Can Murdoch Win on the Web?

He may spend $1 billion to push DirecTV into high-speed broadband -- a risky bet on a hotly contested market that just might pay off

Since the late 1990s, satellite TV has created a powerful rival to the cable TV industry. It has provided digital and high-definition signals that are comparable to cable, but at a lower price. Direct-broadcast satellite services, which emerged in the '90s, now have 27 million subscribers in the U.S., according to researcher Yankee Group. Cable has 71 million. But satellite is growing more than 20% annually, vs. cable's 5% rate.

For all its growth, the satellite TV industry faces some huge challenges adjusting to the new era of TV-Internet convergence, where TV and Web access are delivered in the same package. Subscriber growth rates for satellite players such as DirecTV (DTV), which is part owned by News Corp. (NWS), are down this year (see BW, 12/5/05, "Static In Rupert's Satellite Dreams").


  The cable network is a robust two-way medium that allows users to send and receive data at high rates. That has helped cable gain considerable ground in the Net-access and -phone markets. Telecom companies like AT&T (T) and Verizon (VZ) are building fiber networks that will deliver even more bandwidth to the home. All this should make it even easier for cable and telecom outfits to put pressure on satellite.

Not if News Corp. Chairman Rupert Murdoch can help it. He's mulling a plan that would narrow the gap by pushing DirecTV into broadband. And executives have said he's prepared to spend $1 billion to get the project off the ground. The service would let DirecTV sell high-speed Internet access and Web-based phone service alongside satellite TV, putting DirecTV on equal footing with rivals. News Corp. owns 34% of the pay TV service.

In recent days, senior executives told investors that various broadband strategies were being considered, including the new high-speed wireless networking standard known as WiMax. A faster version of the increasingly popular Wi-Fi technology now built into laptops and PDAs, WiMax is poised to make a splash in the market (see BW Online, 10/5/05, "Why WiMax Could Hit the Hotspot"). DirecTV Chief Executive Chase Carey addressed the issue at an investment conference. DirecTV spokesman Robert Mercer confirms the initiative, though he sayhs WiMax is among "several technologies" under review.


  One company executive says the review has been under way for more than a year. "It's a real competitive issue," the exec says. Possible solutions include an updated version of the satellite network that would carry faster data signals in two directions, instead of just one. The current one-way system is great for downloading huge files, but users can send only a trickle of information in the other direction, which makes it impossible to compete with two-way systems like cable and digital subscriber lines (DSL) from the phone companies.

Other terrestrial wireless systems are under consideration, too. The executive wouldn't elaborate, but those might include OFDM, a wireless-networking standard being developed by companies such as Qualcomm (QCOM). A selection appears to be at least several months away.

One analyst agrees that satellite companies need to address the challenge of offering bundles of TV, voice, and data, providing what's known in industry circles as a triple-play bundle. Wireless is the way to go, because wired systems are too expensive and slow to deploy, says Yankee Group analyst Boyd Peterson. "With the triple-play bundle fast becoming an important asset for cable and telcos, [satellite providers] will face a major hurdle competing in this market without a viable data play," he says. "A wireless-broadband strategy gives DirecTV a new card to play."


  Over the longer run, the broadband network could provide a ready-made in-house platform for distributing the entertainment and news that News Corp. produces. Media companies are quickly warming up to the idea that the Web is a legitimate way to distribute TV and other content. News Corp. spent more than $1 billion last year to buy Internet properties, such as social-networking powerhouse MySpace and gaming site IGN (see BW Online, 1/3/06, "MySpace: Design Anarchy That Works" and BW Online, 10/10/05, "Murdoch's Web Gambit").

The Internet side of the business, known as Fox Interactive Media, is in growth mode. The company's Internet unit has held off on more acquisitions in recent months while focusing on integrating its new properties and developing the business model. "We stopped making acquisitions, but we didn't stop looking at companies. And this is a new year," says Ross Levinsohn, the head of FIM. The Internet properties will carry increasing amounts of video, and allowing customers to download Fox entertainment and news directly over the Web will ultimately help News Corp. by boosting distribution, he says.

One media veteran concurs that the wireless strategy makes sense because it's so much cheaper than building a cable or telecom network from scratch. Murdoch says the company may invest up to $1 billion. "That's a minimal investment for a strong add-on service and portends a very solid return," says Leo Hindery Jr., former head of cable giant TCI, which is now part of Comcast (CMCSA).


  Not everyone agrees that wading into the hotly competitive distribution business will pay off. Telecom analyst Susan Kalla of Caris & Co. warns that broadband distribution is a losing game. In Japan, where the deployment of broadband is way ahead of the U.S., consumer prices have sunk to $20 for a blazingly fast 100-megabit connection. Those services aren't profitable, and neither are broadband services in Europe, she says. "What's good for consumers can be terrible for investors."

Risky or no, News Corp. can afford a foray into the broadband business, because it has other sources of revenue. Its film, TV, publishing, and Internet units are among the largest in the world. And if broadband will keep customers tuned into those services, even a big cash outlay may prove worthwhile in the end.

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