The next digital battleground: TV

Summary:Heavy-hitters battle to control what you'll see when you turn on your next-generation digital TV.

Television makers, cable systems and satellite-programming providers are at war over the next big digital land-grab, and the battleground is your television set.

Each wants to control the first picture you see when you turn on your next-generation digital TV. That image is critical turf in television's long-awaited metamorphosis from a boob tube into a gateway to the Internet and interactive services.

A portal for your TV
Already several players have established interactive-TV beachheads, in the form of on-screen program guides that pop up automatically when you push POWER on the remote. The guides, grids showing what's on around the clock, could evolve into menus for future interactive-TV functions such as music, news headlines, shopping or Internet access.

The betting is that one day the viewing guide will be to the TV what Yahoo! and other Internet "portal" sites have become to the personal computer -- a powerful position from which to direct Internet traffic, sell ads and provide other gatekeeping services. It's a position that Microsoft Corp. (Nasdaq:MSFT) and America Online Inc. (NYSE:AOL) also are staking out.

Unlike the crude guides that have been running on hotel TV sets for years, and even the scrolling grids on certain cable channels, the newest generation of viewing guides would pop up on the TV screen first thing, no matter which channel had been tuned in the night before. If all the features manufacturers hope to offer actually become available, the guides could make their predecessors look as outdated as a game of Pong.

With twice as many TV sets as personal computers in U.S. households, the guides represent an enticing new frontier for TV makers. Sharp Corp. and Thomson Multimedia, a unit of French holding company Thomson SA, already are starting to ship televisions loaded with software for enhanced on-screen viewing guides that appear as soon as the set is turned on. New models on the way from Sony Corp. (NYSE:SNE) and Zenith Electronics Corp. (Nasdaq:ZETHQ) also include guides, but not the kind that come on automatically.

These guides will work only if cable-TV companies relay data about times and channels over their cable systems. But cable-TV companies seem increasingly unlikely to do that. Lusting for their own control over the revenue from interactive-TV services, they are backing on-screen guides that equipment makers are starting to load into the cable boxes that go on top of TV sets.

Stiff competition
And there is more competition from another corner. Two California firms, Replay Networks Inc., of Mountain View, and TiVo Inc., of Sunnyvale, make a new kind of video recorder that uses a hard drive instead of cassette tapes. The hard drive constantly records what the TV is tuned to, allowing viewers to replay, pause for a run to the refrigerator and pick up where they left off. The hard-drive video recorders, which are starting to hit stores now, provide their own on-screen program guides, which pop up in the coveted initial screen.

Smack in the middle of the fray is tiny Gemstar International Group Ltd., a Pasadena, Calif., company with about $125 million in annual revenue. Gemstar is best known as the creator of VCR Plus, a software package that helped technology-challenged people program their VCRs using numbers printed in newspaper and magazine TV listings. From there, it was a short leap into the on-screen guide business. Gemstar now is a major seller of on-screen viewing guides -- under the name Guide Plus -- to set-top box makers.

Gemstar is playing all sides in the game. In 1994, Gemstar signed a critical licensing agreement with Thomson related to its RCA digital receivers for satellite TV. Now Thomson is putting the Gemstar guide in regular RCA TVs, too. (Thomson SA owns 7% of Gemstar.) Gemstar also licenses its technology to about a dozen other major TV makers and even to Microsoft, which uses Guide Plus in its set-top WebTV boxes. Just this week, Gemstar signed a licensing pact with AOL for use in an interactive service it is planning to offer via television sets.

A pivotal role for TV
The deals could put Gemstar in a pivotal role for TVs, similar to the one Internet search engines fill for computers. "The opportunity for [Gemstar] is to act, similar to a Web portal, as a toll-taker as they send customer leads to merchants and programmers," says Michael Graham, a BancBoston Robertson Stephens analyst in San Francisco.

Until then, Gemstar is paying broadcasters. It pays TV stations to transmit the data for its Guide Plus viewing guide the same way the stations relay closed-captioning -- in the millisecond pauses that are part of the TV broadcast signal. Cable companies end up relaying the Gemstar data for free, because under federal "must-carry" rules they must relay each broadcaster's entire broadcast signal. As the Federal Communications Commission reconsiders its rules at the dawn of digital broadcasting, the cable companies are lobbying the FCC to reconsider that requirement.

Gemstar has a back-up plan. It is considering using two-way paging networks to communicate with TVs and already has formed an alliance with Paging Networks Inc., of Dallas, one of the nation's largest paging-service providers. Meanwhile, Gemstar is lobbying the FCC to leave the must-carry rules in place.

All the while, Gemstar has been battling competitors in court. Its main rival is TV Guide Inc., a joint venture of News Corp. and AT&T Corp.'s TCI Cable. TV Guide sells its own on-screen guide to equipment makers and produces the TV Guide cable channel. It has filed a patent lawsuit against Gemstar in federal court in Tulsa, Okla., which Gemstar is contesting. Meanwhile, Gemstar has traded patent suits with three set-top box makers. The disputes have been consolidated in Atlanta federal court.

Henry Yuen, Gemstar's founder and chief executive, says he isn't worried that Gemstar's growing power will put it at odds with customers, the way Microsoft's power put it at cross purposes with PC makers. "I don't believe we will be viewed negatively, because TV needs this feature," he says. "To make the screen guide better takes a lot of money and the return is nebulous for a single company." Still, he concedes, "we are sometimes misunderstood."

Hedging their bets
A few TV makers are hedging their bets. Sony is taking preliminary steps toward possibly developing its own guide. And Sharp is limiting Gemstar's role in its digital models. Says Frank DeMartin, director of advanced TV product-planning at Sharp's U.S. subsidiary, "There's a reluctance to accept that some external company is going to control what goes on inside our TV."

A few years ago, Gemstar's on-screen guides would have added about $100 to the cost of a new set. But as a result of declining prices for components, Gemstar's on-screen guide adds only about $15 to the cost of making a TV -- a figure easily absorbed in price tags of $500 or more, which the models will carry initially.

This year, for the first time, Gemstar's Guide Plus will include space for two advertisements on the screen, next to the schedule grid. Television Data Network, a joint venture of Gemstar, Thomson and General Electric Co.'s NBC unit, is selling the ads.

How ready are viewers to use the on-screen guides? Already, Gemstar has retreated from some more fanciful features for Guide Plus, such as automatically sorting the program grid by putting most-frequently watched channels first. Consumers told Gemstar to keep the grid consistent. "We don't want to hear 'This is good, but, boy, is it complex,' " Yuen says. "That is the death sentence to us."

Topics: Tech Industry

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