Murdoch's Satellite Power Play

If the News Corp. mogul lands DirecTV, he can rewrite the rules that govern the deals between program suppliers and TV service providers

By Ronald Grover

That thud you in heard throughout media land on Apr. 9 was the sound of Rupert Murdoch's long-anticipated $6.6 billion bid to buy control of satellite-TV service DirecTV. After three years of speculation and a few months of serious negotiating, Murdoch's News Corp. (NWS ) reached agreement with General Motors (GM ) to buy DirecTV's parent, Hughes Electronics. The prize here: DirecTV's 11 million satellite-TV subscribers. If the deal closes later this year, as Murdoch and GM have projected, the Australian mogul would own 34% of Hughes and fold it into News Corp.'s 80.6%-controlled Fox Entertainment Group, home to his Fox film studio and TV network.

Disney's (DIS ) Michael Eisner, AOL Time Warner's (AOL ) Richard Parsons, and media lords everywhere have to be wondering today when the boom will land on them. Murdoch would become the world's largest media powerhouse, with the U.S. satellite service being the biggest part of an orbiting armada worldwide that already delivers his Fox news, sports, and entertainment shows in Britain, Asia, and parts of South America. And it gives him tremendous clout to determine which content gets beamed into millions of homes via his sky pipes and perhaps even more important, what new services will get a leg up in finding enough audiences to become profitable.


  In short, Mighty Murdoch now looks even mightier with this deal. He knows it'll likely to draw attention from federal regulators. That's why as part of the deal, News Corp. announced that it agreed to "abide by [Federal Communications Commission] program access regulations" and to both continue to make its own programs available to competing cable operators as well as to not "discriminate against unaffiliated programming services with respect to the price, terms, or conditions of carriage on the DirecTV platform." Simply put, if you're HBO or the Disney Channel, you'll still have a place on DirecTV.

However, the media world's fast-moving consolidation has already started to bruise some program suppliers, and Murdoch won't be shy in exercising his clout. Programmers learned a similar lesson when Comcast (CMCSA ) closed its deal to buy AT&T's (T ) cable operation in November -- and became the country's largest cable-TV provider, with some 21 million subscribers. On the same day its $54 billion deal closed, Comcast filed suit in a Pennsylvania federal court to void a six-year-old deal that AT&T had with pay-TV channel Starz Encore. The lawsuit came even as Comcast and Starz, which is a unit of Liberty Media (L ), were discussing a settlement, Starz said in court papers.

The impact was clear: If Comcast won its case, it could cancel the AT&T deal in favor of a cheaper, separate deal Comcast had with Starz, and according to Liberty Media, save about $80 million a year.


  Comcast isn't commenting on the suit. It has said, however, that it wants to reduce programming costs by $250 million a year -- costs that it says rise by 25% a year and will hit $5 billion annually in 2006. As a result, Comcast is in the middle of tense negotiations with many cable channels, including HBO, Showtime, Lifetime, and TNT. And given its size, Comcast can at the very least force a slowdown in the price hikes by putting the squeeze on channels that want a slot on its system.

Murdoch could well follow a similar strategy once he gets his hands on DirecTV. In making the deal announcement, long-time lieutenant Chase Carey, who will run Hughes for Murdoch, said News Corp. has already figured out several ways to help DirecTV continue to lower costs -- including, he says, programming costs.

Murdoch was quick to say he had no intention to cut out the programmers. "If we don't follow through, you'll get such a scream from Hollywood that you'll hear all about it," he says. But that doesn't mean he won't play hardball. Nothing in the rulebook says he has to give programmers like HBO the 5% increase it's seeking this year.


  Murdoch's real power will derive from offering new channels and TV services, the lifeblood of any media company. He recalls that it took him six or seven years to get 90% of the country to take the Fox News Channel. Even today, despite higher ratings, that channel gets only about 22 cents per subscriber from cable and satellite operators, about one-third less than CNN gets.

With DirecTV, when Murdoch wants to roll out an on-demand movie service, a new interactive sports channel, or a shopping operation, he'll be able to introduce it to more than 10% of the U.S. And if Murdoch is successful in adding to DirecTV's 11 million subscribers -- as his history at BSkyB in Britain suggests he will -- then it'll become that much easier for him to launch those new services. As he told reporters, with DirecTV on his side, "we expect this sort of thing to happen much faster."

So if you're Disney, AOL, or Viacom (VIA ), you have to ask if Murdoch will give you a break when it comes time to launching your own new channels. Companies such as Disney, which own TV stations in local markets, can strike deals to get their new channels carried in return for continued carriage of those TV stations. Such dealmaking is allowed under FCC rules, but large media companies have to cherry-pick the new offerings on which they'll use that chit.

Having DirecTV under his operation puts Murdoch clearly in the driver's seat. He needs the channels a lot less than they need him. And the rest of the media world can only watch as he establishes the rules for the new game he's playing.

Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online

Edited by Patricia O'Connell

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