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Man With A Plan

Patience and persistence may be just about to pay off for Rupert Murdoch. Unless a dark horse emerges to bid against News Corp. for control of Hughes Electronics' DirecTV, Murdoch may finally win the U.S. satellite assets he has long coveted.

Late last week, the board of General Motors, which owns Hughes, was said to be mulling over the latest bid from News Corp.

Although no decision had been made at press time, several things are clear. Washington insiders expect News Corp. to encounter few hurdles as it seeks regulatory approval. For GM, it will ultimately come down to price. After several years of trying to divest its satellite assets, GM is under pressure to decide Hughes's fate. If it is going to sell Hughes, it needs to sell it quickly. The Hughes tracking stock has lost more than two-thirds of its value in just over two years, closing Friday at $11.80.

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"They have to resolve the uncertainty," said Matthew Harrigan, an analyst at Janco Partners.

Just over two years ago, with shares of Hughes trading around $40, Murdoch proposed to combine his Sky Global with DirecTV. Now observers are once again taking stock of the competitive battle in the making between cable and a News Corp.-controlled DirecTV. Unlike Murdoch's previous bids to gain entry into the U.S. satellite market, cable operators today are better positioned to ward off threats from satellite.

"The question will be whether News Corp. will try to grow DTV's margins and generate sufficient return on investment or will [it] drive market share by potentially using price discounts," said Aryeh Bourkoff, a cable and satellite analyst at UBS Warburg. If Murdoch goes for market share, that "could severely impact the cable industry's focus on generating free cash flow."

Regardless of which tack Murdoch chooses, in areas where cable does not have an upgraded plant, "those subs are at risk to what is a very competitive and in some cases a superior offering to cable," Bourkoff said.

In the short and medium term, DirecTV will have a lot to sell. It expects to offer local service in over 100 markets, or 84% of the country, by year-end. DTV's relationship with TiVo allows it to heavily market PVR-enabled boxes. Like cable, it has a nascent HDTV offering, with four channels expected to serve up exclusive sports offerings. In the U.K., Sky Global is on the forefront of ITV offerings - applications whose delivery in the United States could be hastened by the combined company.

"DTV is already pushing PVRs hard," said Janco's Harrigan. "I would expect News Corp. to be very aggressive with PVRs and ITV applications, as they have done with Sky."

However, he noted, over the longer term, "the Holy Grail is still having a viable data product."

That's where Liberty Media may prove helpful. Liberty recently invested $500 million in News Corp., boosting its stake to 19% from 18%. Liberty may be in a position to help Murdoch deploy broadband. Two investments Liberty made in December - upping its stake in Wildblue and buying out its partners in Astrolink - underscore Liberty's belief that satellite broadband can be viable.

Still, MSOs, with a strong bundle of products, will put up some fierce resistance. As Bobby Amirshahi, a spokesman for Cox Communications, said, "We don't see how the proposed integration could offer consumers a better alternative to our real-world bundle of video delivered locally and billed seamlessly with high-speed Internet and local and LD telephone services."

Insight Communications CEO Michael Willner, who says News Corp. would be a formidable competitor, expects there will be efforts to make sure the DBS provider is beholden to the same vertical integration rules as other media companies.

The Federal Communications Commission, under the public interest standard, may ask for guarantees such as equal distribution access to News Corp.'s networks, and certainty that Murdoch will not offer special deals to his own programming networks that would injure EchoStar or cable operators.

With Alicia Mundy and K.C. Neel.

THE NEXT QUESTION:

*Can Murdoch gain DBS market share without alienating MSOs, the largest distributors of his programming?

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Man With A Plan

Cable World, April 7, 2003

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