DOJ Probe Spoils Gemstar's Big Day
There's nothing like a little antitrust accusation to ruin a festive day.
That was the sad story to be told about
Gemstar-TV Guide International
(GMST)
on Monday. In a press release timed for the opening of the cable industry's biggest annual convention, the interactive TV programming guide developer announced a 20-year deal to supply its electronic guide to one of the nation's biggest operators of cable systems.
Yet Gemstar's good mood was darkened by the long shadow of a
Reuters
story that appeared after the market's close Friday -- an article reporting that the
Justice Department
is investigating whether Gemstar has violated antitrust laws on its way to becoming the dominant player in the interactive programming guide market. Gemstar conceded that Justice had asked for information but said the probe is "not material" to its business.
The company's predicament illustrates how, in the wake of
Microsoft's
(MSFT) - Get Report
legal odyssey, investors can get spooked by too much success in a well-defined business, no matter how well-gotten those gains might be. Gemstar's stock, which fell as much as 5.5% Monday morning, traded at $37.77 in the afternoon, down 2.9%.
Winning Streak?
At first glance, the good news just keeps on getting better for Gemstar. The company's new agreement with
Adelphia Communications
(ADLAC)
, announced at the open of the
National Cable & Telecommunications Association's
Cable 2001, represents the third multiyear deal with a major cable TV operator that Gemstar has announced in recent months. Earlier this year, Gemstar announced a 20-year agreement with
Comcast
(CMCSK)
and a decade-long agreement to supply its IPG to
Charter Communications
(CHTR) - Get Report
. Gemstar also has a 10-year agreement making it the exclusive provider of an IPG to
AT&T's
(T) - Get Report
AT&T Broadband
cable unit.
The deal with Adelphia is part of the company's ongoing plans to make its programming guide a nationwide vehicle for advertising and commerce, enabling interactive ads and through-the-TV purchases. With four of the top six cable operators in the U.S., says
Merrill Lynch
TV analyst Keith Fawcett, Gemstar's big challenge shifts from getting distribution to executing on that distribution -- developing a national advertising platform -- and expanding internationally.
In addition, the Adelphia transaction gives a boost to Gemstar's
TVG Network,
a horse-racing channel that enables interactive betting. Adelphia is promising to launch TVG in markets where legal.
The biggest loser from the day's announcement was cable supplier
Scientific-Atlanta
(SFA)
, marketer of a rival programming guide that Gemstar says it will displace in Adelphia's systems by the end of the year. Scientific-Atlanta's stock was down 5.6% Monday afternoon, trading at $51.20.
Question of Focus
Perhaps Gemstar was hoping for a performance more like interactive TV software company
WorldGate Communications'
(WGAT)
. Following last week's reports that AT&T Broadband was favoring WorldGate's software over competitive software from Microsoft, WorldGate and AT&T announced Monday that WorldGate was going to be deployed in a second AT&T market, Tacoma, Wash. WorldGate's shares were up 22% Monday afternoon, trading at $6.50.
Unfortunately, Gemstar went south like Scientific-Atlanta, despite the company's attempts to minimize the damage. Acknowledging in a press release that it had indeed received a request for information from the DOJ earlier this year, Gemstar added that the request "thus far focuses narrowly on activities between
Gemstar
and
TV Guide
that took place during the months preceding the closing of their merger in July 2000," and upon a single transaction involving the merged company and "a non-cable entity." The company added, "There have been no allegations of any wrongdoing whatsoever against the Company by the Department of Justice."
Gemstar certainly isn't shy about striving for success. On a conference call with analysts, co-president Peter Boylan boasted that each major deal the company had closed with a large cable operator -- known in the trade as a "multiple system operator," or MSO -- had been progressively better for Gemstar than the prior one. The longer the MSOs wait to license Gemstar's technology, the more at risk they'll be for paying more for the technology, he suggested.
Fawcett cites the Adelphia deal, along with the prior ones, as indications that Gemstar isn't committing antitrust violations. "Here's another example of a fair market solution being recognized by an MSO," he says. Gemstar and the MSOs -- in little danger themselves of being pushovers -- have "have been able to arrange mutually beneficial economic agreements."
Fawcett rates Gemstar a buy; his firm hasn't done underwriting for the company.