Commentary: Who Wins in the Smackdown over DirecTV?

Whether it's Ergen or Murdoch, the couch potato with the remote really wins

By Ronald Grover

It would be hard to find two more fierce media rivals than Charles W. "Charlie" Ergen and Rupert Murdoch. Ergen, the satellite-dish salesman turned satellite mogul, once gave away free dishes to the entire town of Boulder, Colo., to steal cable customers for his EchoStar Communications Corp. (DISH ) Murdoch isn't stingy, either. The News Corp. (NWS ) chairman gave away tons of free dishes--and took $2 billion in losses--to launch British Sky Broadcasting Group PLC (BSY ) satellite service.

Now, the two are battling over General Motors Corp.'s DirecTV (GM ), the leading U.S. satellite company, with nearly 10 million subscribers and an estimated $5.6 billion in 2001 sales. So far, Murdoch is the odds-on favorite. Ergen still needs backers for a $5 billion bid to buy out GM's 30% stake, while Murdoch has already secured his financing and has been talking to GM for months. It's likely a bidding war will follow.

Whoever wins, the deal will give federal regulators pause: Ergen, because he'd control the only satellite service in America, and Murdoch, because he would be adding to an already mighty media armada that includes a global satellite network and the Fox TV network and studio. Would the public be well served by either guy getting his hands on the nation's third-largest TV subscription service, after cable companies AT&T (T ) and AOL Time Warner Inc. (AOL )?

You bet. In fact, if you want more TV at lower prices, Ergen's your guy. With DirecTV, he could save customers millions by shutting down overlapping uplink centers--the units that send transmissions. Meanwhile, by combining the EchoStar and DirecTV satellites, he would be able to offer more programming, including local channels, in double the 40 regions he now serves. History tells us that people moved from free TV to cable and now to satellite because they get more channels at an affordable price. Ergen understands that better than most: Only after his subscriber base grew 48%, to 5.7 million, last year did he up the price for his most popular service--yet his prices still beat cable's.

How long Ergen can undercut cable is unclear. Even before a potential DirecTV deal, his company had $5 billion in debt. And in its most recent quarter it lost $167 million. A merger with DirecTV will cut some marketing costs, but cable is already stepping up marketing of digital channels and data to compete with satellite. That's why Ergen needs investors, such as his rumored alliance with BellSouth Corp. and Deutche Telekom. But that tie-up will come at a cost: Ergen will no doubt be pushed to offer high-speed data over satellite, currently a tough technological trick that will eat into his earnings.

Murdoch's advantage--which consumers might benefit from, at least in the short term--is a firm grip on programs and other services. He already controls huge amounts of programming, from sports to movies. Spreading the costs of that programming over more subscribers in satellite services throughout the world would let him keep rates down for subscribers in the U.S. He can also drive down the costs of set-top boxes in the U.S. by buying in bulk. He would also be able to bring in programming to his satellite customers that wouldn't be available to cable. That's what he did in England--at first. But in recent years, now that most British households get sports and movies from Murdoch, he has hiked rates 10% annually, says ABN Amro Holding analyst Michael Hilton. "Once he's got you, he's like a drug dealer," says Hilton.

That's why U.S. regulators ought to put conditions on any deal it approves, be it with Murdoch or Ergen. Take the 30 million rural TV owners who can't get cable TV. With only one satellite company to serve them if Ergen wins, regulators should ensure they get the same rates and services other satellite subscribers get. If Murdoch wins, he should be required to offer competing cable operators the same terms he'll charge his U.S. satellite subscribers for Fox Sports, Fox News, and other cable channels.

Even then, cable operators won't be happy with a more powerful satellite operator in their midst. But that's the point. If they want to survive, they'll have to lower rates or offer more channels. Then, the true winners will emerge--the folks sitting at home with the remote control.

Grover covers the media industry. from Los Angeles.

    Before it's here, it's on the Bloomberg Terminal.