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Ops Have Direct Views

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Many speculative things have been said about Rupert Murdoch's bid to take control of DirecTV Inc., but it's no exaggeration to say that the $6.6 billion deal has split the cable industry.

At least since 1996, cable executives have been more interested in removing the regulations on their industry than seeing new rules applied to current or would-be competitors.

But that era came to a close in April, when Murdoch's News Corp. announced the deal to acquire 34% of Hughes Electronics Corp., DirecTV's corporate parent, and become the second largest pay-TV provider in the U.S. with more than 11 million subscribers.

Big cable companies such as Comcast Corp. and Time Warner Cable have decided not to publicly challenge Murdoch's deal at the Federal Communications Commission.

But midsized and small cable companies, representing about one-third of all cable subscribers, are taking a hard line.

They want the merger blocked unless regulators prevent News Corp. from using combined control of DirecTV, 35 local TV stations, the Fox broadcast network and various cable networks to squeeze more money from cable companies that need to obtain key programming from their most formidable competitor.

Last week, cable opponents of the News-Hughes deal reaffirmed their problems with it in a second and final round of comments at the FCC.

Access worries

Filing jointly were Cox Communications Inc., Insight Communications Co. and the Washington Post Co.'s Cable One Inc., together representing about 10 million subscribers.

Cablevision Systems Corp., with 2.9 million subscribers, filed separately, as did the American Cable Association, which represents 8 million subscribers served by the country's smallest operators.

Among other things, the cable companies maintained that Murdoch would threaten to withhold access to his local TV stations — the broadcast home of such popular fare as NFL football, American Idol
and The Simpsons
— unless cable companies agreed to pay rich sums for existing News Corp. cable programming and agreed to carry new cable networks it might have in development.

Small cable operators believe that Murdoch would even use control of Gemstar-TV Guide International Inc.'s electronic program guide (EPG) as another weapon to drive his programming prices higher.

Cable operators that predict being gouged insist that they would ultimately have to surrender to Murdoch because all of News Corp.'s broadcast and cable programming would be available on DirecTV — a fact that would likely be heavily marketed in cable markets where News Corp. and operators were at loggerheads.

Cablevision told the FCC that the agency could mitigate the impact of the merger with one simple condition: Force News Corp. give up retransmission consent and elect only must-carry for its TV stations.

"Requiring a waiver of retransmission-consent rights is self-executing, easy to administer, would require no cumbersome regulatory oversight, and would allow for easy detection of violations," Cablevision said in its comments.

Murdoch testified on Capitol Hill last month that there was no way he would agree to renounce his retransmission-consent rights, because it would put him at a competitive disadvantage with NBC, CBS and ABC.

A News Corp. source last week repeated that the company would not go along with cable's demands on retransmission consent.

"This is the argument that they want it for free. This is crazy," the News Corp source said.

Andrew Jay Schwartzman, president of the Media Access Project, a public interest law firm that is urging the FCC to block Murdoch's deal, said he wasn't surprised that cable operators were nervous about who DirecTV's new owner would be.

"They understand that Murdoch has the ability and the motivation to give them a hard time," Schwartzman said. "The easy thing to say is: It takes one to know one. They regard Murdoch as a worthy practitioner of the monopolist game."

Lawyers for News Corp. last week filed a lengthy rebuttal with the FCC, in which they challenged the economic basis of the claims made by merger opponents and argued that none of the anticompetitive scenarios they outlined would result in profitable undertakings by News Corp.

Failure to reach carriage agreements with cable companies and EchoStar Communications Corp., the No. 2 direct-broadcast satellite carrier with more than 8 million subscribers, ran the risk of closing off the company to 87% of the pay-TV subscriber base.

A strategy that resulted in exclusive carriage of News Corp. programming on DirecTV, which has just 13% of the pay-TV market, would be "a suicidal path for a programmer dependent on advertising and per-subscriber fees," News Corp. added.

News Corp. also pointed out that its 34% interest in DirecTV was too small to justify a strategy that effectively led to exclusive carriage of its content on DirecTV. On the day the deal was announced, News Corp. added, it volunteered to comply with FCC program-access rules, which would prohibit DirecTV from carrying News-affiliated programming on an exclusive basis.

Regarding the use of its TV stations as a weapon against cable operators, News Corp. said inconclusive negotiations with cable companies that led to even temporary loss of cable carriage "could result in a cascade of negative effects."

Retransmission-consent clashes, for example, could cause the loss of cable carriage of News Corp.'s cable networks "because carriage for those networks is often the consideration received by Fox O&Os in exchange for retransmission consent."

Good faith

News Corp. also denied it would have leverage over small cable operators in retransmission consent talks "because if News Corp. were to lose carriage of Fox network programming on even a relatively small number of systems, it would risk being perceived by advertisers — its only source of revenue — as a second-class outlet compared to ABC, CBS, and NBC …" and would see a drop in ad revenue.

Lastly, News Corp. said federal law and FCC rules require broadcasters to negotiate with cable companies in "good faith," a requirement that sunsets on Jan. 1, 2006.

A News Corp. source last week said it was unlikely the company would sit down with Cablevision, Cox, and the others to settle their differences.

"I don't see us dealing with them. These are our main competitors and they'd like nothing else than to cripple us," the source said.

A source affiliated with one of the opposing cable companies said it was possible the FCC would adopt some of cable's proposed merger conditions, but would not go so far as to block it the way the agency did the proposed merger between EchoStar and Hughes last year.

"I think [FCC member Kevin] Martin and [FCC member Kathleen] Abernathy are concerned about this," the MSO source said, referring to two Republicans in the FCC's majority. "Are they going to block the merger? No."

Jeff Chester, executive director of the Center for Digital Democracy, a public interest group opposing the News-Hughes merger, predicted the cable companies would be able to extract concessions from Murdoch.

"[The cable companies] are clearly concerned, and they are going to force some kind of negotiation. One way or other, Murdoch is going to have to come to terms with them," Chester said. "I don't think they would be playing unless they thought they could get something."

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