Hughes Bets On Another Kind Of BirdEric Schine
When C. Michael Armstrong took over as chief executive officer of Hughes Aircraft Co. in early 1992, the company was in turmoil. Profits at the Los Angeles defense contractor, which General Motors Corp. bought in 1985, had been falling since 1989. Worse, Pentagon spending, which accounted for 70% of Hughes's revenues last year, was shrinking by 12% a year.
Now, one year after leaving a top job at IBM to take charge of the $8 billion company, Armstrong has embarked on an ambitious turnaround strategy. Says Armstrong, 54: "We are going to pursue diversification where we can hit home runs." And to show that Hughes can indeed be a long-ball hitter, Armstrong is pushing into businesses that will dramatically alter the company's image as a supplier of military hardware such as missiles, satellites, and radar.
The unlikely centerpiece to Armstrong's plan: transforming Hughes into a major player in the entertainment industry. Using Hughes's expertise in satellite communications, Armstrong wants to provide movies, sports, and other television programming by satellite to both cable subscribers and some of the 12 million U.S. households out of reach of cable TV. Armstrong predicts revenues in excess of $1 billion by 1999.
Armstrong's entertainment strategy is risky. Hughes tried and failed in a similar venture before. A consortium that included Hughes, NBC, and Rupert Murdoch's News Corp. collapsed in 1991 over marketing disagreements.
Still, Armstrong seems to thrive on challenges. As head of IBM World Trade, he presided over a hugely successful revamping of IBM's overseas operations in the late 1980s. He was in line as a possible successor to John F. Akers before leaving to join Hughes, and he's still rumored to be on the IBM board's short list to replace Akers. Armstrong says he has no interest in returning to IBM.
Whether or not the entertainment gambit pays off, defense is still Hughes's core business. Armstrong has moved quickly to sort out the mess. Plant closings and job cuts will trim annual costs 30% by yearend. Armstrong's purchase of General Dynamics Corp.'s missile business last August for $450 million should help prop up sales. Still, analyst Cai von Rumohr of Cowen & Co. says that revenues from defense will rise less than 2% in 1993, to $5.5 billion.
That's why Armstrong is looking for new businesses that will give Hughes room to grow. One promising venture is a push to sell cellular-phone systems to developing regions that can't afford the expensive infrastructure of conventional phone networks. But Armstrong's plans for a direct-broadcast television system are far more ambitious.
The service will beam everything from cartoons to popular movies from a pair of satellites directly to miniature home receivers--18-inch satellite dishes. The entire project, which will blanket the North American continent with 150 channels, will cost $600 million. The launch date: March, 1994.
EXTRA COSTS. Under Armstrong's plan, most programming would be available to subscribers for an average monthly fee of $25, similar to cable TV. Customers will have to shell out $500 to purchase a home receiver, or pay as much as $10 a month to lease one. Specialized services, such as regional sporting events, will cost extra. Both Paramount and the Disney Channel recently signed up to provide programming. Hughes promises more studio deals during 1993. And it may even order up its own custom-made programming.
Finding subscribers won't be easy, however. Many rural households already have big dishes to receive existing satellite programming. And with many cable systems planning to offer as many as 500 channels in the future, households may not see the benefits of yet another source of programming.
Then there's GM. So far, the auto giant supports Armstrong's strategy. It's even hopeful that Hughes may finally live up to its promise mf bringing high-tech electronics to GM's autos. To help, GM has given Armstrong control over its Delco Electronics unit. Even so, as the defense business sags, Armstrong has good reason to assume that GM won't mind if entertainment becomes the unlikely booster engine that lifts Hughes Aircraft skyward.
ARMSTRONG'S CURE DEFENSE Closed 92 facilities, slashed 12,000 jobs to reduce costs by 30%. Acquired General Dynamics' missile business. TELECOMMUNICATIONS Launched worldwide push to sell cellular-phone systems to developing regions, while manufacturing and selling its own cellular phones at home. ENTERTAINMENT Using expertise in satellite technology, hopes to launch a direct-broadcast system in the U.S. in early 1994. DATA: BUSINESS WEEK