For Rupert Murdoch, gaining control of DirecTV was supposed to be the hardest part. When he finally won a 34% stake in the satellite operator in late 2003, the man considered by many to be the most powerful media executive in the world had finally closed the loop on his satellite empire. Now he would be able to offer cut-rate prices, provide cool services, and leverage his vast collection of movies, TV shows, and news to lure new subscribers. Murdoch put in charge 51-year-old Chase Carey, a former college rugby player with a handlebar mustache, to execute his plans to dominate programming and distribution. In Carey's two years as CEO of DirecTV Group Inc. (), the gruff-talking exec has delivered, siphoning off 2 million customers from rival cable operators, bringing DirecTV's total to 15 million.
What Murdoch didn't account for, however, was that in that same period the media world would be reordered by technology. Today his bid so quickly to make DirecTV No. 1 isn't looking like a cakewalk after all. For one thing, DirecTV has had problems sustaining the growth that made it a powerhouse rival in the first place. In the past six months it has added just over half as many subscribers as it did in 2004. And it pays a steep $626, on average, in promotions alone to win a new subscriber. That comes to about 75% of what that customer will pay in fees the first year. Moreover, DirecTV's churn rate -- the number of folks who cancel their subscriptions -- has risen to what Carey calls an "unacceptably high" level.
Meanwhile, competition from cable has stiffened, and phone companies are joining the fray, too. After spending nearly $100 billion in the past decade to lay high-speed fiber-optic lines, cable outfits are rolling out services such as Web access, video-on-demand (VOD), and Internet phone calling, helping to keep subscribers from jumping ship. Time Warner Inc. () and Cablevision Systems Corp. () say they're adding new customers by bundling these services and even offering discounts -- undercutting satellite's long-held price advantage.
The problem at the heart of DIRECTV's model is that it can't yet offer the two-way technologies that are so hot now -- from Voice over Internet Protocol to VOD. Satellite's one-way feed can send shows to TVs, but there's no path back to the satellite, making its pay-per-view offerings much less popular since they start at scheduled times. Plus, cable is a more attractive platform for ads because it can target spots to specific neighborhoods. "Last year satellite had all the advantages. Now cable has attacked them on just about every one," says Craig E. Moffett, an analyst at Sanford C. Bernstein & Co.
Looming but still a bit distant are threats from phone giants Verizon Communications Inc. () and SBC Communications Inc. (), which are gearing up to offer programming services. With its first trial under way in Keller, Tex., Verizon is offering a full menu of TV channels, part of a bundle with its own high-speed Internet services.
Murdoch, who doesn't take being No. 2 lightly, isn't blinking. DirecTV blames much of its slowdown in subscriber growth on an effort to weed out poor-paying customers. Even though it earned $215 million in the first three quarters of this year and its revenues increased 20% on higher rates, to $9.6 billion, DirecTV faces major expenses in the next year to keep pace with cable. It is already spending more than $1 billion to launch satellites to offer local channels in high definition. And advertising expenses for this year could top $200 million, a 30% jump over last year, estimates Merrill Lynch & Co. (). Numbers like those have turned investors sour: DirecTV's stock is down 18% in the past year, to about $14.
Meanwhile, cable is just warming up. On Nov. 2, three of the largest operators signed a deal with Sprint Nextel Corp. () to offer wireless phone service, enabling them to package yet another goodie into their promotions. Others are rushing to offer VOD, joining giant Comcast Corp. (), which offers a library of more than 4,000 TV show and movies, most of them for free. Despite losing customers in its most recent quarter, Comcast claims VOD and other services have helped it lure back so far this year 300,000 former customers who had defected to satellite. One market for other cable operators to emulate is Southern California. Cox Cable has signed up a third of its customers in San Diego and Orange County for TV, Internet, and phone service, leaving satellite's penetration in the area at just 14% of households, vs. a national average of 20%.
These new threats are reenergizing Rupert's crew. Using a key weapon -- its exclusive deal to offer every Sunday National Football League game -- it's marketing a screen with eight games playing simultaneously. To battle cable further, DirecTV will soon offer its own, slimmed-down version of VOD with 100 or so recent movies loaded ahead of time into a customer's set-top box. DirecTV has also announced that it will make some of NBC's hit shows, such as Law & Order, available for a fee on VOD. Still, "to me VOD is a lot of hype," says Carey. "The cable guys offer a lot of second-tier bulk. We're going to offer the ones that [customers] want."
DirecTV is looking for new partners to match cable's Internet and cell-phone services. That would be taking a page from Murdoch's playbook in Europe. News Corp.'s () 37%-controlled British Sky Broadcasting Group () satellite service recently paid $363 million to buy Internet service provider Easynet Group and said it will offer wireless phone service via Vodafone Group ().
Of course, DirecTV is still a huge jewel for Murdoch. Its mass audience, second only to Comcast's 22 million subscribers, is crucial to the mogul's ambitions to expand his Fox TV brand. He wants to use DirecTV to create a new cable outlet a year, such as the recent Fox Reality channel launched on the service, and as leverage to press cable operators to pay more for his existing channels.
But Carey knows that technology can be a game changer. "I don't think anyone is standing still," he says of the competitive landscape between cable and satellite. "They've moved forward, and so have we. We're not done."
By Ronald Grover