Gemstar International Group (GMST) , the electronic TV-listings company, may be a good bet for investors gambling on the future of interactive TV.
The Pasadena, Calif., company, which plans to merge with
, has seen its share price more than triple since March to 112 3/4 Tuesday as the perceived value of the company's onscreen programming guide business has grown. Institutional shareholders insist the stock still has huge potential if and when people start interacting with their TVs.
"Investors have barely pieced together the power of the TV as an interactive platform and the importance of the program guide," says Larry Marcus, a senior analyst covering digital television and Internet media for
Deutsche Banc Alex. Brown
, which hasn't done recent underwriting for the company. Marcus rates shares of the company strong buy, his firm's highest rating.
"I think this is a $200 stock," says Mark Greenberg, the portfolio manager of the
Leisure fund. Gemstar and TV Guide amount to 6.5% of Greenberg's portfolio, and Invesco has bought Gemstar as recently as the past two weeks. "In another five years, most homes in the country are going to have the Gemstar guide in one form or another."
With Gemstar's technology, which analysts expect will be available in 5 million homes by the middle of next year, viewers can scroll through listings at their own pace, search by type of program, record shows with the touch of a button or check the schedule for
Though more than 99% of Gemstar's revenue comes from licensing its technology for TVs, set-top boxes and other consumer devices, analysts and investors are expecting that once enough Gemstar guides are in use, the company's ad revenue will take off.
Arts & Entertainment
already advertise with Gemstar, which sold $400,000 worth of advertising on the guide in the quarter ended Sept. 30. Marcus estimates ad revenue of $4.6 million for the full fiscal year.
That may just be the beginning. Right now, people who watch TV pretty much just sit there. Some people think Gemstar's product could get couch potatoes to interact more with their TV sets -- clicking on their remotes to order a pizza or pressing a button to set up a test drive of the
they just saw.
"People have to get used to the idea that TV is interactive," says Brad Garlinghouse, a general partner of
venture capital affiliate
. "The interactive program guide will act as a Trojan horse to demonstrate to people what is possible in the interactive
Gemstar CEO Henry Yuen readily acknowledges that TV viewing is "relatively passive," and that it's slow to change. But, he says, that will change over the next five to 10 years. In part, that's because he thinks there's a natural progression from getting program information on the set to getting other types of information, and from there to making transactions. "The younger generation is far more ready to interact with the TV than even with their parents," he says. "I wouldn't rule out changes just because the generations are different."
If all goes well, the programming guide would be the gateway to the TV, just the way a portal's home page is a starting point for going online. With the number of channels on cable TV systems regularly surpassing 100 and with some homes receiving four different feeds of
, it's hard to figure out what's on just by flipping through the channels.
"The programming guide really becomes your user interface for navigation," says Barry Schuler, president of the
AOL Interactive Services Group
, which has licensed Gemstar's technology.
As bullish as this picture looks, it's tough to quantify Gemstar's opportunity. The company could eventually have revenue of $100 million a year from every million guides in use, according to Marcus, who expects the first 5 million to be in place by mid-2000. That's a big jump from the less than $5 million in advertising that Marcus is predicting for this fiscal year.
And to open up rudimentary e-commerce and other transactions, the company will need programming guides to send signals, not just receive them, Yuen cautions. That probably won't happen until 2001, he says. Even Gemstar bulls aren't predicting what e-commerce and other revenue could be. "I've already got an ice cream sundae" with Gemstar's ad revenue, says Invesco's Greenberg. "The interactivity is an extra scoop and whipped cream."
Gemstar does seem to have secured the necessary intellectual property to be a portal player. Last month, the company won an arbitration agreement in a licensing dispute with
over Gemstar's technology -- a decision worth at least $37.5 million in damages. The company's expected acquisition of TV Guide will end another major litigation battle.
But Yuen points out the company faces competition from the companies to which it has licensed its technology -- not just AOL, for example, but
, too. "We continue to see this as a highly competitive field," he says.
All Gemstar has to do is hope the interactive opportunities don't melt away.