Patent Protection Concerns Shake Gemstar-TV Guide Stock

Gemstar-TV Guide International's stock is tumbling this week because of doubts that the company can protect its interactive programming guide patents in a key court case, according to analysts. Gemstar is the parent company to the TV Games Network, a horse racing network and interactive wagering service.

The stock price has fallen more than 9% since Thursday and has been trading today around $25 per share. Trading on Thursday dipped as low as $24.26, the lowest intraday price since Nov. 21.

Investors and analysts attributed the selling to a report by Robertson Stephens analyst Lowell Singer, who downgraded the company, citing new uncertainties about Gemstar's patent infringement dispute with EchoStar Communications Corp. (NasdaqNM:DISH), Scientific-Atlanta Inc. (NYSE:SFA), Pioneer and SCI Systems,a unit of Sanmina-SCI Corp. (NasdaqNM:SANM), according to the Reuters Securities news service.

In his report, Singer claimed that, in the second week of a recent U.S. International Trade Commission (ITC) trial on the matter, "it was disclosed that the ITC's staff lawyer filed a pre-trial brief stating his view that Gemstar should not prevail on the issue of patent misuse."

Gemstar was not immediately available for comment.

"Sentiment is starting to shift on this ITC case," said one analyst who tracks the company and said most investors had been convinced it would prevail. "The stock has fluctuating according to legal proceedings related to its patent portfolio."

Gemstar has contended the companies named in the case have skirted its patents in the manufacture of their set-top boxes for cable and satellite TV services.

The companies, which either declined comment or were unavailable, have asserted Gemstar's licensing practices constitute patent misuse.

"While it is difficult to predict how the judge might ultimately rule, the respondents (EchoStar, Scientific-Atlanta Inc., Pioneer and SCI Systems) presented a much stronger case than we had originally anticipated," Singer said, referring to the ITC hearings in December.

A ruling against Gemstar would be a clear setback for the company as many believe its patent portfolio has provided the company with a platform to become a dominant interactive program guide player.

Since acquiring Tulsa, Okla.-based TV Guide for $14 billion in 2000, Gemstar has focused on the expanding digital media arena through its patents and technology, including the VCR Plus+ system, the interactive program guide marketed under the Guide Plus+ and TV Guide Interactive brands and other products.

The judge is expected to issue an initial determination in March. A favorable outcome for Gemstar would serve as a precedent for a parallel case pending in federal court, where damages could be awarded.

A favorable ruling would increase the likelihood of licensing deals between Gemstar and the other companies, which could potentially add millions of subscribers and advertising dollars, analysts said. But analysts note that, if Echostar and other companies prevail, Gemstar's stock would fall, they said.

"The extent of the impact would be based on the nature of the ruling. In our view, if Gemstar were found guilty of patent misuse, the effect would be much more significant than if Gemstar were simply unable to prove infringement of their patents," Singer said.

Such a setback would also follow a recent ruling by the Federal Communications Commission (FCC) that AOL Time Warner Inc.s (NYSE:AOL) Time Warner Cable was not required to transmit an electronic program guide (EPG) embedded in analog TV signals by Gemstar-TV. Gemstar had filed a complaint with the FCC when Time Warner began stripping the company's guide on cable systems in multiple states.

Gemstar shares have traded between $16.05 and $59.56 in the past 52 weeks and have lost about 35 percent over that period.