October 30, 2000

The Suit Defense

K.C. NEEL

Gemstar fights hard for its patent protection

Gemstar-TV Guide International's interactive program guide (IPG) patents may or may not be bulletproof. However, the company has managed to force conglomerates several times its size to capitulate whenever it sues to protect its intellectual property rights.

There are some industry observers who wonder whether Gemstar is verging on patent abuse- that is, suing a competitor whether it has the legal right to or not. Others insist Gemstar is just making sure it is legitimately preserving its assets.

Given Gemstar CEO Henry Yuen's penchant for rushing to court almost any time Gemstar is talked about by competitors, it's no surprise few people were willing to talk about the company or its patents on the record. Yuen is often quietly referred to as a "patent terrorist" by operators who want more than just one choice of interactive program guides and by competitors wanting to offer their own version of an interactive guide.

With more than 100 U.S. technology patents, another 300 pending and about 600 pending in Europe, Gemstar has coerced several companies, such as Sony, America Online and Microsoft, to pay hefty license fees to use its IPG technology.

The company is involved in a handful of patent infringement suits against Pioneer New Media, Scientific-Atlantic and TiVo. Just last week, Gemstar sued EchoStar Communications for allegedly using Gemstar's IPG technology without its permission. Gemstar is asking for an injunction to stop EchoStar from using the technology and wants an unspecified amount in monetary damages.

The company settled a protracted legal dispute with Motorola earlier this month. Terms of the settlement were somewhat nebulous, but it would appear Motorola will pay Gemstar at least $40 million- as was determined by an arbitrator last year- and the two companies will work closely together in the future.

Strength in numbers There is some school of thought in the legal community that the defendants in these pending cases could join forces, which might, for the first time, give the accused enough legal clout to actually fight Gemstar's gaggle of legal eagles.

"If the defendants join forces, they may now be large enough to really dig their heels in and fight Gemstar's allegations," one attorney says.

Despite its bent to sue at what some people say is the drop of a hat, industry sources claim Gemstar has never lost a case. None of its cases have actually been heard by a jury, however. The suits have all been settled out of court.

There are generally three ways to assess damages in cases such as this, according to one expert: reasonable royalties, loss/profit calculations and disgorgement of profits.

In assessing reasonable royalties, the plaintiffs and defendants envision a hypothetical negotiating settlement. The parties use similar license agreement deals to come up with a settlement.

When determining a loss/profit calculation, accountants figure out how much money the plaintiff should have gotten had the defendants not gotten involved or not paid license fees.

The disgorgement of profits is a bit trickier, the expert says. Instead of calculating what profits the plaintiffs would have earned, defendants have to fork over the profits they made on the technology.

Which method to choose depends on how egregious the defendant's actions are, the expert says.

Making merger sense When industry observers question whether Gemstar's patents are as strong as Gemstar would like everyone to think, company executives usually point to its merger with TV Guide, which is primarily owned by News Corp. and Liberty Media, earlier this summer. Many say Liberty chairman John Malone and News Corp. chairman Rupert Murdoch capitulated to Yuen's will because they knew Gemstar's patents are iron clad.

There are competitors who say the merger just made economic sense, and Malone and Murdoch were happy to see Yuen run the show.

"If you owned a company that was worth about $2 billion before the merger, and you ended up with less than 100%, but you got a piece of a company that was worth about $35 billion after the merger, which would you prefer?" one executive close to the companies asks rhetorically. "This merger just made sense, and Malone and Murdoch knew it."

Certainly, in the beginning at least, the folks at TV Guide were pretty sure they could win any lawsuit thrown their way. When Gemstar sued TV Guide in August 1998, TV Guide president Peter Boylan said it was "unfortunate" Gemstar had chosen to use the courts to get what it wanted "because it's not in the cable and satellite industries' best interests to be suing and slowing down digital" deployments.

Clearly, Boylan has changed his tune since joining with Yuen. Calls to his office last week were not returned.

When TV Gateway was announced last July, Boylan said, "I think (TV Gateway) is pursuing a business with an incredible degree of risk," considering Gemstar has more than 100 IPG patents and another 150 pending, which could make for a formidable challenge for the upstart guide venture. Just last month, Boylan told attendees at a Paul Kagan Associates conference in New York that Gemstar has "impenetrable patent protection."

The competitive spirit Without question, cable operators have always tried to foster competition between vendors so they can negotiate the best deals possible. They may have enjoyed a quasi-monopoly market-by-market for years, but they have definitely tried to keep the rest of the business competitively healthy. It's no coincidence Home Box Office, Showtime and Encore all thrive. Nor should it be confounding there are at least two major set-top manufacturers that supply the industry with hardware.

Some industry competitors and operators say a combined Gemstar-TV Guide will secure a monopoly on the on-screen guide market that would cripple the industry. Gemstar's and TV Guide's IPGs are now available to more than 7 million subscribers, and TV Guide's scrolling TV Guide Channel is available in 53 million homes.

A number of industry watchers - including many of Gemstar's rivals - believe the U.S. Justice Department and/or the Federal Trade Commission should never have allowed the No. 1 and No. 2 guide providers to merge in the first place.

"I think the reasons the Justice Department didn't act on this are because 1) they had their hands full with anti-trust suits against MasterCard/Visa and Microsoft, and 2) interactive guides are only available in about 3 million digital homes," says one attorney who has followed Gemstar's legal maneuverings for years. "They had bigger fish to fry at the time and figured 3 million homes is not something to worry about at this point."

So when the feds stepped aside, Comcast, Cox Communications, Charter Communications and Adelphia Communications got together with WorldGate Communications and formed a new consortium that will try to put a dent in Gemstar's stronghold on the IPG business. TV Gateway was born.

Creating an IPG Gemstar won't challenge is no easy task. Yet the companies are confident they've come up with a different take on the interactive guide. TV Gateway isn't Gemstar's only challenger. Source Media and iSurfTV are also trying to crack Gemstar's stronghold on the industry.

Source recently cut a deal with Cablevision Systems to put its IPG on the MSO's Boston digital system. The MSO stressed at the time of the announcement that it's not necessarily adding Source's IPG in all its systems. Muddying the waters is the fact that AT&T Broadband, which has not only a deal with Gemstar, but is also a backer in the company, is buying the Boston operation from Cablevision. Many industry watchers are curious to see what AT&T does with its IPG in that market.

Both Source Media and iSurfTV have cut deals with set-top manufacturers to incorporate their technology in advanced converters. Both companies also have integration deals with middleware providers like Liberate Technologies, (Source just sold its server technology business to Liberate), PowerTV, OpenTV and Microsoft.

All the competitors have opted for a thin-client service. What that means is that information is stored in servers at the headend and downloaded to the set-tops. Gemstar's technology is considered a fat-client service because all the information is downloaded to the box to store. Both technologies have advantages and disadvantages.

Gemstar's technology is fast and good-looking. The competitors' services are less fancy and slower, but they don't take up as much memory in the box.

Source Media's president Steve Palley says he respects Gemstar's "valuable patent portfolio" that protects the fat-client IPG.

"So we just decided to develop a server-based guide," he says.

Palley says the server-based guides will make it easier for operators to launch services such as e-commerce.

"If all your information is stored in the box, you're limited in how much information you provide," he says.

Gemstar, obviously, disagrees, although at the Kagan conference last month Boylan said the company would entertain using server-based technology as well as its box-centric service.

At its core, Gemstar hopes to be the Yahoo! of cable portals. Boylan says if operators do it themselves, "they'll shoot themselves in the foot."

MSOs should instead let Gemstar handle the business for them, he says.

Other Gemstar backers also note that operators will still have their own portal in which to place e-commerce, video-on-demand and other interactive applications. They say viewers will have a choice, although the Gemstar IPG would then compete with the operators' portal.

Competitors such as Hal Krisbergh, WorldGate's chairman, say operators want to control the portal, and that's why TV Gateway was formed.

At this point, it's too soon to tell what will happen.

Some industry observers still believe federal regulators will eventually set their sights on Gemstar. But instead of looking at their monopoly on the market, they think the feds will begin investigating whether Gemstar's litigious trigger finger is a little too itchy.

"There are some companies that are set up to just acquire patents," says one industry player. "They just sue whenever they think they can make some money. They make their business out of taking advantage of patent law. I'm not saying that's all Henry does. He's very good at business. He's also very good at taking advantage of patent laws. When you're in the patent business, you intimidate to create value, and that's exactly what Gemstar has done, and they've done it very well."

Who is Henry Yuen, and how is it that powerful executives such as Rupert Murdoch and John Malone appear to have bent to his will?

By all accounts, Yuen is a brilliant mathematician who got into the TV game when he couldn't figure out how to program his VCR to record a Boston Red Sox baseball game. VCR Plus was a godsend to millions of Americans who had been unable to take advantage of their VCRs.

Yuen was born in 1951 in China. His parents- his father was an attorney- moved to Hong Kong when he was 2. Immigrating to the United States at the age of 17, Yuen earned a B.S. in math from the University of Wisconsin and a PhD from Caltech in 1973, and he also earned a law degree. He was researching wave motion for TRW when he came up with VCR Plus with his friend Daniel Kwoh.

Yuen's Gemstar International got into the electronic program guide business in the mid-1980s. After sparring with competitor StarSight Communications, both of which claimed each had infringed on the other's patents, Yuen bought StarSight, and Gemstar was on its way to becoming a leader in the electronic program guide sector.

Today, the company holds dozens of U.S. patents on interactive program guide technology, and it's not afraid of using its legal clout to protect those patents. To be sure, some industry observers refer to Yuen's willingness to litigate at the drop of the hat as being on the edge of patent abuse. The one-time attorney has cowed several rivals from entering Gemstar's IPG turf.

Here's where Malone and Murdoch come in. In 1998, Yuen agreed to merge operations with TCI-controlled United Video Satellite Group, which had its own EPG service. The two companies had been tangling over intellectual property rights each company felt it owned. The deal fell apart, and UVSG went after Gemstar in a hostile takeover attempt. Yuen followed that action by suing UVSG for patent infringement.

In the meantime, TV Guide, which was owned by Murdoch's News Corp. and UVSG, of which TCI had a major stake, merged operations. Malone's TCI was also purchased by AT&T. TCI's stake in TV Guide was put into the chunk of assets controlled by Liberty Media, of which Malone now serves as chairman.

Eventually, the two sides settled and decided to merge, forming Gemstar TV Guide International. The $12.4 billion union left Yuen in the driver's seat of the country's largest IPG company. If Yuen was tough before, he now had gargantuan power. He not only ended up owning more of the merged company than Malone and Murdoch, he now forced the executives' companies into helping him maintain a stronghold on the IPG marketplace. Cable industry executives secretly refer to Yuen as a "patent terrorist."

At one point a year ago, Yuen's Gemstar was embroiled in a half dozen lawsuits against giants such as AT&T, TV Guide, Scientific-Atlanta, General Instrument (Motorola) and Pioneer Electronics. The company settled its suits with AT&T and TV Guide by merging with TV Guide earlier this year. Gemstar and Motorola settled their legal wrangling this month. Yet suits against TiVo, S-A and Pioneer remain unresolved.