Where Do Media's Big Dogs Go from Here?
It was a telephone call between titans. On Oct. 27, Rupert Murdoch, at home in New York's SoHo district, rang up cable-programming magnate John C. Malone at his suburban Denver ranch. Minutes earlier, Murdoch had pulled out of the bidding to buy satellite-TV operator DirecTV from General Motors Corp. (GM ) His conversation with Malone was much friendlier. "They were two guys who had just lost a big one," says a source close to both men. "The next thing out of Malone's mouth was, `Where do we go from here?"'
Where indeed? The deal by Charlie Ergen's EchoStar Communications Inc. (DISH ) to buy DirecTV for $24.6 billion has significantly reshuffled the ambitions of Murdoch's News Corp. (NWS ) and Malone's Liberty Media Corp. (LMC.A ), which had joined Murdoch's bid for the TV service. But it may generate aftershocks well beyond them, elsewhere in Media Land.
NIGHTMARE. Cable giants such as AOL Time Warner Inc. (AOL ) and content providers such as Walt Disney Co. (DIS ) are likely to reexamine whether they have the size to compete in the fast-consolidating media landscape. The battle over AT&T's (T ) cable unit may also heat up. Other deals will likely follow. "Having one player [a combined DirecTV/EchoStar] out there with 16 million subscribers tends to make everyone look at their hand again," says Peter Kreisky, a media consultant with Mercer Management Consulting Inc.
What's more, Ergen has proven to be a competitor's worst nightmare, willing to undercut cable rates, for example, to gain market share. Just weeks before the GM deal was struck, Ergen had mixed it up with cable operator Charter Communications Corp. (CHTR ), which charged EchoStar with deceptive advertising over its $9-a-month TV package. Ergen denied the charge. With EchoStar and DirecTV under one roof, Ergen has said he could cut more than $500 million in overhead, offer more local signals, and continue to charge lower subscription fees.
Another reverberation of the DirecTV deal is that new attention is turning to AT&T's 14-million-subscriber cable unit, the largest block of subscribers still on the market. Although AT&T has hinted that it may take down the "For Sale" sign, some industry sources believe that's a ploy to wrangle a higher price for its long-struggling subsidiary. Comcast Corp. (CMCSA ) is contemplating increasing its $40 million bid for the unit, say Wall Street sources. More recently, Cox Communications Inc. (COX ), the nation's No. 5 cable operator, has begun sounding out potential partners to make a counteroffer. Neither Comcast nor Cox would comment. AOL Time Warner, which had all but taken itself out of the running, is again pondering buying some or all of it, says a source close to the company. Rumor mills have been buzzing that Malone, who sold the cable assets to the telephone company just two years ago, may regroup and join with another company to get them back.
COSMIC IRONY. Right now, Ergen has his work cut out for him. The day after announcing the deal, he was already cozying up to legislators and antitrust regulators who might yet unravel his plan to merge the No. 1 and No. 2 satellite companies. But a far bigger problem may be shareholders of DirecTV parent Hughes Electronics Corp. (GMH ) Its stock has fallen nearly 14% since the deal was announced, which may yet force Ergen to sweeten his offer. To complete the financing, Ergen says he would be willing to look for strategic partners.
Therein lies the cosmic irony. The guys with the hot money right now are Malone and Murdoch. Murdoch has flirted with Ergen before, but the attempted merger between News Corp.'s satellite unit and EchoStar ended in a $5 billion lawsuit brought by Ergen. Is a new accord bringing Murdoch and Malone into Ergen's DirecTV deal only a telephone call away?
By Ronald Grover in Los Angeles, with Tom Lowry and Steve Rosenbush in New York