News Corp. Finally Wins DirecTV To Reach Goal of Integrated System

After years of trying and lots of missteps, News Corp., led by Rupert Murdoch, finally snared DirecTV, the nation’s largest direct broadcast satellite provider, and hit its strategic objective of forming a media supply chain that links content and the means to deliver it. The Australian-based media giant shelled out $6.6 billion to buy control of Hughes Electronics Corp., the operator of DirecTV, from Hughes’s parent General Motors Corp. With the acquisition, Murdoch has achieved his goal of securing a U.S. platform for TV, interactive entertainment, high-definition feeds, Internet access, and possibly telephone service. Most powerful man in TV The deal must still pass U.S. regulatory hurdles, but if Murdoch clears government review he would become the most powerful man in TV and other media. DirecTV would give him the capacity to reach more than 110 million viewers on four continents. Murdoch’s dream of owning a globe-spanning satellite broadcast network seemed out of reach in late 2001, when General Motors agreed to sell Hughes to EchoStar Communications Corp. But after U.S. antitrust authorities gave the thumbs-down on that deal, Murdoch was back in the game. “What this deal shows is that Rupert Murdoch has learned the John Malone lesson, namely that content and distribution go hand in hand,” says Barry Orton, a professor of telecommunications at the University of Wisconsin. If the deal goes through, Murdoch would be able to leverage his ownership of Fox News, Fox Sports, the Fox Family Channel, and his other content properties as he negotiates with other content providers that would be buying space on DirecTV. Ownership of the Twentieth Century Fox movie studio gives News Corp. another venue for meshing content with advantageous distribution in both the outlets it owns and those that distribute its programming. “DirecTV is the single most important acquisition Murdoch could have made,” says media consultant Peter Kreisky. He says the deal would allow Murdoch to generate enormous cost savings that he, and only he, can achieve by leveraging his worldwide network of satellite distribution. Kreisky expects Murdoch to continue to concentrate on owning sports rights because it has proven to be a huge driver of subscriptions. He points to News Corp.’s business plan in the United Kingdom to use the rights to the Premier League soccer matches to drive its SkyTV subscriptions. Kreisky thinks that a similar strategy would be used with American sports broadcasting as a key to luring viewers from cable systems. Blair Levin, a telecommunications analyst at Legg Mason, believes that a driving force in the deal for Murdoch is to gain a satellite venue for leveraging his properties in order to chip away at the market share of cable companies. But while the acquisition is seen as vital for Murdoch, Kreisky and other industry followers think that News Corp. would have been better off if it had won the original round of bidding. “You might argue that he got it for a better price, but he lost time, and DirecTV is a weaker competitor today than it would have been two years ago,” Kreisky asserts. Satellite pros and cons Kreisky and others believe satellite has fallen behind cable in some technical areas during the last two years. Both cable and satellite providers are racing to provide the services customers want. Cable has an advantage in allowing two-way signals, which satellite providers generally can’t match now. And unlike satellite providers, cable is also able to offer high-speed Internet access. One advantage that satellite broadcasters enjoy is their use of digital signals, which offer more flexibility. Cable TV traditionally has used analog signals to send out its programming. In recent years, cable companies have spent an estimated $70 billion to upgrade many of their systems to carry digital signals, but many systems remain analog. Orton says he expects DirecTV to target the weaker cable systems He predicts that DirecTV would aggressively market its satellite dishes in areas where cable companies are vulnerable, because of outdated technology, poor customer service, or lack of variety in programming options. He says that Charter Communications Inc., beset by shareholder lawsuits, accounting investigations, and a $19 billion debt load, would be a likely target. With less than 20% of its subscriber base in the top 75 markets, Charter’s systems are located in rural areas where satellite has established its strongest footprint. Most observers predict that the DirecTV acquisition won’t get shot down but note that regulators would be looking at the potential of the newly combined company to control programming access and to discriminate against non-preferred content providers. He expects New Corp. to agree to certain conditions that would satisfy regulators that the system would be open to competitors’ programming. The cable industry is required by the 1992 Cable Act to provide access to competitive sources of programming, and Levin believes that Murdoch would make similar guarantees. Treatment of rivals is an issue Another issue that regulators would likely consider is whether the combined company would provide nondiscriminatory treatment of competitors in areas other than programming. “You may see a guarantee that prevents Fox properties from being awarded the top channel slots with its strongest competition buried down around channel 999,” Levin says. Overall, he says that while the government may erect “speed bumps,” the vertical nature of the deal makes it likely to be approved. Given Murdoch’s clout on the distribution and the content side, some observers say they could envision cable operators reacting by seeking to emulate his holdings. Levin says that if the deal goes through, he could see Viacom Inc. making a bid for EchoStar, for example. Other pacts might grow out of the expected loosening or abolition of a number of cross-ownership bans by the FCC when it reviews the issue in early June. “In the past TV networks couldn’t own cable systems, but once that rule disappears, you might see them buying distribution systems,” Levin says. Copyright 2003 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com