Murdoch's Problem with Charlie Ergen

Once again, the EchoStar CEO is trying to foil his fellow mogul's bid for DirecTV. Does he want it for himself, or is there another motive?

By Ronald Grover

Charlie Ergen is at it again. On Aug. 5, the audacious chief executive of satellite TV company EchoStar Communications made a $30 billion bid for competitor DirecTV, which Rupert Murdoch thought he had in the bag. For the last year or so, the media moguls have been in a bidding war over the country's No. 1 satellite service, owned by Hughes Electronics. Everyone -- probably including Ergen himself -- knows he has little chance of winning. So why does he keep on trying?

Granted, Ergen would probably love to own DirecTV. Combined with his Colorado-based company, the two services would have north of 16 million subscribers, more than either AT&T or AOL Time Warner. But I think what really keeps him in the game is that it serves his purposes to keep everyone involved in this deal running in circles for a little while longer.

Why? You see, for the last year, while DirecTV's management was distracted by its negotiations with Murdoch, its marketing efforts have come apart at the seams. That has allowed Ergen to pick up market share left and right, as much the result of his own aggressive marketing as DirecTV's ineptitude.

So far this year, Ergen's service has added 810,000 new subscribers. If he keeps going at this rate, EchoStar by the end of the year will be beaming signals to 7.1 million U.S. homes, or 39% of the overall market, according to satellite experts at the Carmel Group. DirecTV, which is expected to have around 10.7 million subscribers, has seen its market share fall to 61%, from 70% only 18 months ago.


  While one should never underestimate a wily guy like Charlie Ergen, his bid to buy DirecTV looks like a major-league long shot. So far, he hasn't offered up any cash, even though General Motors says it needs $6 billion to make the deal work (Hughes is a wholly owned subsidiary of GM). And combining the country's No. 1 and No. 2 satellite services would have to set off antitrust alarm bells, even in George Bush's Justice Dept. Ergen dismisses any notion he's simply trying to slow the process, and says he would put up cash if GM wants it.

Still, his protests sound a mite hollow to me. "Look, I wouldn't put on a suit if I wasn't serious about this deal," says Ergen, who is known for his khaki-and-shirtsleeve attire. He insists this is a great deal for Hughes shareholders, who would own the majority of the new company he proposes.

If the trajectory of his own company's stock is any indication, he's right: EchoStar's stock has taken off like a Hughes rocket over the last five years, increasing some 800%. But what makes me cynical is Ergen's history of trying to gum up deals. In 1998, Ergen for months held up the sale of Primestar, at the time industry's third-largest satellite company, recalls Stephen Keating.

Keating, author of Cutthroat, a book about Ergen, John Malone, and other media heavyweights, says Ergen delayed the deal by buying Primestar bonds and using that position to try to make his own bid. DirecTV eventually bought Primestar for $1.8 billion, but not before the distraction and disruption allowed Ergen's EchoStar to pick up several satellite customers Primestar might have lured.


  Ergen's marketing plan has always been fairly simple: Offer a free satellite dish, charge a small installation fee, and require subscribers to sign on for a year at prices ranging from $21.99 a month for 50 channels to $69.99 a month for the works -- all the HBO, Showtime, and Star Encore movie channels a subscriber can handle. Hughes' DirecTV, saddled with more expensive equipment costs and stodgier management, offered various pricing models. Each was more expensive than what Charlie was offering.

To its credit, Hughes in recent months has scrambled to put more emphasis on marketing, while reducing prices and eliminating the need for customers to buy a satellite and receiver. And it does have a strong lure in its exclusive $179 package featuring all of the season's NFL pro football games played each Sunday.

Still, it would be a giant leap of faith to believe Hughes' upgraded marketing will ever put it on equal footing with EchoStar in the race for new subscribers. Even if Murdoch does ultimately win control of DirecTV, it would likely take months before he could get formal regulatory approval, move his own team in, and revamp the marketing apparatus to do battle with Ergen & Co.

So everything, it seems, plays directly into Ergen's strategy of making a big fuss, throwing some interesting new deal into the mix, and watching Hughes continue to struggle. It's actually brilliant.


  Meanwhile, folks inside the News Corp. camp are apoplectic. They thought they were nearing completion of their deal to merge DirecTV with News Corp.'s other far-flung satellite holdings, including its very successful BSkyB service in Britain. Murdoch hopes to use a similar model over here: go heavy on dirt-cheap programming, popular sporting events, and some nifty interactive shopping.

That, combined with bargain-basement subscription prices, enabled Murdoch to get a giant chunk of the TV market over there. In the U.S., it would probably allow him to take a huge bite of market share from Ergen, as well as incumbent cable companies like AOL Time Warner.

So keeping Murdoch off the playing field is very important to Ergen right now. That's why his bid was timed for two days before GM's board was scheduled to meet and discuss News Corp.'s latest proposal for DirecTV. GM immediately said it was taking Ergen's bid seriously. There's even a shareholder lawsuit in Delaware demanding GM stage a public auction, so investors can decide between the EchoStar stock Ergen is offering and stock in a new company that Murdoch would create for the satellite holdings.

There is something familiar about all this. Last year, Ergen suggested a merger with DirecTV. Earlier this year, he put a formal offer on the table. Each time, Murdoch had been close to his own deal with the GM board. Hughes investor Larry Haverty, whose State Street Research fund owns 10 million shares, says it reminds him of Groundhog Day. In that flick, the same day plays over and over again for star Bill Murray. Charlie Ergen seems to be laughing the hardest.

Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BW Online Edited by Patricia O'Connell

Edited by Patricia O'Connell

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