Bracing for Rupert's Satellite Attack

Cable companies gear up before News Corp. buys DirecTV

To fellow media moguls, Rupert Murdoch is like one of Steven Spielberg's dinosaurs. The ground starts shaking even before he shows up. That's why some of cable television's largest players swung into action in early May, after General Motors Corp. (GM ) acknowledged it was negotiating with Murdoch's News Corp. (NWS ) to sell him GM's controlling stake in its fast-growing DirecTV satellite service. Just days later, Cablevision Systems Corp. (CVC ) dramatically geared up its rollout of digital services and said it will spend $1.7 billion to offer video-on-demand and other digital services to compete with satellite TV. Other cable executives have been out campaigning on behalf of their industry, too, making the case that cable service still outperforms satellite. "Rupert should try to get all the market share he can quickly because we like the hand we've got," says Cox Communications (COX ) chief executive James O. Robins.

Murdoch is still weeks away from striking a deal to merge DirecTV with his own far-flung satellite assets in Britain, Asia, and Latin America. But the U.S. cable industry has reason to worry. Already, small-dish satellite TV has eaten steadily into its market share. Since DirecTV was launched in 1994, it and satellite rival Echostar Communications Corp. (DISH ) have grabbed 15.4 million subscribers. While still small compared to cable's 69 million, satellite is growing at a sizzling 18% annual rate.

Now, the cable industry sees an even greater threat in Murdoch's likely entry into their market. Feared in the media world as a merciless competitor, Murdoch in the past has taken losses to win eyeballs, as he did in 1994 when his Fox network outbid CBS to air National Football League games. This time around, cable operators worry, Murdoch will slash prices for satellite service and import offerings that have already proved successful at his BSkyB (BSY ) service in Great Britain. "Rupert is cable's worst nightmare," says Larry Haverty, a vice-president at State Street Research, which owns 11 million shares of Hughes Electronics Corp. (GMH ), the GM unit that owns DirecTV. "They haven't seen competition like they'll see now."

Murdoch isn't commenting. But the News Corp. chairman has said privately he wants to at least double DirecTV's nearly 10 million subscribers, giving him the mass audience he needs to launch new channels. To cut costs, he's likely to use Fox to advertise DirecTV, and drive down the costs of set-top boxes by ordering mass quantities for all his satellite assets. The cost cuts will allow him to bid for more channels and to offer set-top boxes to consumers for free, as he does with BSkyB. Currently, DirecTV customers buy their boxes.

BALANCING ACT. A smart strategy, except for one thing: If he gets DirecTV and makes such moves, Murdoch would be walking an uneasy line, both competing with cable and supplying it with programming. Cable operators paid News Corp. $1 billion in the past nine months to show his Fox channels, which earned $107 million, a 43% increase. And once he has DirecTV, Murdoch will likely import channels for it that compete with cable, such as one that allows sports fans to choose their own camera angles. That, combined with lower prices, could convince cable to play hardball when Fox programs come up for renewal.

The war that has yet to begin is having another result: Murdoch's ambitions are putting heat on the cable industry to speed efforts to upgrade its own offerings and provide a level of service comparable or better than satellite. The industry has been selling itself as a "bundler" of voice and data to go along with TV. That gives them an advantage over satellite, which needs phone lines to offer anything beyond TV--and an opportunity to fight back on pricing.

To get there, cable is in a mad push to go digital, which will also allow it to offer hundreds of channels, a crisper picture, and interactive programming guides. By late this year, the industry will have 14.6 million digital subscribers, projects Goldman, Sachs & Co. analyst Richard J. Rosenstein. That would still trail the combined number of DirecTV and EchoStar, making some cable guys vulnerable, figures UBS Warburg analyst Thomas W. Eagan. Among the weaker players are AT&T (T ), which inherited several poor systems when it bought Tele Communications Inc., and Cablevision, which has been late to roll out digital boxes. And when Murdoch shows up, that's when the ground will really start shaking.

By Ronald Grover in Los Angeles, with Tom Lowry in New York

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