Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x Accelerated Filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As of February 6, 2008, there were 429,187,731 shares of the registrant’s common stock outstanding. As of June 30, 2007, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $1.1 billion, based on the closing sale price of $4.92 per share as reported by the Nasdaq Stock Market on such date. Shares of common stock held by officers, directors, and any stockholder whose ownership exceeds 5%, have been excluded from this calculation because such persons may be deemed to be affiliates. The determination of affiliate status is not a conclusive determination for other purposes.
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| ITEM 1. | BUSINESS. |
Overview
Gemstar-TV Guide International, Inc. (“Gemstar-TV Guide” or the “Company”) is a media, entertainment and technology company that develops, licenses, markets and distributes products and services targeted at the video guidance and entertainment needs of consumers worldwide.
The digital age has resulted in a significant market opportunity for Gemstar-TV Guide because of the explosion of both content choices and means of video distribution. Our mission has evolved as the need for video guidance has expanded beyond simply informing consumers as to what’s on television and when. Today, consumers need more advanced tools to help them navigate through an increasingly complex media environment. Our goal is to be the leading provider of video guidance across multiple media platforms and to enable consumers to maximize their enjoyment of the diverse entertainment offerings available to them through their use of the rich data, content, and information we provide.
Our corporate vision focuses on today’s traditional media platforms, both in the U.S. and internationally, as well as on the ever expanding universe of new media platforms including broadband video, video-on-demand (“VOD”) and mobile devices. Rich in unique content and utility, our products and services are being built on the foundation of our five unique assets: our brand, data, content, intellectual property and multi-platform distribution.
Building on the unique combination of assets and strong, long-standing relationships with leading companies in the cable, satellite, telecommunications (“Telco”), consumer electronics and mobile arenas, the Company over the past couple of years has been focused on developing an enhanced cross-platform guidance experience to provide consumers with the ability to find what they like, regardless of the viewing platform — and then offer them convenient means to discover more of it. To that end, we have designed a suite of next generation cross-platform guidance products and services to allow consumers to seamlessly manage their viewing options at any time, from any place and from a variety of devices in an integrated, coordinated fashion. This cross-platform suite of products and services, called “My TV Guide” offers a more personalized guidance experience for consumers, through targeted programming recommendations, remote recording capabilities, and customizable user interfaces and the ability to receive richer content and information around their favorite shows and stars. These personalized guidance solutions will enable consumers to enjoy a content-rich, integrated guidance experience as they access video entertainment on platforms ranging from traditional linear television, to the Internet and mobile devices.
In 2008, the Company plans to offer these new capabilities to distributors across cable, satellite, Telco, CE and mobile, including those deploying Gemstar-TV Guide’s i-Guide, Passport, and CE IPG product lines and is working with distributors to develop custom solutions for their customers.
We continue to focus on expanding our technology licensing business and, as a result, our customer base has grown both internationally and on emerging platforms. During 2007, we signed new multi-year licensing agreements with industry leaders worldwide. Patent license agreements were reached in the U.S. with MediaFLO USA, Inc., a wholly owned subsidiary of Qualcomm Incorporated and an industry leading mobile entertainment service; and with MobiTV, the leader in mobile and broadband entertainment services; and with Verizon for Interactive Program Guides (IPGs) and other related technology, including collaboration that will enable FiOS TV customers to remotely schedule recordings on FiOS DVRs using TV Guide listings. New international licensees included Sky Italia, the leading multi-channel video service in Italy, who has licensed our IPG patents; CZCATV, an emerging cable system operator in China’s Jiangsu province, for whom we are providing an IPG; and Loewe Opta GmbH, Metz-Werke GmbH & Co. KG and KATHREIN-Werke KG, German device manufacturers who have licensed our IPG patents in their respective televisions, recorders and set-top boxes that are deployed in Germany and throughout Europe.
In 2007, the Company grew its U.S. cable customer base for IPG products and applications by expanding its relationship with Cox Communications for Gemstar-TV Guide’s Passport IPG; and with more than 60 other cable system operators including Mediacom Communications and Insight Communications for our Listings2Go online television guide application.
In mid-2007, the Company announced that it reached agreements with several multi-channel video providers to collaborate on My TV Guide services. Specifically, TVGuide.com will offer remote recording services available from Verizon’s FiOS TV service, EchoStar Communications and DIRECTV. The remote recording capability will also be offered to TV Guide’s IPG affiliates as part of the A26 i-Guide release, currently planned for 2008 availability.
Gemstar-TV Guide IPG technology increased its penetration around the world through licensing of patents and porting of its IPG software to digital set-top boxes, digital video recorders and digital television devices. By the end of 2007, nearly 61
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million domestic and 15 million international digital subscribers were licensees of the Company’s technology, an increase of nearly 30% versus the prior year. Additionally, the Company’s mobile business in Japan, known as G-GUIDE, reached over 21 million registered users at year end, double the previous year’s number.
The Company also recently signed the first customers for two of its new CE IPG products. “TV Guide Daily” was embedded by Mitsubishi Digital Electronics America, into select digital televisions in its portfolio in the U.S. market. “Data Loader”, a full featured, full-scale version of the Company’s CE IPG which allows original equipment manufacturers to customize their Graphical User Interface for a distinctive on screen guide look and feel, was embedded by Polaroid Labs into its media hub.
We believe we have the largest worldwide patent portfolio within the video guidance arena. We have developed an extensive portfolio of intellectual property related primarily to video guidance with over 300 issued patents and 450 pending applications in the U.S., over 550 issued patents and 100 pending applications in Europe and over 300 issued patents and over 300 pending applications in Asia/South Pacific. Our portfolio is the product of substantial and early innovation in the field of electronic and interactive program guides, and it continues to expand based on our ongoing investment and focus on research and development and innovation in the video guidance area.
The Company continued to invest in operational infrastructure, including the creation and optimization of a set of centralized resources and systems, to ensure that our corporate vision can be pursued as effectively as possible. In 2007, the Company completed the initial phase of a project to modernize its extensive TV show listings database into an interactive, automated content management system featuring not only rich listing data, but also video, audio, photographic and editorial content. This content infrastructure will be the backbone for many future initiatives, including the My TV Guide initiative. The final phase of this project is expected to be completed by the fourth quarter of 2008.
The Company has been revitalizing the TV Guide brand. To that end, during 2007, the Company ran a major national TV and online brand marketing campaign during the Fall TV season to elevate awareness of the brand and to drive greater consideration and usage of TV Guide products. Several other important brand awareness and sampling initiatives were undertaken including high-profile tour sponsorships related to top entertainment shows on television such as the American Idols Live! Tour 2007 and the 2007 Dancing with the Stars Winter Tour.
In 2007, the Company broke new ground in providing online users a navigation and search tool to discover the best of professionally produced online video throughout the Web with the introduction of TVGuide.com’s Online Video Guide. Additionally, the Company increased its focus on delivering breaking entertainment news, deploying this initiative across TV Guide.com, TV Guide magazine and TV Guide Network.
The combined reach of the Company’s media platforms increased in 2007. As of December 31, 2007, TV Guide Network was available in 83 million Nielsen households, TV Guide SPOT was available in more than 30 million digital cable households and TV Guide Broadband expanded its distribution relationships with a variety of broadband media Web portals. TVG Network, the Company’s horseracing network, expanded its distribution to over 29 million domestic households, and reached an additional 19 million households internationally through distribution partnerships. TVGuide.com averaged 4.5 million unique users per month, an increase of 46% versus 2006. TV Guide magazine total paid weekly circulation averaged 3.3 million and had an estimated readership of over 20 million weekly. The magazine succeeded in accelerating its financial turn-around ahead of plan in 2007, while continuing to improve and refine its editorial, build its advertiser base and improve the quality of its subscriber file.
In March 2007, the Company acquired Aptiv Digital, a privately-held California-based IPG engineering and products company that provides software solutions for television set-top boxes. Aptiv’s world-class products, services and capabilities extend the Company’s ability to provide leading edge products and services in the area of video guidance across multiple platforms, both here in the United States and abroad.
In July 2007, the Company announced that it would explore strategic alternatives intended to maximize shareholder value. This review culminated on December 6, 2007, when the Company’s Board of Directors unanimously approved an agreement for the Company to be acquired by Macrovision Corporation, a NASDAQ listed company, in a cash and stock transaction.
Macrovision Corporation (“Macrovision”) is a global leader in protection, enablement and distribution solutions that empower consumers to discover, acquire, manage and enjoy digital content. Gemstar-TV Guide is a global leader in video and entertainment guidance with products and services that deliver rich data and information to consumers over multiple media platforms. The combined company is expected to be a leading enabler of the digital home entertainment experience and well-positioned to benefit from emerging opportunities across this exciting landscape. A joint proxy statement/prospectus on Form S-4
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(333-148825) describing the transaction was filed by Macrovision Solutions Corporation, the acquirer in the proposed transaction, on January 23, 2008 with the Securities and Exchange Commission. The transaction requires, among other customary closing conditions, approval by two-thirds of the outstanding shares of the Company’s common stock, and a majority of the shares of Macrovision common stock. News Corporation, which owns approximately 41% of the Company’s common stock, has agreed to vote in favor of the proposed transaction, subject to the terms of a voting agreement. On January 11, 2008, the Federal Trade Commission and the Department of Justice granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, which ends the U.S. government’s antitrust review of the transaction. The shareholder vote is anticipated to take place early in the second quarter of 2008.
Business Segments
The Company presents its business units to its chief operating decision maker in three reportable segments—Guidance Technology and Solutions, Media Networks and Publishing. In addition, the Company also has Cross Platform Costs which includes certain company-wide expenditures. See Note 12 – Segment and Geographical Information of the Notes to the Consolidated Financial Statements for financial information regarding segment reporting.
Guidance Technology and Solutions
Our Guidance Technology and Solutions Segment consists primarily of (i) IPG Patent Licensing to third party guide developers such as multi-channel video service (cable, satellite and IPTV) providers; consumer electronics (“CE”) manufacturers; set-top box manufacturers; and interactive television software and program guide providers in the online, personal computer and mobile phone businesses, (ii) Company-developed IPG Products and Services provided for multi-channel video service providers and CE manufacturers, and (iii) video recording technology currently marketed under the VCR Plus+ brand in North America and under other brands in Europe and Japan (collectively referred to as “VCR Plus+”). This segment also includes TV Guide Data Solutions and TV Guide Mobile Entertainment.
IPG Patent Licensing and IPG Products and Services
An IPG is an on-screen listing of television program information with interactive functions that enable viewers to navigate through, sort, select and schedule television programming for viewing and recording. We believe that interactive television guidance technology is quickly becoming a must-have tool for television viewers bombarded with an increasing amount of available content, an increasing number of digital cable and satellite television channels, and VOD services.
Our multi-channel video service provider licensees either deploy IPGs provided by the Company or, pursuant to an IPG patent license, their own IPG or a third party IPG. For those service providers that distribute one of our IPGs, we also offer them operational support, content and data. Our IPGs allow service providers to customize certain elements of the IPGs for their subscribers and also allow these providers to upgrade over time the features and services they can offer to their subscribers. Our IPGs are compatible with service providers’ subscription management, pay-per-view and VOD services. Our IPGs also allow service providers to provide their viewers with current and future program information. We currently offer two different IPGs marketed to service providers under the i-Guide and Passport brands.
We have agreements with the majority of the domestic multi-channel video service providers, including Charter Communications, Comcast Corporation (“Comcast”), Cox Communications, Time Warner Cable, Verizon, DirecTV and EchoStar Communications Corporation. We also have license agreements with certain international multi-channel video service providers including British Sky Broadcasting Group plc, Sky Italia S.r.l. and Shaw Communications. The majority of subscribers for which we are paid a license fee are receiving an IPG pursuant to a patent license between us and the service provider.
The Company and Comcast have a joint venture, Guideworks LLC (“Guideworks”), to develop IPGs for the cable industry. We own 49% of the joint venture and Comcast owns 51%, with Comcast serving as the managing member. Comcast has the right to use the joint development products in connection with products and services Comcast offers across its digital subscriber base. We have the exclusive right to distribute the joint development products in connection with products and services we offer to other multi-channel video service providers.
Our wholly owned subsidiary Aptiv Digital Inc. (“Aptiv”) develops, supports, and maintains the Passport IPG for multi-channel video service providers in the United States, Canada, and Latin America. The Passport IPG is our most widely distributed IPG offering in the Latin American market.
Our CE manufacturer licensees include Hitachi, JVC, LG, Panasonic, Mitsubishi, Motorola, Philips, Pioneer, Samsung, Scientific-Atlanta, Sharp, Sony, TiVo, Toshiba and others. Generally, our agreements enable our licensees to incorporate an IPG provided by the Company and / or utilize our IPG patents in specified products in certain territories. We generally receive license
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fees based on the number of units produced and shipped that incorporate our IPG or a licensed third party IPG. We have also entered into agreements with certain licensees that enable them to ship an unlimited number of units provided they pay us a specified flat fee. We generally do not receive a license fee on set-top boxes that are manufactured by our CE licensees for a multi-channel video service provider where that service provider has also licensed our IPG technology.
We currently offer multiple IPGs to the CE industry, including those marketed under the G-GUIDE brand in Japan, the GUIDE Plus+ brand in Europe and the TV Guide On Screen brand in North America. These IPGs are generally incorporated in mid-to high-end plasma, DLP and LCD televisions and DVD hard drive recorder based products. Our IPGs generally deliver continuously updated multi-day program listings to users, regardless of whether they receive their television signal via cable or over-the-air broadcast. Our CE IPGs require no subscription or special data input connection.
In the United States and Canada, we use the VBI, or vertical blanking interval, in the analog television signals and/or its digital equivalent in the digital signals of the local affiliates of major broadcast networks such as PBS (through National Datacast), ABC, CBS, NBC, Fox and national cable networks to supply program listing information to our IPGs incorporated in CE products. Norpak Corporation, a majority-owned Canadian subsidiary of the Company, develops and manufactures television-based data transmission systems including the VBI insertion equipment we use. We use a variety of terrestrial, satellite and broadband Internet transmission means to deliver listings data to our IPGs incorporated in CE products internationally. We are currently rolling out digital infrastructure in the United States, Europe and Japan to support the future generations of products from manufacturers.
In Japan, Interactive Program Guide Inc. (“IPG JV”) is our joint venture with Dentsu Inc. and Tokyo News Service Limited that is the exclusive provider of program listings and advertising for our IPGs marketed under the G-GUIDE brand. We own 46.25% of the outstanding shares of the IPG JV and have certain contractual rights with respect to the ongoing management of the IPG JV. We also retain the right to license our technology and intellectual property to third parties in Japan who will receive program listings and advertising from the IPG JV, and we retain all rights to the revenue from such licenses. We have entered into licensing agreements with CE manufacturers and other third parties for televisions, digital recorders, personal computers and cell phones that are enabled to receive the G-GUIDE service.
Our IPGs, except Passport IPGs, also feature advertising. Advertisers place ads through a variety of display formats incorporated into the guide screens. Advertisements can display additional text information and/or ad copy when clicked on via the remote control. Ads for television programming can link directly to a TV channel or allow consumers to program a recording or a reminder. Advertisers can target specific audiences by airing ads at certain times of the day, or target by viewers’ programming preferences (e.g., movies, sports or children) in the respective search screens of the IPG. Multi-channel video service providers and CE manufacturers who have a patent license from us are not required to provide advertising in their IPG. However, our agreements with domestic multi-channel video service providers generally require the sharing of advertising revenue if IPG advertising is provided.
We have also licensed our IPG patents to certain online businesses. Our online IPG patent licensees include MeeVee, TitanTV and Yahoo!, among others. We generally receive either license fees based on the number of unique users that view an IPG on our licensees’ websites or a flat fee to license our IPG patents for a specified time period.
IPG Patent Licensing revenues accounted for approximately 27%, 21% and 15% of our consolidated revenues in the years ended December 31, 2007, 2006 and 2005, respectively. IPG Products and Services revenues accounted for approximately 12%, 10% and 7% of our consolidated revenues in the years ended December 31, 2007, 2006 and 2005, respectively.
VCR Plus+
Our VCR Plus+ (ShowView/Video Plus+ in Europe and G-Code in Asia) technology is an industry standard for setting the recording of television programming and is adopted by virtually every major consumer electronics manufacturer. VCR Plus+ is offered internationally in 27 countries. It is incorporated into VCRs and digital devices such as DVD recorders and DVD hard drive recorder based products. VCR Plus+ enables consumers to record a television program by simply using a proprietary one to eight-digit PlusCode number.
PlusCode numbers are generated through a patented process developed by us and are printed next to television listings in over 1,300 newspapers and program guides worldwide. The PlusCode numbers are found in publications with a combined circulation of over 240 million, including the Washington Post, the Los Angeles Times, the Asahi Shimbun (Japan), the Sun (U.K.), the Daily Mirror (U.K.) and the Oriental Daily News (Hong Kong). In North America, we pay an agency to manage, collect and remit payments from owners of newspapers and magazines that publish our PlusCode numbers. We also license our PlusCode numbers to a data company that bundles the codes with other data sold to owners of newspapers and magazines. In Europe we use agencies and also directly manage and collect the fees under our PlusCode publication contracts. In Japan, the sale of PlusCode numbers is handled by an unrelated third-party company. For the rest of Asia, Australia and New Zealand we directly manage and collect our publication fees.
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Our VCR Plus+ and IPG Patent and Product licensing businesses experience fluctuations due to the seasonality of CE product shipments, which tend to be highest in the fourth calendar quarter. We recognize revenues associated with our technology incorporated in these CE products when the shipments are reported to us, which is normally the quarter immediately following that of actual shipment by the licensee. In addition, manufacturer shipments vary from quarter to quarter depending on a number of factors, including retail inventory levels and retail promotional activities. As a result, we may experience variability in our licensing revenues on a quarterly or annual basis.
TV Guide Data Solutions
TV Guide Data Solutions is a provider of North American television guidance information data, servicing all types of media and other business customers through print, on-screen through IPGs, as well as online products. TV Guide Data Solutions provides data services to our IPGs, TV Guide Network, tvguide.com and TV Guide Mobile Entertainment. Our clients also include PBS.org, Insight Communications, Yahoo! and Comcast Cable. We currently provide listings data for over 13,000 broadcast and cable channel lineups in the United States and Canada. TV Guide Data Solutions’ base of information includes unique data on 170,000 movies, over a million TV series episodes, and searchable data on every TV show produced since 1960.
TV Guide Mobile Entertainment
TV Guide Mobile Entertainment provides TV listings products – both what’s on at home and what’s on Mobile TV – formatted and optimized for mobile phones and portable media players. TV Guide Mobile’s home TV listings products are offered through leading U.S. operators on a premium monthly subscription or ad supported basis and provide localized program line ups and schedules packaged as a downloadable application and a mobile web site. The TV Guide Mobile Electronic Service Guide is an on-screen interactive program guide that will be licensed to Mobile TV service providers and will provide guidance about video programming available for viewing on mobile phones. TV Guide Mobile also creates and distributes made-for-mobile video programming available through Verizon’s VCAST service.
Media Networks
Our Media Networks Segment includes the operations of TV Guide Network, TVG Network (“TVG”), Online Networks, TV Guide Broadband and TV Guide SPOT.
TV Guide Network
TV Guide Network offers entertainment and television guidance-related programming as well as localized program listings and descriptions primarily in the United States. TV Guide Network is typically included in a basic or expanded basic viewing package offered by television programming distributors to their subscribers, and is usually available in both analog and digital channel lineups. Subscribers do not need additional equipment to receive the network. In cable television homes, the screen for TV Guide Network is divided into two components which provide viewers an entertaining and easy guide to what’s on TV. The lower portion of the screen contains a scrolling program guide, which is color-coded by genre and displays updated local program listings information. This customized text portion of the screen contains viewing times, channel numbers, network identification, program titles, weather, movie descriptions, program ratings and ordering instructions for pay-per-view and, where available, video on demand (“VOD”) services, for over 2,500 unique channel lineups in the United States, Puerto Rico, and the U.S. Virgin Islands. The upper portion of the screen contains original programming dedicated to the world of television. In DBS homes, TV Guide Network’s programming is shown full-screen, without a scrolling program guide. We are currently evolving TV Guide Network into an entertainment destination that features high-quality original programming relating to the world of television, entertainment news and celebrities. We are now producing approximately 14 hours per week of new and original content from our studio in Hollywood, California and through third party producers. As of December 31, 2007, TV Guide Network was distributed to 83.3 million households as measured by Nielsen Media Research (“Nielsen”).
TV Guide Network’s viewership comes primarily from analog cable homes where scroll data is still utilized for guidance. Digital cable and DBS homes have many more channels and generally use an IPG, rather than TV Guide Network, for listing information. TV Guide Network’s overall distribution increased by approximately 3.6 million subscribers since December 31, 2006 due to an increase in digital cable and DBS homes, partially offset by a decrease in analog cable homes. As of December 31, 2007, approximately 29% of our total distribution was in analog cable households, down from approximately 38% at December 31, 2006. We believe this trend will continue as more subscribers upgrade from analog cable to digital cable, switch to DBS or IPTV and as MSOs migrate the TV Guide Network from analog to digital. We continue to invest in programming and believe this investment will lead to increased viewership from our total distribution – analog cable, digital cable and DBS households.
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TV Guide Network revenues accounted for approximately 21%, 23% and 21% of our consolidated revenues in the years ended December 31, 2007, 2006 and 2005, respectively. TV Guide Network derives revenue primarily from advertising. TV Guide Network generates advertising revenue from national advertising, which runs daily from 11:00 AM to 2:00 AM, and from infomercials. In 2007 approximately 57% of our advertising revenue came from national advertising and included advertising campaigns from marquee advertisers such as Kraft, Proctor & Gamble and Unilever, among others. TV Guide Network also receives affiliate fees from multi-channel video service providers. As the majority of our affiliates are contracted under long-term agreements with increases available only for cost-of-living, our future growth is highly dependent on advertising revenue.
TVG
TVG combines live horse racing from many of the premier horse racetracks in the United States and other countries with the convenience of wagering from home via telephone, online (www.tvg.com), interactive set-top box and WAP/Internet enabled mobile devices, if in certain states. In addition to live racing, the television programming also features commentary, race analysis and interviews with the sport’s newsmakers, handicapping tutorials, and originally-produced programming for racing’s major events. TVG, which is 94.5% owned by the Company, delivers racing content and accepts state-licensed pari-mutuel account wagers on races from horse racetracks in return for a fee based on a percentage of gross pari-mutuel wagering by TVG customers.
In the United States, TVG is an exclusive marketing partner of the National Thoroughbred Racing Association and has exclusive agreements for television and interactive wagering with certain horse racetracks. TVG currently maintains wagering accounts for residents of the following states: California, Florida, Idaho, Kentucky, Louisiana, Maryland, Massachusetts, North Dakota, Ohio, Oregon, Virginia, Washington and Wyoming. Additionally, TVG manages an account wagering system in New York as an agent for Yonkers Raceway.
Youbet.com, Inc. licenses certain intellectual property and sublicenses certain audiovisual and pari-mutuel account wagering rights from TVG. Youbet.com, Inc. maintains wagering accounts for residents of certain states in which TVG does not, as well as in states that TVG currently does, offer wagering accounts. TVG is paid a royalty based upon account wagering processed by Youbet.com, Inc. from certain horse racetracks.
As of December 31, 2007, TVG was available in approximately 29.1 million U.S. households. TVG programming is also available to over 11 million households in the United Kingdom and Ireland via the United Kingdom’s leading horseracing network, At the Races, and more than 8 million households in the United Arab Emirates, Saudi Arabia and other markets in that region via the Dubai Sports Channel. Wagering customers in the United Kingdom and Ireland can wager on horseracing through The Racing Network International (“TRNI”). TVG is paid a royalty based upon account wagering processed by TRNI from certain U.S. horse racetracks. In addition, TVG is also carried on Fox Sports Net in approximately 7 million Southern California homes for two hours or more, five days a week.
Future growth in the business will depend on the legislative and regulatory environment on both Federal and state levels, the continued expansion of its distribution worldwide and the integration of interactive wagering technologies for online and interactive television applications. TVG experiences fluctuations in gaming and licensing revenue due to the seasonal nature of horse racing. TVG’s wagering and licensing revenue tend to be highest during the second and third quarter.
Online Networks
Online Networks is comprised of five entertainment websites, led by tvguide.com, which feature a combination of entertainment news, video programming, celebrity information, localized channel listings, editorial guidance, community features and search features. The tvguide.com search engine provides consumers with a comprehensive experience by integrating online video with the breadth and depth of TV Guide’s database of listings, show and episode descriptions, news, reviews, ratings, user blogs, groups, message boards, photos, TV Guide magazine covers, and other contextual information; as well as video clips from TV Guide Network and certain third party networks. Additionally, the recently launched Online Video Guide allows users to search and access the best professionally produced video content on the Web. According to Nielsen/Net Ratings, our Online Networks (tvguide.com, jumptheshark.com, tv-now.com, tvshowsondvd.com and fansofrealitytv.com) averaged 5.0 million unduplicated unique users per month for the year ended December 31, 2007, which includes an average of 4.5 million unique users per month at tvguide.com.
Online Networks generates the majority of its revenues from advertising, which has grown steadily over the past three years from $7.9 million in 2005, to $10.1 million in 2006, and $12.9 million in 2007. Online Networks is also a source of new subscription orders for TV Guide magazine.
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TV Guide Broadband and TV Guide SPOT
TV Guide Broadband and TV Guide SPOT are advertiser supported, video-on-demand services featuring short-form, originally-produced entertainment programs that guide consumers to the most compelling fare on TV each week. TV Guide Broadband is available on tvguide.com and is also distributed on major video portals such as AOL Video, Veoh, BrightCove and Google Video. TV Guide SPOT is now available to approximately 30.6 million digital cable subscribers and to subscribers with stand-alone TiVo set-top boxes.
Publishing
Our Publishing Segment consists primarily of TV Guide Magazine.
For over 50 years, the TV Guide brand has been the most recognized, widely used and trusted resource in the United States for all aspects of the TV experience. TV Guide magazine plays a central role in the recognition of the TV Guide brand. TV Guide magazine also provides us with unique access to Hollywood and its content is repurposed and used across our other platforms. TV Guide magazine articles appear on tvguide.com and members of the magazine’s editorial staff create and maintain blogs on tvguide.com and appear on the TV Guide Network and other media outlets.
TV Guide magazine’s weekly content includes TV-related news, feature stories, celebrity photos, behind-the-scenes coverage, reviews and recommendations and national television listings. TV Guide magazine is family-focused and primarily targets women readers ages 30 to 54. The magazine is published as one national edition, with either an Eastern/Central or a Mountain/Pacific time-zone listings. During 2007, the regular newsstand cover price was $2.49.
TV Guide magazine’s rate base, the volume of circulation guaranteed to advertisers, was 3.2 million as of December 31, 2007, 2006 and 2005. TV Guide magazine’s circulation is primarily from subscriptions. In 2007, TV Guide magazine’s average weekly circulation was approximately 3.3 million, including an average of 225,000 units from single copy newsstand sales. TV Guide magazine’s total weekly readership, according to Mediamark Research Inc.’s fall 2007 study, is approximately 20 million.
TV Guide magazine sells advertising principally through an internal advertising sales force. We receive advertising revenue from both program and conventional advertisers. In 2007, TV Guide magazine attracted advertising campaigns from such marquee advertisers as Toyota, Proctor & Gamble and each of the major broadcast networks, among others.
TV Guide magazine revenues accounted for approximately 23%, 26% and 38% of our consolidated revenues in the years ended December 31, 2007, 2006 and 2005, respectively. Future TV Guide magazine revenue growth will be highly dependent on our ability to increase advertising revenue.
The printing of TV Guide magazine is outsourced to three independent commercial printers with facilities located in four locations throughout the United States. We believe there is an adequate supply of alternative printing services available to publish the magazine at competitive prices should the need arise. The principal raw material used in the publication of the magazine is paper. Paper prices are affected by a variety of factors, including demand, capacity, pulp supply and general economic conditions. We do not hedge against increases in paper costs. Postage for product distribution, billings, renewals, and direct mail solicitations is also a significant expense to TV Guide magazine. TV Guide magazine uses Comag Marketing Group to manage newsstand distribution through a limited number of wholesalers that service a vast network of retail chains. TV Guide magazine has also outsourced its subscription fulfillment and customer service operations to Communications Data Services (CDS), beginning in October 2007.
Cross Platform Costs
Cross Platform Costs includes costs related to the Company’s product development and technology group and corporate marketing expenditures, as well as corporate management, finance, legal, information technology, human resources and related expenses such as certain litigation and insurance costs. The product development and technology group focuses on developing next generation guidance products and services, such as My TV Guide, that will be offered across many of our business units. Corporate marketing is primarily focused on cross-platform marketing initiatives to drive greater usage of our products and elevate our brand.
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Intellectual Property Rights and Proprietary Information
We operate in an industry in which innovation, investment in new ideas and protection of intellectual property rights are critical for success. We protect our innovations and inventions via a variety of means, including but not limited to applying for patent protection internationally and domestically. We believe we have the world’s most extensive portfolio of intellectual property in the area of video guidance, which broadly covers fundamental advances related to IPG information delivery, storage, retrieval, advertising, two-way interaction, electronic commerce, and related user interfaces, including those relevant to online and interactive television services.
Our technology and intellectual properties have been licensed to multi-channel video service providers; CE manufacturers; interactive television software and program guide providers in the online, personal computer and mobile phone businesses. We currently market IPGs under various brands including TV Guide On Screen, GUIDE Plus+, G-GUIDE, Passport and i-Guide. We currently have over 300 issued U.S. patents in the general area of audio-visual technologies and over 1,000 issued foreign patents. Each of our issued patents will expire at a different time based on the particular filing date or issue date of that respective patent, with expiration dates as late as 2025. We continue to actively pursue a worldwide intellectual property program and currently have approximately 450 U.S. and 600 foreign patent applications pending.
We hold extensive trademark and service mark registrations throughout the world and have multiple trademark and service mark applications pending for a variety of marks. Marks for which we have registrations or applications to register in the United States or foreign countries include TV Guide, My TV Guide, TV Guide Interactive, TV Guide Mobile, TV Guide Network, TV Guide On Screen, (GUIDE Plus+ in Europe and G-GUIDE in Asia), Passport, VCR Plus+ (VIDEO Plus+, ShowView and G-CODE in Europe and Asia), PlusCode, Gemstar, TV Guide Online and TVG.
We hold various domain names relating to our trademarks and service marks including gemstar.com, tvguide.com, gemstartvguide.com, tvgnetwork.com and tvg.com.
Competition
Our technologies, products, services, content and data compete with those of other companies. Many of our present and potential competitors have, or may have, substantially greater resources than ours to devote to further technological and new product developments. We believe that we will compete effectively based primarily on the originality of our concepts, the speed with which we can introduce such concepts to the market, the uniqueness of our designs, the breadth of our content and data, the focus of our business approach, the strength of our intellectual property portfolio, the extensiveness of our business relationships, the quality and innovation of our technologies and our ability to identify and meet consumer needs.
Interactive Program Guides
Competition in the market for the delivery of television program schedule information is intense. There are a number of companies that produce and market IPGs as well as television schedule information in various other formats, and that compete or will compete with our IPG products and services. These alternative formats currently include traditional printed television guides (including our own TV Guide magazine), as well as passive and interactive on-screen electronic guide services, online listings, printed television guides in newspapers and weekly publications, and local cable television guides, many of which are similar to other products or services of the Company.
Improvements in software porting and in software substitutability, together with government mandated introduction of an Open Cable Applications Platform, will increasingly permit the creation of new guides and their quick placement in set-top boxes—both those purchased or leased from multi-channel video service providers and those purchased at retail.
Many of our competitors and other companies and individuals have obtained, and may be expected to obtain in the future, patents that may directly or indirectly affect the products or services offered or under development by us. We are currently developing a variety of enhancements to our IPGs. We cannot assure that any enhancements developed by us would not be found to infringe patents that are currently held or may be issued to others. There can be no assurance that we are or will be aware of all patents containing claims that may pose a risk of infringement by our products and services. In addition, patent applications are generally confidential for a period of 18 months from the filing date, or until a patent is issued in some cases, so we cannot evaluate the extent to which certain products and services may be covered or asserted to be covered by claims contained in pending patent applications prior to their publication. In general, if one or more of our products or services were to infringe patents held by others, we may be required to stop developing or marketing the products or services, to obtain licenses to develop and market the products or services from the holders of the patents or to redesign the products or services in such a way as to avoid infringing the patent claims. This could have an effect on our ability to compete in the IPG marketplace.
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VCR Plus+ System
We are not aware of any product or service other than the VCR Plus+ system that allows the user to program a VCR by entering a numerical code. However, several products and services on the market offer other simplified VCR programming functions and thus compete with the VCR Plus+ system. Such products and services include on-screen program guides incorporating point-and-click recording capability. In addition, some products, such as DVRs, permit consumers to record programs directly from air, cable or satellite for later viewing through the use of memory chips and hard disk drives contained in the devices. Worldwide shipments of VCRs has declined and is expected to continue to decline as VCRs are replaced by digital recording devices such as DVD recorders and DVRs. The VCR Plus+ system is incorporated into some of these digital recording devices, notably low-priced DVD recorders and DVRs. However, to the extent that IPGs with recording capability are widely adopted, such guides may reduce the need for VCR Plus+. Additionally, electronic, interactive and online programming guides compete with the printed television guides and may adversely affect our PlusCode number coverage.
TV Guide Magazine
Given its editorial focus on entertainment, news and guidance, as opposed to listings, the reformatted TV Guide magazine competes with general entertainment and other weekly magazines at newsstand and for subscribers. TV Guide magazine also competes with magazines and other forms of media for marketers’ advertising spend.
As a source of listing information, TV Guide magazine competes with television listings included in local and national newspapers, as well as free supplements in Sunday newspapers; niche cable-guide publications; and electronic, interactive and online programming guides, including our own interactive and internet program listings guide services.
TV Guide Network
TV Guide Network’s viewership comes primarily from analog cable homes, where scroll data is still utilized for guidance. In DBS and digital cable households, which have many more channels and generally use an IPG for listings information, there has historically been little viewership. We continue to invest in original programming, including programming revolving around various entertainment awards shows. We believe, by focusing on programming celebrating television we can draw an audience beyond those that currently tune in solely for television program listings. This means we will compete with general entertainment channels for television viewership and marketers’ advertising spend. Our future success in DBS and digital households is dependent on programming success.
TV Guide Network also competes with other networks for limited analog cable television system channel slots. The competition for channel space has increased, and we believe will continue to increase as programming distributors increase deployment of advanced digital services such as high definition (“HD”) television, voice over Internet protocol (“VoIP”) and video-on-demand.
As a source of listing information, TV Guide Network has the following primary sources of competition: television listings included in local and national newspapers, as well as free supplements in Sunday newspapers; niche cable-guide publications; and electronic, interactive and online programming guides; including our own interactive and Internet program listings guide services. TV Guide Network also faces competition from cable television operators who may wish to launch their own programming guide channels.
Online Networks
Online Networks competes with general entertainment Web sites for visitors. Online Networks also competes with general entertainment Web sites and other forms of media for marketers’ advertising spend. Certain initiatives, including our television focused search engine, competes with established online search providers who may have an inherent advantage in terms of their online brand recognition and current traffic.
As a source of listing information, Online Networks has the following primary sources of competition: other programming listing services available on the Internet; electronic, interactive and online programming guides, including our own interactive program guide, television listings included in local and national newspapers, as well as free supplements in Sunday newspapers, niche cable-guide publications and our own TV Guide magazine.
TVG
TVG has competitors in television and pari-mutuel account wagering. In the national television area, TVG competes with HRTV, a subsidiary of Magna Entertainment Corporation (“MEC”) and Churchill Downs Incorporated (“CDI”), the two
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largest owners of horse racetracks in the United States. In the area of pari-mutuel account wagering, TVG’s primary competitors are Xpressbet, a subsidiary of MEC, TwinSpires.com, a subsidiary of CDI, Youbet.com, Inc. and various offshore entities. TVG is party to an agreement with Youbet.com, Inc. pursuant to which it receives royalties in exchange for licenses to certain of its intellectual property and sublicenses to certain of its audiovisual and pari-mutuel account wagering rights for content from various horse racetracks. MEC and CDI also have a joint venture, TrackNet Media Group, that competes for racetrack content rights with TVG. While we believe that TVG is in a strong competitive position with its television distribution agreements, intellectual property portfolio and racetrack content agreements, there may be competitors with additional strengths that are unknown to us.
In addition, TVG competes with other networks for bandwidth on cable television systems. The competition for channel space has increased, and we believe will continue to increase as programming distributors increase deployment of advanced digital services such as high definition (“HD”) television, voice over Internet protocol (“VoIP”) and video-on-demand.
Research and Development
The market for our products and services is subject to rapid and significant changes in technology and frequent new service and product introductions. We believe that one of the keys to our future success will be our ability to develop new technologies, enhance our existing technologies and to introduce products and services using such new technologies on a competitive basis. Accordingly, we will continue to engage in significant research and development activities. Consolidated research and development expenses in 2007, 2006 and 2005 were $42.1 million, $32.1 million and $33.1 million, respectively. Research and development expenses are primarily recorded in our Guidance Technology and Solutions Segment and Cross Platform Costs. The Cross Platform Costs includes research and development expenses related to our product development and technology group. Our product development and technology group focuses on developing next generation guidance products and services that will be offered by many of our business units. Research and development efforts in our Guidance Technology and Solutions Segment focus on enhancing our IPGs. Research and development activities in Guidance Technology and Solutions includes our 49% share of Guideworks’ research and development expenses (See Note 1 to the Consolidated Financial Statements) as well as research and development activities at Aptiv (acquired in March 2007). The increase in research and development expenses in 2007, as compared to 2006, is primarily due to the acquisition of Aptiv and an increase in research and development expenses in our product development and technology group.
Regulation
The satellite transmission, cable and telecommunications industries are subject to pervasive federal regulation, including Federal Communications Commission (“FCC”) licensing and other requirements. The industries are also often subject to extensive regulation by local and state authorities. Although most cable and telecommunication industry regulations do not apply directly to us, they affect programming distributors, a primary customer for our products and services. We monitor pending legislation and administrative proceedings to ascertain relevance, analyze impact and develop strategic direction surrounding regulatory trends and developments within the industry.
VBI and Digital Data Carriage Matters
We use the VBI, or vertical blanking interval, in the analog television signals of the local affiliates of major broadcast networks such as PBS (through National Datacast), ABC, CBS, NBC, Fox to supply updates throughout the day of program listing information to our TV Guide On Screen and GUIDE Plus+ branded consumer electronics devices in the United States. We have an agreement with CBS Corporation (“CBS”) which allows for the distribution of our CE IPG data over the digital broadcast signals of both CBS owned and operated stations and participating CBS affiliates, following the installation of necessary equipment. We are in the process of securing the participation of additional CBS affiliates in order to reach additional homes. The FCC has ruled that it is within the discretion of a cable MSO to retransmit or strip out data transmitted in the VBI lines of broadcast stations carried on that MSO’s system. We have agreements with MSOs which provide for carriage of our program listing information in either the VBI or within the digital signal of broadcast television stations.
Digital-to-Analog Converter Box Coupon Program
Full-power televisions stations must cease analog broadcasting by February 18, 2009 pursuant to the Digital Television Transition and Public Safety Act of 2005 (“Act”). To assist consumers wishing to receive broadcast programming over the air using analog-only televisions after this date, the Act authorizes the National Telecommunications and Information Administration (“NTIA”) to implement a digital-to-analog converter box coupon program. Under the program, eligible consumers may obtain coupons that can be applied towards the purchase of digital-to-analog converter boxes. At the request of the Company, NTIA in 2007, adopted regulations permitting eligible converter boxes to contain hardware and software necessary for the continued functionality of our IPGs in analog consumer electronic devices. We have an agreement with a converter box manufacturer that, if the manufacturer produces boxes, it must incorporate hardware and software necessary for the continued functionality of our IPGs. We are currently in discussions with this company regarding the manufacture of eligible converter boxes.
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Compatibility Between Cable Systems and Consumer Electronic Equipment
The FCC has been working for over a decade to implement a congressional mandate that it create a competitive market for cable television set-top boxes and other devices to access video programming on cable systems (“navigation devices”). To meet its statutory obligation without compromising the security of video services, the Commission required cable systems to make available a security element (now known as a CableCARD) separate from the basic navigation device needed to access video program channels. In 2003, the FCC adopted regulations implementing an agreement between cable television system operators and consumer electronics manufacturers to facilitate the retail availability of so-called “plug and play” devices that utilize unidirectional CableCARDs, including digital televisions and other digital devices that enable subscribers to access cable television programming without the need for a set-top box (but without the ability for consumers to use interactive content). The parties continue to negotiate a bi-directional “plug and play” agreement, which would permit subscribers to utilize interactive and other two-way services without the need for a set-top box. Disappointed in their progress, the FCC sought comment in June of 2007 on whether it should intercede to facilitate the deployment of interactive devices.
In an effort to ensure that cable operators adequately support CableCARDs, FCC regulations also prohibit multi-channel video service providers (except DBS providers) from deploying after July 1, 2007 navigation devices with combined security and non-security functions (the “integration ban”). To level the playing field, both cable operators and consumer electronics manufacturers are required to use the same security solution. The integration ban could stimulate the development of a retail market for navigation devices that can be used in any cable system through which consumers receive video programming. The Commission granted a number of requests for waiver of the integration ban, and denied several petitions for waivers or deferrals. Certain parties have asked the United States Court of Appeals for the District of Columbia Circuit to review the FCC’s denials.
Further developments with respect to these issues could impact the availability and/or demand for “plug and play” devices, particularly bi-directional devices, and set-top boxes, all of which could affect demand for IPGs incorporated in set-top boxes or CE devices.
Pari-Mutuel Wagering
TVG derives a substantial portion of its revenue from pari-mutuel wagering, which is subject to extensive statutory and regulatory oversight. As such, the gaming activities of TVG are extensively regulated. TVG’s pari-mutuel account wagering operations are located in Oregon and operated pursuant to a license granted by the Oregon Racing Commission. Operations must be in compliance with Oregon law and regulations. Additionally, TVG is licensed and regulated in several other jurisdictions, including California. TVG must also comply with the applicable provisions of the Federal Interstate Horseracing Act (15 U.S.C. Sections 3001 – 3007). Adverse changes in the political climate, new legislation or regulatory activity could harm our business. Members of Congress and state legislatures frequently introduce bills that would prohibit or severely restrict off-track interstate pari-mutuel wagering. The enactment of any such legislation at the federal level, or in any state from which we derive significant wagering revenues, could have a material adverse impact on our business. Congress recently passed legislation which prohibits the use of various electronic payment methods and systems in connection with illegal Internet-based wagering activities. While this recently enacted legislation is not intended to impact advance deposit wagering on horse racing as conducted by TVG, there is a risk that further legislation or regulations could be enacted or promulgated that could adversely affect the business, operations or prospects of our TVG business. In addition, from time to time, payment systems have, on behalf of their member financial institutions, taken actions to limit the use of credit cards and debit cards for non face-to-face gaming transactions as a means of combating illegal Internet-based gambling operations and may do so in the future in response to additional regulatory burdens. Although such efforts to restrict payment mechanisms may not be intended to restrict the lawful activity of licensed operations such as TVG, the resulting inconvenience to our customers caused by such measures could harm our business or growth prospects.
Geographical Information
Information regarding our operations by geographical area is contained in Note 12, “Segment and Geographical Information,” to the Consolidated Financial Statements.
Employees
As of December 31, 2007, we employed 1,590 full and part-time individuals, of whom 167 were employed outside the United States.
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Incorporation
On February 9, 2000, the Company was incorporated under the laws of the State of Delaware as Gemstar International Group Limited. Gemstar thereupon changed its name to Gemstar-TV Guide International, Inc. on July 12, 2000.
Web site Access to SEC Reports
Our Internet Web site can be found at www.gemstartvguide.com. Information contained on our Internet Web site is not part of this report. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our Web site, free of charge, as soon as reasonably practicable after such reports are filed with or furnished to the SEC.
Alternatively, you may access these reports at the SEC’s Internet Web site: www.sec.gov.
| ITEM 1A. | RISK FACTORS |
CERTAIN RISKS AFFECTING BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION
This section highlights some specific risks affecting our business, operating results and financial condition. The list of risks is not intended to be exhaustive and the order in which the risks appear is not intended as an indication of their relative weight or importance.
Our entry into a merger agreement with Macrovision Corporation may have adverse impacts.
On December 6, 2007, we entered into a definitive merger agreement with Macrovision. Consummation of the merger is subject to customary closing conditions and approval by our stockholders and the stockholders of Macrovision. We cannot assure you that these conditions will be met or waived, that the necessary approvals will be obtained, or that we will be able to successfully consummate the merger as provided for under the merger agreement, or at all. We face risks and uncertainties due both to the pendency of the merger as well as the potential failure to consummate the merger:
| • | We may not realize any or all of the potential benefits of the merger, including any synergies that could result from combining the resources of Gemstar-TV Guide and Macrovision; |
| • | We will remain liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the merger even if it is not consummated; |
| • | Under some circumstances, we may have to pay a termination fee to Macrovision in the amount of either $27.7 million or $55.4 million; |
| • | The pendency of the merger could have an adverse impact on the Company’s relationships with employees, customers and suppliers, and prospective customers or other third parties may delay or decline entering into agreements with us as a result of the announcement of the proposed merger; and |
| • | The attention of our management and employees may be diverted from day-to-day operations. |
The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and our stock price. For more risks and uncertainties associated with the merger with Macrovision, please see the section entitled “Risk Factors” in the Registration Statement on Form S-4 (SEC File No. 333-148825) filed by Macrovision Solutions Corporation on January 23, 2008, and any changes or updates to such Risk Factors at the time such Registration Statement is declared effective by the Securities and Exchange Commission.
New products and services, rapid technological change and changes in consumer demand may adversely affect our operations.
The emergence of new consumer entertainment products, services and technologies, changes in consumer preferences and other factors may limit the life cycle of our products, services and technologies and any future products, services or technologies we might develop. Although we believe that we will continue to develop attractive new products and services, the industries in which we operate are characterized by rapid changes, including technological changes and changes in consumer demand. Our future operations could be adversely impacted by our ability to identify emerging trends in our markets and to develop and market new products and services that respond to competitive offerings, technological changes and changing consumer preferences in a timely manner and at competitive costs.
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Our investments in developing new products and services, improving existing products and services, and promoting our business through corporate marketing initiatives may not be effective.
We have recently established a new product development and technology group to enhance the Company’s product development efforts, and we are committing significant resources to our product development efforts. The process of developing and marketing new products and services is inherently complex and uncertain, and there are a number of risks, including the following:
| • | we cannot assure you that the level of funding and significant resources we are committing for investments in new products, services, technologies and initiatives will be sufficient or result in successful new products, services or technologies; |
| • | we cannot assure you that our newly developed products, services or technologies can be successfully protected as proprietary intellectual property rights or will not infringe the intellectual property rights of others; |
| • | we cannot assure you that any new products or services that we develop will achieve market acceptance; |
| • | our products, services and technologies may become obsolete due to rapid advancements in technology and changes in consumer preferences; and |
| • | our competitors and/or potential customers may develop products, services or technologies similar to those developed by us, resulting in a reduction in the potential demand for our newly developed products, services or technologies. |
Our failure to successfully develop new and improved products, services and technologies, including as a result of any of the risks described above, may reduce our future growth and profitability and may adversely affect our business results and financial condition.
We have also recently launched various corporate marketing initiatives, including a national cross-platform consumer marketing campaign, designed to drive greater usage of our products and elevate our brand, and thereby increase the Company’s revenues. These marketing initiatives represent a significant investment of both time and money. There can be no assurance that these marketing initiatives will ultimately be successful in driving greater usage of our products and elevating our brand, or that they will lead to greater revenues for the Company.
We have made and expect to make significant investments in infrastructure which, if ineffective, may adversely affect our business results.
We have made and expect to make significant investments in infrastructure, tools, systems, technologies and content, including initiatives relating to digital asset and rights management and data warehouses, aimed to create, assist in the development or operation of, or enhance our ability to deliver innovative guidance products and services across multiple media, digital and emerging platforms. These investments may ultimately cost more than is anticipated, their implementation may take longer than expected and they may not meaningfully contribute to or result in successful new or enhanced products, services or technologies.
We face risks arising from our TV Guide magazine publishing business.
Risks Relating to the Transformation of TV Guide Magazine. Prior to the re-launch of TV Guide magazine in a full-sized, full-color format in October 2005, the operating results of our magazine publishing business had deteriorated over a period of several years due to significant declines in the digest-sized magazine’s newsstand sales, contribution per copy, and advertising revenue. Prior to the re-launch, we sought to reverse such declines through a variety of different initiatives, including editorial changes and aggressive promotional offerings. However, those efforts were unsuccessful. Consequently, during the fourth quarter of 2005 we transformed our TV Guide magazine from a digest-sized, listings oriented format to a more contemporary full-sized, full-color magazine, filled with more features and photos and targeted at a younger demographic. However, several other widely circulated magazines and other media outlets seek to appeal to this market segment and the advertisers who seek to reach it. A business initiative of this scale is inherently risky and there can be no assurance that our assumptions are valid or that our circulation and advertising goals can be achieved. Additionally, the ongoing costs associated with the transformation of the magazine are substantial, and should this initiative ultimately prove unsuccessful, the cost of pursuing other alternatives may be significant. We cannot assure that the transformed magazine or our magazine publishing business will achieve profitability.
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Risks Relating to the Magazine Publishing Business. Both our advertising and circulation revenue can be negatively impacted by decreases in circulation and readership levels. In addition, TV Guide magazine and the overall magazine industry have been subjected to increasing competition from sources other than traditional print formats, such as the Internet. The risk exists that this trend may continue. We have attempted to take advantage of the growth of online media and advertising, but we face increasing competition from other online sources for both advertising and circulation revenues. To the extent advertisers view other forms of media as providing a more cost-effective or generally superior method for reaching consumers with advertising, the profitability of publishing magazines, including TV Guide, will be negatively impacted. We may not be successful in achieving the volume of circulation guaranteed to advertisers or may incur significant additional costs in attempting to do so and we may not be able to recover these costs through circulation and advertising revenues. If we cannot maintain our magazine circulation or if we experience erosion in the magazine’s readership, this could, in turn, adversely affect our circulation and advertising revenues.
We face risks arising from our TV Guide Network strategy.
Revenues at TV Guide Network consist of affiliate fees and advertising revenues; however, since the majority of our affiliates are contracted under long-term agreements with only cost-of-living increases available under certain contracts, we do not expect significant growth in affiliate revenues in the future. Accordingly, the results at TV Guide Network are highly dependent upon advertising revenue. Advertising revenue at the TV Guide Network primarily comes from commercials sold during our programming hours (11:00 AM to 2:00 AM) and infomercials broadcast between 2:00 AM and 11:00 AM. Advertising sales are primarily dependent on the extent of distribution of the network; viewership ratings, such as those published by Nielsen; and the strength of the market for advertising. While TV Guide Network has benefited, to a certain degree, from the expanded distribution that we have achieved, a significant portion of the expanded distribution has been to DBS subscribers, who did not previously have TV Guide Network as a programming choice. Digital cable and DBS homes also have many more channels and generally use an IPG, rather than TV Guide Network, for listing information. As such, the viewership of TV Guide Network in digital cable and DBS homes has been minimal to date. Also, certain of the long-term agreements with MSOs for the TV Guide Network allow for migration to exclusively digital carriage. If the MSOs elect to migrate TV Guide Network to digital carriage, TV Guide Network will generally experience a corresponding reduction in subscribers, resulting in reduced affiliate fee revenue and potentially reducing advertising revenue, due both to the smaller pool of potential viewers and the fact that TV Guide Network’s viewers come primarily from analog cable homes where scroll data is still utilized for guidance. We have been investing in new programming and marketing initiatives at TV Guide Network with an expectation that the additional investments that we are making in programming and marketing will, in the future, result in increased viewership in both cable and DBS homes. If our viewership ratings do not improve sufficiently or we are unable to maintain broad distribution of the TV Guide Network, our increased programming and marketing costs could have a material adverse effect on our results of operations. While we have undertaken significant programming and marketing initiatives designed in part to position TV Guide Network as an entertainment destination independent of listings data, there can be no assurance that such initiatives will ultimately result in increased viewership ratings and advertising revenues, or that any initial increase in viewership ratings will be sustainable over time.
Labor disputes in the entertainment industry may adversely impact certain of our businesses.
Labor disputes involving one or more of the unions involved in the production of television or film programming, including the recent work stoppage by the Writers Guild of America, could result in reduced revenues for, or otherwise adversely impact, certain of our businesses. The adverse impacts of such disputes, even if they are resolved between the parties, may be direct or indirect. The potential impacts on our businesses could include reduced program promotion advertising in or on TV Guide magazine, TV Guide Network or Online Networks, the cancellation of awards shows or events we would otherwise cover, or a general decline in the public’s interest in television or entertainment. The longer and more extensive any such labor dispute is, there is an increased likelihood that our businesses will be adversely impacted.
Failure to attract and retain key employees could adversely impact our business.
In order to be successful, we must attract and retain talented executives and other key employees, including those in managerial, technical, sales, marketing and support positions. Our businesses require individuals with relevant experience and diverse skill sets, and the market for these personnel is highly competitive. The failure to attract employees with the requisite skills and abilities to our company, or the loss of key employees, could adversely impact our ability to meet key objectives, such as the timely and effective development and delivery of products and services, and could otherwise have a significant impact on our operations.
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Digital recapture may adversely affect our TV Guide Network business and operating results.
Cable television is transmitted on a limited frequency spectrum that must be allocated between multiple analog and digital channels. As digital penetration increases, MSOs are reclaiming analog bandwidth to launch more high-definition channels and other services, and are likely to continue this recapture until they rebuild their plants to increase bandwidth or there is stability in the mix of analog and digital carriage. Digital recapture will result in a significant decline in the distribution of our analog TV Guide Network, which could negatively impact our operating results.
The market for IPG advertising and our ability to fully exploit it may not develop.
The market for IPG advertising is at an early stage of development and we cannot assure you that we will succeed in our efforts to develop IPG advertising as an advertising medium widely accepted by consumers and advertisers. In addition, MSO, DBS and IPTV providers who have a patent license from us are not required to provide advertising in their IPG. Therefore our ability to derive advertising revenues from IPGs distributed by our patent licensees is also dependent on the implementation of IPG advertising by such licensees.
Our business may be adversely affected by fluctuations in demand for consumer electronics devices incorporating our technologies.
We derive significant revenues from manufacturer license fees for our VCR Plus+ and IPG technologies based on the number of units shipped. We do not manufacture hardware, but rather depend on the cooperation of CE manufacturers to incorporate our VCR Plus+ and IPG technologies into their products. Generally, our license agreements do not require manufacturers to include our technology in any specific number or percentage of units, and only a few of these agreements guarantee a minimum aggregate licensing fee. Purchases of new CE devices, including television sets, integrated satellite receiver decoders, DVRs, DVD recorders, personal computers and Internet appliances are largely discretionary and may be adversely impacted by increasing market saturation, durability of products in the marketplace, new competing products, alternate consumer entertainment options and general economic trends in the countries or regions in which these products are offered. As a result, our future operating results may be adversely impacted by fluctuations in sales of CE devices employing our technologies.
In addition, the decision by manufacturers to incorporate our IPG technology into their products is a function of what other guide technologies and products are available. Our future operating results may be adversely impacted as a result of CE manufacturers opting not to incorporate our technology into their devices as a result of other available alternatives.
VCR Plus+ revenues have declined over time and are expected to decline further.
The worldwide shipment of VCRs has declined, and is expected to continue to decline as VCRs are replaced by digital recording devices such as DVD recorders and DVRs. Although VCR Plus+ is now being incorporated into some lower price point digital recording devices, there is no assurance that this practice will become widespread or continue. Furthermore, in order to encourage the incorporation of our IPG in CE products, we have been offering certain large CE manufacturers the opportunity to bundle both our IPG and VCR Plus+ technology at a significant discount beginning with sales reported in fiscal 2005. While we believe this will ultimately accelerate the incorporation of our IPG to our benefit, there can be no assurance that this will be the case. In addition, there can be no assurance that we will be able to renew our existing VCR Plus+ agreements as they expire, upon terms as favorable to us as those contained in prior contracts, or at all.
We face competition in many areas and the competition could negatively impact our operating results.
We face competition from a wide range of other companies in the communications, advertising, media, entertainment, publishing, information, Internet services, software and technology fields. The competitive environment could, among other results, require price reductions for our products and services, require increased spending on marketing and product development, limit our ability to develop new products and services, limit our ability to acquire rights to produce and/or display content that is popular among our targeted audience, limit our ability to expand our customer base or even result in attrition in our customer base. Any of these occurrences could negatively impact our operating results. Many of our competitors have greater financial and human resources than we do. As a result, these competitors can compete more effectively by offering customers better pricing and other more favorable terms and conditions. Our IPGs face competition from companies that produce and market program guides as well as television schedule information in a variety of formats, both print and electronic. Several products and services on the market offer simplified VCR programming functions that compete with our VCR Plus+ system. TV Guide magazine competes with general entertainment and other magazines at newsstand and for subscribers. The TV Guide Network competes with general entertainment channels for television viewership and carriage on cable and DBS systems. Online Networks competes for visitors with general entertainment Web sites and online search providers, including sites that provide television listings, television-specific information and/or that enable users to locate and view video on the Internet. Each of TV Guide magazine, TV Guide
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Network and Online Networks vie for marketers’ advertising spend with other media outlets. TVG competes for viewers with other television networks, one of which is under common ownership with several racetracks and accepts wagers from residents of more states than TVG accepts. In addition, TVG competes for wagering and telecast rights with other networks and account wagering providers. TVG licenses its patents, and sublicenses audiovisual and pari-mutuel account wagering rights for content from various horse racetracks, to certain account wagering providers and is paid royalties based upon account wagering from certain horse racetracks processed by its licensees. These licensees currently maintain wagering accounts for residents of certain states in which TVG does not. TVG’s contracts for account wagering and telecast rights with racetracks, as well as its sublicensing arrangements, have varying maturities and renewal terms. TVG could be unable to renew its current contracts when they expire or the renewal terms could be less favorable than the current terms, which could have an adverse effect on the Company’s TVG business. In addition, TVG and its licensees compete for wagering revenue with other account wagering operations and industry participants.
Any infringement by us or some of our licensees on patent rights of others could affect the development of our products and services