Macrovison: More M&A on the Horizon

Shortly after Macrovision’s (MVSN) announced sale of the TV.Guide channel to Lions Gate Entertainment (LGF), the stock was upgraded by J.P. Morgan (1/14/09) for lightening its debt after last year’s $2.22B purchase of Gemstar. While the sale has been heralded as an opportunity for LGF to begin creating original programming, MVSN ability continue to focus on guidance technology could bring the stock to the promised land. It is particularly interesting that the upgrade (raise in price target) was based solely on sale of Gemstar assets. No word provided about the real valuation particulars which continue to work in MVSN’s favor such as: Guide Data –

• The sale of TV guide did not include the TV Guide data service (which provides the basis on which the guide channel operates). So even though LGF gets the subscribers to the low-tech scrolling guide channel subscribed by most cable operators, MVSN gains a new revenue stream from sale of TV Guide data to LGF (a revenue stream it didn’t previously have when it owned TV Guide channel).

• Growing dependency on guide data – With DVR (both network and CPE based) penetration expected to reach 41% in 2009, continued growth of digital video satellite and cable service which use guide data within their electronic program guides (EPG), along with a growing presence of remote programming/scheduling applications on computers and mobile devices which interface with video service programming the use and need of guide data has gone beyond value add to a must have programming. The two main guide data services are Tribune Media Services (TMS) and MVSN (TVGuide) and I’d expect MVSN to make a serious play for TMS in the coming year.

Content Protection

• The bread and butter of MVSN has long since been its analog content protection system which is part of most cable and satellite set top boxes (STB) world wide. While these protected analog outputs (component/composite) are being dropped for newer all-digital connections like HDMI, the installed bases of STBs with these analog outputs still represent the majority of STBs installed and currently being installed. It will likely be another year or two before new STBs come with no analog outputs. This means MVSN will be licensing its analog content protection system for at least another 7-9 years.
• In 2007, MVSN bought the BD+ technology which protects Blu-ray disks from CRI for $45mm. While at the time Blu-ray was still battling with HD-DVD for high-definition video disc supremacy and the technology had been partially cracked, that all changed last year with Blu-ray winning out. Now Blu-ray is taking off and MVSN is finally seeing some return on its investment. BD+ is part of the self-protecting-digital-content (SPDC) which is part of the mastering process of each disk as well as the technology in each player. With the total number of DVD players sold (131mm) and total DVD disks sold (1.7B) in 2007, sales of BD+ for Blu-ray players and disks should eclipse that of MVSN’s analog content protection system within a couple years.

Electronic Program Guide (EPG)

• EPG business is also beginning to take off and vendor supported EPG efforts are drying up. Major competitors remain in NDS (NNDS), Microsoft (MSFT) as well as some in-house efforts from major service providers like Time Warner Cable (TWC), Comcast (CMCSA), and Verizon (VZ) who still build their own guides. I expect this to change as more of these players go head to head. For example, VZ and AT&T (T) will be competing in video soon. When people are given 3-4 choices in video offerings, a slowly developed in-house guide will become a boat anchor for video operators, especially given the fact that a common saying in the industry is if you want something new in your in-house guide the most likely response is we need 3 years and $30mm to do that.

Wild Card

• I’ve not seen many analysts talk about MVSN/Gemstar’s patent portfolio. It represents one of the most formidable in the television industry (bar none) to the point where you really cannot build an EPG or do anything useful on a television without taking a license from MVSN. I’m sure all the operators building their own guide pay a yearly license fee for freedom to build their guide. While this portfolio is aging and will likely become public art within the next 3-5 years, clearly the next generation of TV configuration and operation revolves around guide applications. It will be interesting to see whether MVSN seeks to extend this aspect of their revenue stream – however its continuing to focusing on the EPG business would likely work in its favor.

Are these not worth more than merely clearing up the debt incurred in buying GemStar? Perhaps JP Morgan seemingly got it right, but I think its analysis missed the mark on the real value of MVSN.

Disclosure: No position.