For Interactive TV, a Shifting Landscape but Little Fertile Ground
The balance of power in interactive television is shifting, though the medium's profits seem as elusive as ever.
In signs of change Monday among ITV businesses, shares in onscreen program guide developer Gemstar-TV Guide (GMST) plunged in response to an adverse court decision, while cable programming and investment conglomerate Liberty Media (L) announced plans to acquire interactive advertising firm Wink Communications (WINK).
While Gemstar faces new skepticism over its ability to further penetrate the multichannel television market and increase its licensing revenue, Liberty -- controlled by cable TV veteran John Malone -- continues to build on its goal of becoming a key participant in the ITV business, presumably to the detriment of Gemstar.
Yet, as RBC Capital Markets analyst David Lee Smith points out, the payoff for Liberty and other companies with ITV interests won't take place overnight. The cable TV operators who dominate the multichannel TV market in the U.S. "are only going to do two or three things at a time," says Smith. "Interactive is the fourth thing." (Smith has an outperform rating on Liberty; his firm hasn't done underwriting for the company.)
ClosureBecause a sense of finality in civil litigation is a rare commodity, it is far from clear whether Gemstar has been dealt a crushing blow in its longtime quest to be a patent-protected powerhouse in interactive onscreen television navigation. But following a judge's ruling that EchoStar Communications (DISH), Scientific-Atlanta (SFA) and other companies didn't infringe certain Gemstar patents, it's clear that most investors feel no need to wait around for a definitive answer.
Flirting With ACTVMeanwhile, Liberty's agreement to acquire Wink indicates that Gemstar isn't the only company hoping to amass assets of one type or another to stake a claim in the ITV business. The deal to acquire Wink for $3 a share in cash, or about $100 million, follows announcements in May that Liberty would acquire a controlling stake in set-top-box software company OpenTV (OPTV) and perhaps buy interactive TV company ACTV (IATV). Spearheading Liberty's effort is Peter Boylan III, president of the company's Liberty Broadband Interactive Television subsidiary and, up until March, Gemstar's co-president and co-chief operating officer. (Boylan isn't the only link between Gemstar and Liberty; up until December, Liberty owned a major stake in Gemstar, which it exchanged for shares in another major Gemstar investor, News Corp. (NWS). The Rupert Murdoch-led News Corp. has since written down $4.2 billion of its investment in Gemstar.) The prize for Liberty, says Carmel Group senior analyst Sean Badding, is access to the more than 80 million U.S. multichannel television households -- that is, cable or satellite subscribers. That would enable Liberty, says Badding, to reap revenue in the future from interactive TV advertising and what's known as T-commerce, or commerce taking place over a television set. But, warns Badding, the key word is "future," because success won't be immediate. Smith agrees, saying that the ITV market won't take off until the second half of next year at the earliest. Meanwhile, Liberty's experience with ACTV indicates that Gemstar isn't the only patent-carrying interactive TV company whose market performance can suffer as a result of litigation. ACTV's shares jumped 48% on May 8, to $1.67, after it said it had signed a letter of agreement regarding its possible acquisition by Liberty. But it slid downward later that month after it announced that a judge had dismissed a suit ACTV filed in December 2000 alleging that an Internet play-along version of Disney's (DIS) then-hit show Who Wants to Be a Millionaire had infringed on ACTV's patents. With ACTV's patents presumably valued lower than they might have been before following that ruling, the fate of any Liberty transaction and the price of such a transaction remain unclear. Spokespersons for ACTV and Liberty Broadband Interactive Television didn't return phone messages Monday.
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