, competitors would be able to "drop" their EPG software into the box and it would work.

Why? Why wouldn't they be able to engineer it software so it can be connected to data feeds without allowing others to obliterate the functionality of the software? Microsoft publishes connectivity specs for Windows but none of them allow a competitor to change the OS. Instead, Windows is considered open because the connectivity specs are published and available free of charge to anyone who wants to write software that connects to the OS.

I'll also bet the data sent by the broadcast networks is in Gemstar's proprietary format and not an open standard format. I'm not quite as sure about point, though.

Proprietary software and open software are not mutually exclusive. The point is that Gemstar's format remains proprietary but the connectivity remains open, making it possible for the various networks' data to be operable on Gemstar's proprietary architecture.

I think our disagreement is how we define "open". My definition of open in this context is published and available for use by others.

Mine is too. More important, that's the book's definition. I'd clarify that for a technology to be open, such as an API, it would be available to others without having to pay a licensing fee.

Again, the model that most of us can relate to is Microsoft's, where they have a proprietary architecture (Windows) that they license to manufacturers that want to use it as a computer's OS. But it's also open because any company that wants to write software that will work with it gets the connectivity specs free of charge.

--Mike Buckley

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My apologies, Alan. I responded to your first post about open technologies without seeing your later post.

Like I wrote initially, the concept of an "open" technology is counter to the traditional use of the term and easily confused until it's mulled over many, many times, especially for a non-techie like me.

--Mike Buckley
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Thanks, InvestorALan for the informative post. Are you aware that Gemstar has also purchased the manufacturers of the two leading eBook readers, Rocket eBook (Nuvomedia) and SoftBook?
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>Are you aware that Gemstar has also purchased the
>manufacturers of the two leading eBook readers,
>Rocket eBook (Nuvomedia) and SoftBook?

I saw the announcements but didn't and probably still don't understand the potential for e-books. I tried to read a classic on the Internet a few years ago. It was a trying experience. I didn't finish the book. For me, I can read short articles on a monitor but I need to have long stories printed.

- Alan
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I saw the announcements but didn't and probably still don't understand the potential for e-books. I tried to read a classic on the Internet a few years ago. It was a trying experience. I didn't finish the book. For me, I can read short articles on a monitor but I need to have long stories printed.

Stephen King's lastest book published electronically is rumored to have gotten 450,000 downloads. Haven't been able to confirm this.

Last PR I found is:
http://biz.yahoo.com/prnews/000314/ca_adobe_s_1.html

I agree however that reading a book on a monitor is hard (can't sleep under it) and still haven't figured out how to read them in the bathroom (don't own a PDA) yet. Short articles are fine and reference material is great (except it is hard to leaf through it). I love having all my design docs, referenced docs, standards, whatever, loaded on my laptop so that when I need them I don't have to hunt around for them. Will be an interesting market to watch.

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