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Yuen and What Army?

Gemstar-TV Guide billionarie Henry Yuen transformed TV – now he’s hell-bent on reinventing the way people read.

It all started with a phone call from a stranger. Sitting in a florescent-lit cubicle in the foothills of Silicon Valley, Martin Eberhard quickly warmed to the voice on the phone. Pleasant and professorial, the caller was full of high praise for Eberhard’s company NuvoMedia Inc., developer of the Rocket e-book, a paperback-sized tablet billed as the Model T of the burgeoning e-book industry.

The caller suggested that their two companies could do some big business together, but there was just one problem. “I had no idea who this guy was,” remembers Eberhard. “I had never heard of Henry Yuen.”

Most people haven’t. Which suits the bespectacled 53-year-old former math teacher just fine. Intense, secretive and highly persuasive, Yuen has emerged as a media baron capable of outmaneuvering the likes of News Corp., Liberty Media and Microsoft—which through lawsuits, license fees or failed takeover bids, have all bent to the company Yuen heads, Gemstar-TV Guide.

Now after extracting heavy tolls from Murdoch, Malone and Gates, Yuen has targeted his most formidable opponent yet: Guttenberg. Yuen is convinced that readers everywhere are ready to ditch their dust-collecting volumes in favor of a slim gray box that contains the equivalent of a shelf crammed with books—along with a stack of magazines and newspapers. He envisions ink and paper disappearing, home libraries emptying and late-night bookworms devouring mysteries by the dull glow of liquid crystal displays.

The seemingly casual call to Eberhard in August of 1999 was in fact a crucial first shot in an all-out assault on the e-book market. Within 60 days of meeting Eberhard, Yuen reached agreements to purchase not only NuvoMedia, but its closest competitor SoftBook Press Inc., while simultaneously brokering deals with Thomson Multimedia to mass produce two repurposed, redesigned RCA e-books in time for Christmas. In less than a year, Yuen leapfrogged over all his competitors to become the dominant force in digital publishing. His goal, he says, is simple: to wholly transform what he calls “the last standing legacy of yesteryear’s media.”

Yuen’s arrival in e-books represented a major development in the still embryonic e-book industry, but it’s relatively small stuff to Yuen. The total price of acquiring the two companies—$400 million in stock—represented less than three percent of the fully diluted shares of Gemstar-TV Guide. A darling on Wall Street, Gemstar-TV Guide is today valued at $20.9 billion, while Yuen’s personal worth is estimated at around $2 billion.

With his bemused smile, bowl haircut and engineer’s attire – he greets a visitor wearing khakis and a fleece vest bearing his corporate logo – Yuen doesn’t exactly strike fear in first-time acquaintances. But rivals have learned not to underestimate Yuen. One associate says Yuen personally handled every aspect of a complex technical e-book pact, easily fielding the volleys of a team of lawyers and engineers. Another says the divorced father of two college-age boys seems utterly uninterested in what money can buy, commuting to work from a Downtown apartment in a Lexus SUV. And with such deep pockets to draw from, Yuen has the luxury of patience. “He’s definitely not depending on this to make his numbers,” says one analyst. “This could be a complete failure and it’s not going to make much of a difference for Gemstar.”

He’ll need at least a few years to get some breathing room between himself and his competitors – Microsoft, and Adobe offer rival formats that now feature better text display than either RCA unit – and to overcome mounting suspicions about a system in which all downloads (and all fees) flow through Gemstar.

His entry into e-books comes at the peak of an incredible career that began soon after Yuen turned 40. During “a bit of a midlife crisis” while toiling as a researcher at TRW, Yuen and a few grad school pals invented VCR Plus, a relatively simple gadget that allows viewers to record upcoming shows with a few clicks of the remote. The system was a big hit, and Yuen parlayed a big IPO into a prime stake in the market for electronic program guides (EPGs), the scrolling TV menus that enable viewers to find, sort, and record the hundreds of channels offered by cable and satellite services. Bullish cable analysts believe EPGs could become the Yahoo! of interactive TV, predicting a $15 billion business by 2005.

With his technology now used in 8.5 million U.S. households, Yuen has dug himself into a position directly in the path of anyone aiming to enter the television market of tomorrow. And as Rupert Murdoch and John Malone discovered two years ago, Yuen doesn’t yield easily. After battling it out in court over Yuen’s EPG patents, Murdoch and Malone combined the resources of Malone’s United Video and Murdoch’s TV Guide in a $2.8 billion million hostile takeover bid. If Yuen had accepted the offer, he could have walked away $300 million richer. Instead, he convinced his board not to sell, waited a year, and then bit back. In October 1999, Yuen purchased TV Guide for $15 billion in a deal that left Murdoch with 45 percent stake in Gemstar.

Its no wonder then that Yuen’s arrival in the e-book market has sent pulses racing in publishing circles. Even as his new devices were running off the conveyor belt in October, the e-book made an appearance on “Oprah” --"It’s amazing!” she crowed to her cheering faithful – and Yuen posed for publicity shots with publishing brass from HarperCollins and Penguin Putnam. Underscoring his commitment, Yuen announced he would spend $100 million promoting exclusive Gemstar editions of six new bestsellers.

Coming so soon after Steven King snubbed traditional publishers with the electronic-only release of the novella “Riding the Bullet,” Yuen’s plunge into e-books prompted top-level reconsideration of an area usually dismissed as the marginal enthusiasm of daffy futurists. “It’s a tremendous vote of confidence in e-books to have a successful company like Gemstar involved,” says David Steinberger, president of corporate strategy for Harper Collins, which is owned by Yuen’s junior partner Murdoch’s News Corp. and which granted Yuen exclusive rights to new novels by Jeffrey Archer and Susan Elizabeth Phillips. “Those of us in publishing have always known books are sexy, but those outside the industry sometimes forget that.”

A few publishers admit to being a bit cowed by the shrewd CEO with grand visions for their industry. “He’s determined to make this business work – and knowing Henry, he’ll find a way,” says Larry Kirshbaum, president and CEO of Time Warner Trade Publishing, which granted Gemstar exclusive digital rights to new releases by James Patterson and Brad Meltzer. “I can’t always tell what his next move will be, but I’ve found that Henry is about ten steps ahead of the rest of us.”

Yuen certainly got heads scratching in December, when rumors percolated into the financial pages that he was about to buy book behemoth Barnes & Noble. Yuen kept quiet, leaving analysts floundering for a motive – was Gemstar really going retail, or was this a telescopic play for e-books? Whatever his intention, Yuen shut down the rumor mill a few weeks later, saying talks between the two companies were directed only at “strategic alliances.” “We’re working hard to find win-win ways to convert Barnes and Noble customers into e-book customers,” he says.

Even as Yuen was stirring up the publishing pool, the team that built the Rocket was learning that their new boss was not quite the deferential admirer he first appeared to be. Eberhard says that within a month of acquiring NuvoMedia, Yuen began a major overhaul of the company. In its new incarnation, the Rocket would only display text downloaded via a central server, entirely scrapping Eberhard’s open, web-based technology. Meanwhile, company managers marched into NuvoMedia offices unannounced and fired longtime employees on the spot.

“I got used to coming in and seeing my employees crying, seeing programs arbitrarily cancelled and seeing responsibilities stripped,” says Eberhard. Mass resignations followed, with Eberhard and his partner Mark Tarpenning stepping aside before the end of the year. Of the 60 NuvoMedia employees at the time of the buyout, “maybe six or seven remain,” he says.

The turmoil doesn’t surprise Forrester Research senior analyst Daniel O’Brien, who closely tracks the e-book market. He says Yuen’s genius is not in managing people, but in identifying and fencing off vast territories of intellectual property. “It’s clear he’s trying to lock up the patents and then go after anybody who tries to launch a competing product,” he says. “That’s his strategy.”

For his part, Yuen denies that the discontent at NuvoMedia was anything out of the ordinary, especially in these days of strategic re-thinks and layoffs in the tech and digital sectors. After the purchase, “there was great relief and a great deal of joy before politicking sets in, which is always true,” he says. It was his impression, Yuen says, that his new employees were “greatly happy.”

The transition was smoother at SoftBook, where CEO Jim Sachs – an e-book pioneer who previously developed the Macintosh mouse and the animatronic toy Teddy Ruxpin—quickly cozied up to Yuen and convinced him to spare much of the SoftBook technology and its staff. Andrew Preston, president and chief operating officer for SoftBook at the time of the buyout, says less than 20 percent of the staff was cut loose after the merger (and while Preston lost his job, he says they “parted amicably.”)

“Henry could be off-putting, but he’s got a very different style than we’re used to at Valley startups,” he says. “He’s got a much more methodical, close-to-the-vest approach.”

Yuen never let slip, for example, during extensive talks about the rollout of the new SoftBook – code name Mini Me – that he was simultaneously negotiating with the French electronics giant Thomson to take over manufacturing. “From where Henry was sitting, we were little gnats on the back of an elephant,” says Preston. “He had a much larger vision and a much bigger financial position to see through.”

So big, in fact, that Gemstar has stirred up major anxiety among competitors and e-book enthusiasts. One former associate calls Yuen “a world class control freak” whose aggressive pursuit and protection of patents is turning a formerly wide-open market of innovators into a legal minefield. Privately dubbed “the patent terrorist” by rivals in the cable industry, Yuen has not been shy about taking competitors—including General Instrument, Scientific Atlanta, Echostar, Pioneer Electronics and TiVo—to court over their use of technology he believes is rightfully his. And so far, his legal record is chillingly good, with zero losses and two big victories.

“Let’s just say we’re keenly aware of Henry’s reputation,” says Bob Garthwaite, vice president of worldwide sales and marketing for Franklin Electronic Publishers, which is releasing the competing eBookMan this month (FEB). “But we’re certain we can more than hold our own.”

Meanwhile Yuen has been on the receiving end of his share of legal challenges. Echo Star and Pioneer have both lodged suits claiming that Gemstar has conspired to create an unfair monopoly in the market for EPGs. And back before Yuen got cozy with Malone and Murdoch, TV Guide pursued a similar line of attack.

And then there’s a certain LA County Superior Court case filed under Yuen vs. Yuen. In September 1997, Yuen’s ex-wife Molly filed papers claiming that her husband secretly divorced her a year after establishing Gemstar, forging her name to dissolution papers in an attempt to protect his growing fortune. In court documents, Molly said she was “absolutely stunned” upon learning she had been legally divorced from her husband for ten years, and that she only discovered his “vast wealth” when he quickly cleared a credit card purchase of a $67,000 piano. Yuen’s attorneys denied all the charges, insisting she knew about the divorce all along and fabricated the story in an attempt to extort a larger settlement. Yuen settled the case last summer, though Molly’s lawyer declined to reveal terms of the deal. (This is a clearly a sore subject to the intensely private Yuen; While he discussed his e-book strategy at length with [Inside], he cancelled interviews and declined any further comment when informed this story might include mention of his ex-wife’s lawsuit.)

•••

For such a formidable corporation, Gemstar keeps a very modest house. No leafy campus or imposing black tower for Yuen—he’s content with his headquarters in half a rented floor in a beige stucco office building in downtown Pasadena. Visiting Yuen feels less like meeting a titan of the new economy than checking in with your neighborhood dentist.

Yuen leaves it to a display in his main corridor to do the impressing. Visitors are escorted down a hall flanked by row upon row of wood-finish plaques bearing the license numbers of more than 120 patents that Gemstar controls. Marking the boundaries of the intellectual property Yuen so fiercely protects, these plaques—not grand entryways or cushy offices—are what Gemstar is all about.

The first patent Yuen registered dates back to 1988. The son of a successful Hong Kong attorney, Yuen moved to the United States at the age of 17, studying mathematics at the University of Wisconsin in Madison and Cal Tech in Pasadena. After graduation, he joined TRW, publishing more than 70 papers on the behavior of ocean waves.

Yuen stayed at TRW for 18 years and very well may have ended his career there, if it weren’t for an everyday frustration that formed the basis of his late entry into entrepreneurship. The story goes that one day this 40-year-old Ph.D. found himself flummoxed in an effort to program his VCR to tape a Red Sox playoff game. He and a Cal Tech buddy named Daniel Kwoh came up with VCR Plus. The success of the system – it is now used in 180 million homes around the world – might suggest that Yuen is, essentially, a gearhead who hit paydirt thanks to his technical wizardry. But the fact is that Yuen has always had much more on his mind than widgets.

Even as Yuen toiled by day at TRW, he earned a law degree at night, setting up a private practice that catered to Asian-American businesses (and that served as the first office for Gemstar). That practice came in handy when it came time to find a market for his first invention. That’s because the genius of VCR Plus wasn’t so much in its gadgetry—it’s a relatively simple system—but in getting electronics manufacturers and publishers of TV listings to participate. They not only participated; they paid for the privilege. Last fiscal year, VCR Plus license fees accounted for 45% of the company’s total $225 million in revenue. “What he did with VCR Plus was absolutely brilliant,” says John Kelleher, general manager of electronic program guides for the Tribune Media Services. “He turned around a nearly impossible situation and got everyone to pay him.”

Yuen next set out to cure another affliction common among couch potatoes; the stupefied daze that accompanies attempts to navigate the hundreds of channels offered by satellite and cable services. Yuen spotted a solution in technology then in the works at two tech startups, Starsight Telecast and VideoGuide. Flush with capital from his recent IPO (and foreshadowing his strategy with e-books), Yuen gobbled up the two companies, locked up their patent portfolios and promptly took action against anyone pursuing something similar.

When the TV Guide merger was finalized last summer, Yuen obliterated any remaining suspicion that he was a minor leaguer mixing it up with the big boys. But while the deal solidified his stature, it also put forced him into an uneasy alliance with Murdoch. Shortly after the close of the merger, John Malone swapped the bulk of his Gemstar holdings to Murdoch in exchange for a bigger chunk of News Corp, leaving Murdoch’s Sky Global Networks with a hefty 43 percent stake in Gemstar. And while Yuen insists that he bears no ill-will toward the man who once tried to forcibly oust him – he says the pair are frequent dinner companions and even hung out together at the Sydney Olympics – it’s hard to believe that the News Corp. chairman’s ambitions for interactive television will be satisfied by a spot on the Gemstar board.

“These were two bitter enemies in a very, very hostile relationship,” says Nick Capuano, a banker for Trust Company of the West who has known Yuen for five years. “There was a lot of skepticism about how it would work out.”

So far, the hyphen between Gemstar and TV Guide appears to be binding tight. Yuen acknowledges that there are big cultural differences – he says he was “surprised to find that the TV Guide satellite sales office in Los Angeles is three times larger than our entire company.” But both sides have certainly benefited from the resolution of their patent disputes, with cable and satellite companies now back in the rich EPG market after waiting on the sidelines to see who would prevail.

Many of these potential customers are now suffering from sticker shock, says Stacy Bingler Forbes, a research analyst with Janco Partners in Englewood, Colo. While Gemstar-TV Guide has forged one big deal with AT&T, Forbes says many other long-term pacts are stuck in a stalemate.

“Now that they’re the only game in town, Gemstar can jack up the price a bit,” she says. “I think right now everyone is holding out to get the best deal they can.”

And while Gemstar signed a 12-year licensing deal with AoL two years ago, a longtime rift with AoL’s new partner Time Warner (which at one point blocked the Gemstar EPG signal over its cable lines) threatened that fat, $63 million-per-year contract. “Time Warner has suddenly gone from being one of their biggest enemies to being one of their biggest customers,” says Capuano. “That’s not going to heal overnight.”

But as the company rolls out a more interactive version of its EPG that allows viewers to shop at home using their remote, analysts say overall prospects are still very rosy. Janco Partners estimates that Gemstar will bring in $85 million licensing and selling advertising for its EPGs this year, along with $167 million from TV Guide Magazine and $30 million from its broadcast TV Guide channel, to say nothing of the smattering of television stations left behind by Malone’s United Video, including WGN in Chicago and KTTV in Los Angeles.

Perhaps the most remarkable thing about Gemstar is how little labor it expends for all its boffo revenues. The company lists just 180 employees on its payroll; Yuen and his close associate and CFO Elsie Leung share an assistant and oversee almost all company business personally. “It’s pure margin,” says Capuano. “They’ve got R&D guys, lawyers and that’s it basically.”

Which is the main reason why Wall Street analysts have remained smitten with Gemstar stock, with most rating it a “strong buy” even as its Nasdaq-index listed stock has sunk with the lowering tech tide. Way down from its split-adjusted all-time high of $107 in March, the stock hit a low of $33 in December, but has since rebounded to hover around $50.

Yuen says he’s not overly troubled by the gyrations of his stock. “I don’t like to see what’s happening – but the reality is you have to ask yourself, ‘Is this because I didn’t do something right?’ I don’t believe so. I think we’ve delivered everything and we are on track.”
+++

After finding fortune in the mass medium of television, why is Yuen bothering to crack the book market? Americans spend an average of seven hours a day watching TV, while literacy rates continue to decline. Isn’t what Yuen is attempting something like building an absinthe distillery after making a fortune in beer?

Yuen says the appeal is partly personal. While he’s never cared much for television, he’s an avid reader of popular and science fiction. He says he’s a longtime fan of the cyberpunk author William Gibson and ranks James Clavell’s “Shogun” and Frank Herbert’s “Dune” as favorite novels.

More to the point, Yuen sees a chance to establish himself as a tollkeeper in the new publishing paradigm—much in the same way he has staked a claim in the broadcast world. There are billions to be made, he insists. “The theoretical savings of reading on my device versus reading on paper is enormous,” he says. “Probably 70 percent of the cost of a book is in publishing, distribution and returns. We are literally taking a $10 billion industry and saying, here’s $7 billion back. There’s something in it for everybody—for the consumer, the author, the publisher and for us.”

At the moment, however, few are making actual money on e-books, and no one expects to for some time. Jupiter Communications estimates that fewer than 50,000 e-book hardware devices have sold in the U.S., with an estimated 1.9 million by the end of 2005, hardly a major threat to dead tree publishers.

But for many bookish techies, the promise is just too enticing to resist. Last year Microsoft released its Microsoft Reader software for handhelds and PCs, with Redmond e-book evangelist Dick Brass declaring that “twenty years from now, 90 percent of everything will be published electronically.” Meanwhile in August, the software giant Adobe acquired Glassbook, which manufactures another dedicated device, this one featuring an even more crystal clear display. Smaller players include NetLibrary’s Peanut Press and AportisDoc.

Beating back these rival formats is just the first of Yuen’s problems. The biggest stumbling block for everyone in the e-book market proved too much for early models by Franklin Electronics, which released an early version back in 1986, and Sony, which launched Data Discman in 1991. Neither caught on, almost entirely due to the lack of available titles. It’s a classic chicken-and-egg problem: without the simultaneous efforts of both publishers and manufacturers, the container cracks and the content spoils.

Which explains Yuen’s persistent wooing of publishers. Yuen knows his gadget is only as compelling as the books it displays. In exchange for periods of exclusive e-book availability for new releases by best-selling authors, Yuen has offered the kind of promotional support usually reserved for Hollywood blockbusters. “He made them an offer they couldn’t refuse,” says Forrester Research analyst O’Brien. “No one else was willing to step up and spend millions of dollars on e-books, for quite rational reasons. The publishers are getting a free ride, basically.”

It’s a ride most publishers are happy to take. Steve Cowen, senior vice president of St. Martin’s Press, says Yuen came to the bargaining table offering to promote a new thriller by Robert Ludlum to the tune of $1.5 million. “Henry’s offering us something more than just making our title available in a fancy new format,” he says. “He’s got something to trade. If I had to spend that money myself, it would be 100 percent out of pocket for me. This business is too new not to test these kinds of ideas.”

While St. Martins has released titles in rival formats, other publishers say they prefer to stand by their man. “We made the decision that instead of going crazy and establishing ten different systems for ten different platforms, we’d stick with this one,” says John Schline, vice president and corporate director of business affairs for Penguin Putnam, which gave Gemstar exclusive digital rights to novels by Patricia Cornwell, Ken Follett and James French.

Meanwhile a few outside the big publishing houses are annoyed that the corporate newcomer has been greeted so warmly. “There’s no market at all – so why not let someone else bother to spend the time and effort making it,” says literary agent John Brockman. “At this point it’s a great way to lose a lot of money and for publishers to avoid doing their real job, which is selling authors’ books.”

But publishers know they can’t ignore convergence, and Yuen has won them over partly by playing to their worst fears. The Gemstar devices are the only e-books that decrypt text page by page and communicate directly with a central server, bypassing the Internet entirely. This makes his system virtually unhackable (while also putting Gemstar close to the cash register in every e-book transaction). Yuen argues that competitors – especially Microsoft – will inevitably summon publisher’s worst nightmare: a peer-to-peer market for pirated books.

“Encryption is uniquely unsuitable for content protection,” he says. “A com sci 101 student, probably in high school, can crack an encrypted book. You can have iron-clad delivery but when I send it to you, no one can stop you from cracking the code—And the same person who may not pick a dollar bill off the floor may be more than happy to go to a site and read whatever’s there, without worrying about if its copyright protected or not.”

The pitch hits home with publishers. “We are determined not to have books get away from us in the way that music got away from record companies,” says Adam Rothberg, a spokesman for Simon & Schuster, which gave Yuen a 30-day exclusive on Ed McBain’s “Candyland” in December. “Microsoft came along with no copyright protection built in at all.”

But while publishers may fret, it’s not likely readers will ever clamor for pirated e-books the way music fans madly swap favorite Britney Spears singles. “There’s simply never going to be a big Napster-like market for books,” says O’Brien. “University presses have put whole texts online and seen sales increase. There’s an incredible opportunity here for publishers, but they’ve been too terrified to take it.”

Besides, cracking a sophisticated encryption code isn’t the only way to make a book available online. “The biggest threat to security isn’t from hackers – it’s from scanners,” says Bob Bruce, president of the trade association Open eBook Forum (which lists Gemstar as a member). Armed with a scanner equipped with a speedy paper feeder and simple conversion software, “you can make a digital version of a book in about 15 minutes. It’s easy and cheap and there’s nothing anyone can do about it.”

After his hasty departure from NuvoMedia, it’s no wonder that Eberhard sees an ulterior motive in Yuen’s pontificating against piracy. “It’s not about security for Henry Yuen,” he says. “It’s about control.”
+++

It’s too early to say whether Yuen’s bet on e-books will pay off, but expectations have already diminished considerably. At the October launch of the two Gemstar devices—the black-and-white Rocket descendant retails at $299, while a bigger, spiffier color model from SoftBook goes for $599—Thomson sales reps said they hoped to sell between three and seven million units in 2001. No word on holiday sales yet, but observers say the buzz in the book world has been lukewarm at best.

Late in December, Forrester Research released a study proclaiming that “e-books will flop,” reversing more hopeful estimates floated earlier in the year. Digital delivery of custom printed books, textbooks and e-books will account for $7.8 billion by 2006, Forrester predicts, but just $251 million will come from e-book devices.

“People just aren’t going to pay so much for something that does so little,” says Mike Heikka, an attorney and contributor to the webzine eBookNet. “They haven’t given consumers enough reason to make the switch. The justification that you can put eight or nine books in a device—that’s fine for the few people who travel all the time with lots of books. But portability is about all they’re offering.”

Yuen acknowledges that the e-book is pricier than he’d like. “Pricing is a funny game,” he says. Soon enough, however, Gemstar will make enough on its cut of every download—as much as 20 percent of every e-book title—that the price of the devices will sink to $100-$200, a target he hopes to reach by 2002.

But while competing models come with organizers, MP3 players, sound recorders and other features, Yuen maintains that reading is important enough to warrant a dedicated device. “Every bit of this box has to be designed in such a way that it enhances the reading experience,” he says. “When you’re reading for leisure, just like when you’re watching TV, you want to lie back and enjoy—not sit forward and interact. You want to be fed information.”

Beyond economic or technical hurdles, the biggest obstacle facing Yuen – and all his e-book competitors—is much more basic. Even as consumers embrace PDAs, PVCs and DVDs, the book remains sacrosanct for many readers. Most people simply can’t fathom purchasing data rather than bound pages and can never see themselves happily reading on a twitchy backlit screen. Tony Hendra, original editor of National Lampoon and president of founder of the new electronic-based publishing venture Gigawit, calls predictions of mass-market acceptance “millennial hogwash.”

“Books are almost genetically installed in us,” he says. “They remain the fundamental medium. They are the perfect one-to-one, author-to-reader medium. That’s going to be very hard for anyone, no matter how powerful or well-financed they are, to overthrow.”

Even if he could single-handedly close every paper mill in America, it would likely be just the beginning for Henry Yuen. “Henry has very long term vision,” says SoftBook’s Preston. “This battle is not going to be won in the next four quarters – changes in this market, and in people’s behavior, take place over a long time. But when we get there, I expect to see Henry at the front of the line.”