Murdoch Gets DirectTV
But FCC Approval Affords Cable Insurance Against Abuses
By Mike Farrell & Ted Hearn -- Multichannel News, 1/4/2004 7:00:00 PM
Do cable giants Comcast Corp. and Time Warner Inc. really need government protection from Rupert Murdoch?
According to the Federal Communications Commission, the answer is yes.
In approving News Corp.'s takeover of DirecTV Inc. on Dec. 19, the FCC effectively decided that every cable company in the land required various layers of protection from anticompetitive abuses Murdoch would allegedly unleash by owning DirecTV Inc., 35 Fox TV stations, 10 national cable networks, and 12 regional sports services.
Under conditions imposed by the FCC, News Corp. is barred from withholding any cable network under its control from any cable operator or satellite carrier at least until October 2007, and must submit to arbitration to settle carriage disputes involving its TV stations and regional sports nets through 2009.
While disputes are raging, Murdoch is barred from pulling his content.
These conditions are one-sided. Murdoch, for example, has to sell his regional sports nets to Comcast, but Comcast is under no obligation to sell its RSNs to DirecTV.
In fact, because Comcast SportsNet is terrestrially distributed, Comcast refuses to sell the popular Philadelphia-based regional to DirecTV or EchoStar Communications Corp.
Murdoch did carve out one exception: he's not required to sell NFL Sunday Ticket to cable, because the National Football League is unaffiliated with News Corp.
Comcast and Time Warner appeared to be accidental beneficiaries of the FCC ruling, because neither MSO sought merger conditions from the FCC. Among large and midsized cable companies, the industry's public attack on the merger was led by Cox Communications Inc., Insight Communications Co. Advance/Newhouse Communications, and Cable One Inc.
SMALL OPS WIN
Small cable companies, which gained the most from the FCC, were led by the American Cable Association and its president, Matt Polka.
Regarding cable companies with fewer than 5,000 subscribers, Murdoch is effectively limited to must-carry for his TV stations because the FCC said he can't demand cash or programming carriage.
Murdoch is also required to engage in collective bargaining if "small" cable companies so desire. The small cable firms may appoint a single agent to do their bidding.
"That's going to help drive the parties together to produce reasonable marketplace deals. If Fox wants to get nasty about it, then we will wind up in arbitration," Polka said last week.
The FCC set the "small cable company" ceiling at 400,000 subscribers, a standard met by every U.S. cable company except the 11 largest, according to the National Cable & Telecommunications Association's annual industry guide.
Jimmy Schaeffler, a DBS analyst with the Carmel Group, predicted that DirecTV in Murdoch's hands would place enormous pressure on small cable.
Small operators, Schaeffler said, "will be consolidated or run out of business unless they can do that critical digital upgrade and bundling. That's what we see coming."
Polka said he members were ready to meet the challenge.
"I don't see our members getting out big wholesale," Polka said. "It's premature to talk about the death of small cable."
News and DirecTV parent Hughes Electronics Corp. closed the deal just days after gaining FCC approval.
COMPLEX TERMS
The $6.6-billion deal, first announced in April, involved a series of complicated transactions. News basically acquired General Motors Corp.'s 19.8% stake in Hughes for about $3.8 billion in cash and stock.
News also made a tender offer for 14.1% of Hughes shares from public shareholders, GM's pension fund and other benefit plans, for $2.8 billion in News securities.
News then transferred that 34% interest — with super-voting rights that lead to more than half of the shareholder votes — to Fox Entertainment Group Inc., its 80%-owned subsidiary, in exchange for a $4.5-billion promissory note and 74.5 million shares of Fox. News increased its stake in Fox to about 82%.
In public comments, Murdoch has given all indications that he intends to play nice with cable operators, a far cry from the fear he induced in 1997 when he attempted to merge with EchoStar.
"Death Star" (a nod to Darth Vader's Star Wars super weapon) was the ominous moniker given to the failed EchoStar merger, a union that was expected to crush cable. But News backed out of the deal about two months after it was announced, some say in deference to cable operators who carried the company's programming networks.
Since then, News Corp.'s relationship with cable operators has appeared to be cordial. That spirit of cooperation continued last month when its Fox Sports Network regional sports network avoided a bloody fight with Cox, agreeing to a new five-year contract with a substantially lower rate increase — 7% to 9%, versus the originally proposed 35% increase.
EYES 20M SUBS
Not that Murdoch will kowtow to cable — on the contrary, he expects to grow DirecTV from its current 12 million customers to 20 million subscribers (he neglected to give a time frame), largely through discount offerings, new technology and free-equipment promotions.
Most analysts expect News Corp. to be aggressive, modeling DirecTV on its other satellite television business, British Sky Broadcasting Group plc.
When Murdoch created BSkyB in 1989, it was facing tremendous competition from the incumbent British Broadcasting Corp. and two new private television networks — ITV and Channel 4.
Ten years later, after flooding the market with free interactive set-top boxes, acquiring the rights to Premiership soccer — the top league in England — and pushing interactive features such as shopping and sports gambling, BSkyB had forced one competitor, ITV, into bankruptcy and outpaced its remaining competition.
While that may not be entirely possible in the U.S. — the gambling part appears out of reach — most analysts believe Murdoch will pull few punches once he gains control of DirecTV. On the sports side, most analysts expect Murdoch to push DirecTV's exclusive NFL Sunday Ticket package and to go after more exclusive sports deals.
'ENTREPRENEURIAL'
"I would not underestimate Rupert Murdoch and News Corp.," Merrill Lynch & Co. entertainment analyst Jessica Reif Cohen said. "This company is entrepreneurial, they think differently. This is not like any other company they [cable] have competed with. They [News Corp.] are lean and mean; they're smart and aggressive. It's different."
Reif Cohen added that another News Corp. advantage is that they have long-term experience in the satellite market and have been known to be aggressive promoters.
"This is not like competing with an RBOC," Reif Cohen said. "They have a lot of resources available to them."
Stifel Nicolaus analyst Ted Henderson said he believes Murdoch will focus DirecTV on high-end customers, also making sure to protect the distribution base for News Corp.'s cable networks.
"Murdoch is facing the same challenge that Charlie [Ergen] is facing: In a multichannel-video market that is 85% penetrated, how do you grow?" Henderson said.
"You grow by either taking market share away from cable, raising rates or taking market share from the other DBS provider. I think Rupert will go after the high-end. Rupert will promote interactivity and Rupert will promote unique content to not only go after cable subs but EchoStar subs."
Henderson doubted Murdoch would start a price war with cable, simply because the vast majority of the carriage for his television networks is with cable operators.
"Vis a vis the cable industry, he knows where his bread is buttered with his content," Henderson said. "The lion's share of the revenue that is generated by the Fox networks, outside of the broadcast channel, still comes from the cable industry."
MURDOCH SPOKE
On News Corp.'s fiscal fourth-quarter conference call, held on Aug. 13, Murdoch all but eliminated the possibility of a price war with cable, adding that he doesn't plan to mimic cable offerings such as bundling video and high-speed data service to compete.
"We're not certainly planning any price wars," Murdoch said on the call. "We're not a great believer in the bundling. There are a lot of people, some people like it and a lot of other people prefer to get their bills one by one.
"I don't like it, and I think if you give the people a bundle that comes in at over $100 a month, and they think they have to cut back for some reason, they're more likely to cut out one premium video service than they are telephony or whatever. So, we're quite happy to keep it separate. I think our offering will be so rich and so strong people will be very happy to have it."
Subscriber growth at DirecTV has waned in recent quarters. It's on track to add 1 million net new subscribers in 2003, but has lagged No. 2 DBS service provider EchoStar, which added 1.35 million subscribers in 2002.
That is something that Murdoch alluded to in a Nov. 5 conference call with analysts, pledging to return DirecTV to its past robust growth by improving customer service and introducing interactive technologies.
"We have to make DirecTV a unique viewing experience," Murdoch said on the November call.
"There's a tremendous amount of work to do. It will make great progress. I hope we can get back to growth of a million subscribers a year for a number of years. You can't do that forever, but we can grow the business into something much bigger. That's our intention."
| News Corp.'s Programming Stable | |
|---|---|
| Channel | U.S Households |
| * According to the Fox Entertainment Group fiscal 2003 annual report. Fox Entertainment Group (82% owned by News Corp.) owns 35 television stations in nine of the top 10 DMAs, reaching a total of 44.2% of the television households in the U.S. Fox Broadcasting has 196 affilate stations and reaches 98% of U.S. television households. In Filmed Entertainment, News Corp. owns the 20th Century Fox movie studio and Fox Television Studios. News Corp. also owns 175 newspapers worldwide — one in the U.S. (the New York Post) — and owns international book publisher HarperCollins. Source: Discovery Networks January Universe Estimates |
|
| Fox News Channel | 85.02 million |
| FX | 83.02 million |
| Fox Sports Net* | 75.7 million |
| Speed Channel | 60.33 million |
| National Geographic Channel | 46.9 million |
| Fox Movie Channel* | 19 million |
| Fuel* | 4.7 million |
| Fox Sports Digital* | 2.8 million |
Murdoch: DirecTV Won’t Attack Cable
11/25/2003Murdoch Aim: U.S. News
04/11/2004
