Rupert's World

With DirecTV, Murdoch finally has a global satellite empire. Get ready for a fierce new media war

Five stories above the frenzied Twentieth Century Fox studio lot near Los Angeles, Rupert Murdoch eases back in a leather sofa to reflect for a moment. A bank of TV sets flickers nearby. "I am a blessed man these days," says the 72-year-old News Corp. (NWS ) chairman, looking as fit as ever in a French-blue shirt sans tie. After all, Murdoch has beaten prostate cancer -- in remission now for three years. His two sons, Lachlan, 32, and James, 31, hold top positions in the company, and daughter Elisabeth, 35, may soon rejoin. So someone named Murdoch is clearly in the wings to succeed him one day. Right on time for a late breakfast of fruit salad, Murdoch's third wife, model-thin Wendi, 35, arrives with their 2-year-old daughter, Grace, a cherub in a mandarin-collar dress. (A second girl, Chloe, was born to the couple in July.) And Murdoch is just days away from departing for a two-week vacation in his native Australia, where he'll visit his 95-year-old mother, Dame Elisabeth. On this sun-scorched California morning, Murdoch is on top of the world.

Yet Murdoch is feeling blessed by so much more. He just received a phone call from his top Washington lobbyist, Michael Regan, with news that federal regulators were set to announce their approval later that day, Dec. 19, of News Corp.'s $6.8 billion acquisition of a controlling interest in DirecTV. The agency's move would give Murdoch the missing link in News Corp.'s worldwide satellite distribution system, creating the truly global media empire he has dreamed about for years. All this, and his company is more financially sound than ever. Still, Murdoch characteristically downplays his jubilation. "Don't worry. We don't want to take over the world," he says with a wide smile across his creased face. "We just want a piece of it."

Potent Mix

That same smile, the one that warms Wendi and Grace, sends chills halfway around the world, from Hollywood to New York and beyond. Capturing a 34% stake in DirecTV (HS ) and its 12 million subscribers in the U.S. marks a pivotal turn in Murdoch's 50-year rise from Australian newspaperman to one of the world's most powerful executives. He will now oversee a media empire with businesses that generate $30 billion a year and reach into just about every corner of the world. That's bigger than every U.S. media player but Time Warner Inc. (TWX ). The pirate outsider from Down Under, who prints Bibles and at the same time favors bare-chested women in his London tabloids and sexy-and-salty TV shows, has always been formidable as a publisher and TV programmer. But DirecTV is the crown jewel for Murdoch, giving him a unique set of powers. No other media company controls such a potent mix of programming and the means to deliver it to households from Melbourne to Maine. "With the span of assets he's assembled, he scares the heck out of just about everyone," says Leo T. Hindery, veteran cable operator and currently head of Yes Network, a New York sports channel.

Consider Murdoch's domain: His satellites deliver TV programs in five continents, all but dominating Britain, Italy, and wide swaths of Asia and the Middle East. He publishes 175 newspapers, including the New York Post and The Times of London. In the U.S., he owns the Twentieth Century Fox Studio, Fox Network, and 35 TV stations that reach more than 40% of the country. Fox's National Football League broadcasts on Sunday afternoons are still some of the highest-rated sports programs in the world. His cable channels include fast-growing Fox News, which has zoomed past CNN in viewers, the FX general entertainment channel, and 19 regional sports channels that in some markets outdraw ESPN 2 to 1. In all, as many as one in five American homes at any given time will be tuned into a show News Corp. either produced or delivered.

Murdoch's unprecedented reach will ignite a new and decisive phase in the media wars. Today, TV is delivered in three ways to the 108 million homes in the U.S. with sets: cable, satellite, and over-the-air broadcast. Now, Murdoch is girding for a battle that will pit satellite against cable for supremacy as the carrier of choice -- and in the process could shift the balance of power in the industry his way. Traditionally, creators of TV programming battle for dominance against those distributing their shows. DirecTV makes Murdoch a general in both the content and the distribution camps. "This is where Rupert has always wanted to be," says Sir Howard Stringer, CEO of Sony Corp. (SNE ) of America, which sells programming to Murdoch. "He's in an enviable position."

Murdoch coyly says he's buying control of DirecTV to ensure that his own channels don't get stomped by the likes of cable-distribution giants Comcast and Time Warner. But it's the wily Murdoch himself who is set to become the more fearsome gatekeeper, with increased say about what gets into people's living rooms and on what terms. He'll be able to do so in two ways: No longer beholden to other distributors, industry insiders predict, he will drive down the prices of others' entertainment and sports programming. With so many viewers hooked up to DirecTV, the argument goes, no programmer will dare risk getting kicked off his system, so they'll bend. At the same time, he'll have leverage to force his cable and satellite rivals to carry his programs -- at premium prices. Always willing to wager big, Murdoch will also endure temporary losses to gain share. A possible tactic: giving away $300 personal video recorder set-top boxes to lure cable subscribers to DirecTV, a maneuver similar to one he used in Britain in the early 1990s when he handed out digital boxes free to vanquish cable foes there.

Not since newspaper magnate William Randolph Hearst in the first half of the 20th century has one man had such means to shape mass media. Murdoch dismisses this notion, saying: "Sometimes I get too much credit." But there's no denying Murdoch has become the poster boy for all that is bad about Big Media. For one thing, the Oxford-educated Murdoch loves to tweak the cultural Establishment, using his scale to push tawdry programming out to the masses. His tabloids regularly feature scantily clad starlets and sensationalist crime stories, and his TV shows have cornered the low-brow market with their attack dogs and fat fiancés.

What worries his critics far more is that Murdoch is not shy about using his media outlets to pursue agendas, whether they're politically conservative causes or his own business interests. Now his audience will be much greater. Murdoch would deny he's a right-winger, and many conservatives say such rivals as CNN and network news shows are liberal outlets. But there's little doubt that he has made Fox News a soapbox for a collection of shrill, right-of-center commentators like Bill O'Reilly and Sean Hannity. Coverage on Fox and in the New York Post during the Iraq war was widely criticized for being outright jingoistic and for eschewing the usual journalistic distance.

Still, Murdoch is not above reversing his positions to boost business. In his most famous about-face, he stripped the outspoken British Broadcasting Corp. from his Star satellite network in China in 1994 after Chinese complaints, replacing it with Chinese-language films. He also had his HarperCollins book unit publish a biography by Deng Xiaoping's youngest daughter, Deng Rong, in a move, some critics say, to curry favor with Communist leaders.

Slugging It Out

No one hears the coming battle cry more loudly than Brian Roberts, CEO of Comcast Corp. (CMCSA ), the country's No. 1 cable system -- with plenty of market muscle of its own. Right now, cable has an important advantage, offering high-speed, two-way Net access, even phone capability. Satellite is still mostly a one-way service. Murdoch understands that edge all too well. Had he moved into satellite in the U.S. earlier, perhaps "cable wouldn't have made those investments and would have been more vulnerable," concedes Murdoch. Now both systems are scrambling to be big players in hot new consumer technologies like the digital video recorder (DVR), high-definition TV, and a host of gizmos that are making home entertainment the new media frontier. As cable's foremost rival, Murdoch secures himself a seat at the table as everyone from TV-equipment makers to sports leagues to Hollywood's most powerful moguls slugs it out for consumers' loyalties. His new power is also likely to spur further consolidation among cable's smaller players scurrying for shelter from the big guns.

Murdoch's new power isn't absolute, however -- not yet. To get approval for the deal, Murdoch agreed to play fair. The Federal Communications Commission had already banned large cable operators from discriminating against rival programmers, and Murdoch volunteered to follow those rules. That means he can't muscle shows off DirecTV. And he must submit to arbitration if cable operators accuse him of using his most popular channels as bargaining tools, much as he did last year when he yanked Fox Sports off the air in some Time Warner Cable markets in a contract dispute. Similarly, his Fox unit forced RCN Corp. (RCNC ), a small Princeton (N.J.) outfit that competes with cable and phone operators, to take Fox Sports Español in Boston in order to get Fox's The Simpsons and NFL football. The problem? RCN had no Spanish-speaking customers on its Boston system, says John Murawski, director of programming for RCN.

But the restrictions are temporary: They expire in six years, when Murdoch figures he'll have 6 million more subscribers. The rules are "Band-Aids in several places," wrote FCC Commissioner Michael J. Copps in his dissenting opinion, arguing that the DirecTV approval was "putting too much power in one conglomerate's hands." Anyway, Murdoch will probably find ways to gain advantage -- he always has. "Rupert loves those loopholes," says Viacom ex-CEO Frank J. Biondi. "If he and his lawyers can find one, he's going to use it"(table).

Even before Murdoch got the nod, Big Cable was preparing for his juggernaut. "[Rupert] has broadcast, news, sports, movies, cable channels, and now distribution. You'd have to be crazy to not take that seriously," says Comcast's Roberts. "That's going to cause a lot of people to reassess their businesses." The 44-year-old cable boss recently struck an important deal, locking the bevy of must-have Viacom channels, such as MTV and Nickelodeon, into his 21 million-subscriber system for as long as five years. What's more, the deal also gives him Viacom programming for Comcast's growing video-on-demand (VOD) business, a service that could help cable hold on to its customers.

Family Business

In the 14 months since Comcast closed its $54 billion acquisition of AT&T Broadband, Roberts has pursued decidedly Murdochian maneuvers of his own: He has held firm on fees for pricey cable channels, won favorable deals for equipment, and even begun to pressure Hollywood to blow apart its long-standing movie-release formula so he can get movies ahead of video stores and sell them over cable. Murdoch clearly has more programming, but Roberts is already working to bulk up the content side of his empire, partnering with Radio One (ROIAK ) to launch a new channel targeting African Americans and snapping up TechTV to cater to video gamers. And on Dec. 2, he struck a deal with Chicago's major sports teams -- the Bulls, Cubs, White Sox, and Blackhawks -- to create a new sports channel, leaving Murdoch's Fox Sports Chicago, a partnership with Cablevision Systems Corp., without its biggest draws.

It's all hardball for these two men, both of whom are second-generation scions who sit atop family-controlled businesses. Both would rather eat glass than lose. In their off hours, Roberts swats away opponents in national squash tournaments, while Murdoch lets off steam boxing with a personal trainer.

Yet the Aussie-turned-U.S.-citizen has been warming up for this fight with cable for far longer. Look no further than Britain to see how Rupert will be able to use his trifecta of pricing power, programming clout, and indifference to losses to level his competitors. Starting in 1989 with four channels and films from only half the Hollywood studios, Murdoch eventually took a controlling interest in British Sky Broadcasting Group. He proceeded to spend heavily on BSkyB, at one point losing $1 billion to roll out digital boxes, giving viewers more than 400 channels and the ability to shop or gamble over the telly, and even choose camera angles for key sporting events. The Brits ate it up: Today, BSkyB has more than 7 million subscribers, or about 30% of Britain's 25 million TV homes.

It wasn't long before BSkyB's success helped to crush its largest cable competitors, forcing one to liquidate and the other two into financial restructurings. The cable companies didn't help themselves by spending lavishly in the face of the competition, but Murdoch's newspapers also heavily promoted BSkyB, says Adam Singer, former CEO of Telewest cable. "Competing against them is like running an 800-meter race every day and always getting the outside track," he says. What's more, the hefty prices BSkyB charged its cable rivals for sports and movies contributed "in some measure" to the cable operators' woes, as Barclay Knapp, former chairman of NTL Inc., told local newspapers. Knapp didn't reply to phone requests for an interview.

Now, Murdoch will get a chance to repeat that performance in the U.S. Of course, American cable outfits are formidable, but now Murdoch has a strong hand. Suppose Time Warner wants to raise the 78 cents-per-subscriber monthly fee it gets from DirecTV to carry its popular TNT Channel. To squeeze those pennies out of Murdoch, the media giant may have little choice but to cough up more than the 30 cents Time Warner Cable (TWX ) pays News Corp. for its FX Networks. On the news channel front, a big fight is likely to erupt when highly rated Fox News begins to push for a fee comparable to the 38 cents that Time Warner's CNN commands, says CIBC Worldwide analyst Michael Gallant. Murdoch won't comment on that, but he will surely press other programming companies to cut fees. "We've inherited a lot of charges at DirecTV that are outrageous," says Murdoch. "If [programmers] want us to carry their channels, they are going to have to promise they can get an audience."

Churning Out Hits

Hacking away at high costs will only benefit an already robust News Corp. Less than a decade after nearly losing his debt-loaded company to his bankers, Murdoch's empire is among the media world's healthiest outfits. Its stock is up 38% in the past year, to about $36. Also in its most recent year, the company reported net earnings of $1.1 billion, a 70% increase, on revenues of $17.5 billion. That's not including sales from companies in which it has minority stakes, such as BSkyB and DirecTV, bringing total revenues to more than $30 billion. The movie studio is churning out hits like X2: X-Men United and the budget Bend it Like Beckham that are selling well on DVD. TV successes such as The X-Files, The Simpsons, and King of the Hill are pulling in big bucks in syndication, and earnings by News Corp.'s cable channels doubled, to $430 million, last year, boosted by ratings spikes at Fox News and FX. Since the company used cash and stock for DirecTV, its debt remains at about $9 billion.

Such health gives Murdoch flexibility to invest in DirecTV. His plan is to add 1 million subscribers a year, using technology as the lure. That challenge falls to Chase Carey, a former college rugby player and onetime News Corp. co-chief operating officer. Murdoch put Carey in charge of DirecTV when the two companies closed the deal on Dec. 22. The 50-year-old exec aims to improve service and spend upwards of $1 billion to offer local TV in all 210 markets by 2008 -- a big selling point in the drive to lure customers away from cable, which shows local channels in every market. Using excess feeds from NFL games on his Fox TV stations or from reporters at Fox News Channel, DirecTV will soon give viewers the ability to choose their angle at sports events or create their own video newsmagazines.

Murdoch can make such pledges because he intends to buy new DVRs in bulk -- up to 20 million at a pop, says Carey, who figures mass purchases will drive the current $300-per-box price to below $200. Pressed on whether he would actually give away the boxes, Murdoch bristles. "[EchoStar Communications CEO] Charlie Ergen is already giving away some of his boxes. We will be matching him," he says. "We can't have him out there with a financially superior offering." At the moment, DirecTV offers the machines for $99, a price that will likely drop, he concedes.

Another trump card for Murdoch vs. cable: American football. Right now, he shows National Football League games on his Fox Network and inherits DirecTV's popular NFL Sunday Ticket package. By 2005, when the NFL's contracts with cable and broadcast networks come up for renewal, rivals predict Murdoch may just go for the battering ram -- snatching away the Sunday night cable package by outbidding ESPN and putting it on cable rival Fox Sports Network. News Corp. President Peter Chernin has been meeting with NFL Commissioner Paul Tagliabue and the league's top media exec, Steve Bornstein, to see how News Corp. can work more closely with the League.

Meanwhile, Murdoch, strengthened by a solid balance sheet, hopes to unleash a barrage of new programming to give News Corp. an upper hand. He plans to add new channels to DirecTV, aiming to make them must-haves for cable operators as well. One possibility: a history channel stocked with biographies that Fox's studio now makes for the A&E channel. Fox News is considering a new business channel to compete with CNBC. Or how about something more titillating, like an all-Temptation Island Channel? Murdoch is pressing his troops to come up with new, more enticing stuff. "Cable is so slow that it takes them six months to figure out what they want," boasts DirecTV's Carey. "By that time, we'll have a whole lot of new things that will make what they sell to us look pretty tame."

Carey, Chernin, and other deputies have plenty of autonomy, say insiders, but Murdoch is commander-in-chief. He runs his sprawling media empire mostly by phone, doesn't like time-consuming meetings, and hates using the Internet. Fresh from his 6 a.m. workout, he usually hits the phones by 7:30, calling London and the Asian capitals. "I can talk to him four or five times a day, easily," says Chernin, a member of the five-person Office of the Chairman that meets each Monday morning -- often by phone -- after Murdoch has reviewed The Flash, a weekly compilation of the company's performance over the prior seven days. Murdoch's view is from 30,000 feet, say staffers, watching as the pieces click into place. But he dives in when needed. When influential shareholders opposed his plan to elevate son James to run BSkyB, Murdoch hopped on his private 727 jet to wage a charm offensive, ultimately pushing through a unanimous vote to put him in the job.

Longtime Nemesis

As each side draws blood trying to outdo the other with new services, consumers will probably be the big winners. Cable execs, for now, are counting on their systems' clear advantages over satellite and are hustling to roll out new offerings such as video-on-demand, telephony, and high-definition channels. They spent more than $75 billion over the past eight years to upgrade their systems for the two-way technology that still eludes satellite. With Murdoch breathing down their necks, many are scrambling to launch the nascent services quickly so their customers don't defect. On Dec. 8, Time Warner Cable, with 10.8 million subscribers, said it would accelerate its debut of phone service over its lines in partnership with Sprint Corp. (FON ) and MCI.

Murdoch will also be watching out for his longtime nemesis, EchoStar's Ergen, who has 9 million subscribers on his DISH Network. It was Ergen who handed Murdoch a rare defeat three years ago, when Hughes Electronics, DirecTV's parent, accepted his bid over Murdoch's. But Ergen's deal was rejected by regulators, largely because of Murdoch's behind-the-scenes lobbying in Washington. Ergen has not forgotten. For weeks he's been holding weekend meetings with his staff to figure out how to block Murdoch's advance. The ex-professional poker player, who started in the satellite business by selling dishes door-to-door, spends lavishly on promotions and offers rock-bottom prices. "Charlie's the best in the business," Murdoch says. "We just intend to be a little better." Ergen declined to comment for this article.

Even at 72, Murdoch has the rare luxury of planning for the future. Unlike, say, Michael D. Eisner, who is under pressure for his recent lackluster tenure at Walt Disney Co., Murdoch's family-owned Cruden Investments Ltd. owns 30% of News Corp. stock and maintains voting control. And he's preparing his sons, James at BSkyB and Lachlan, who runs the company's newspaper and TV station operations, to carry on. "I intend to be around as long as my brain holds out, and my mother is doing very well at 95," says Murdoch. That's daunting news for cable operators and other media moguls. With his new satellite treasure, Rupert Murdoch may say he just wants a little piece of the world, but everybody knows he is after much more.

By Ronald Grover and Tom Lowry

With Catherine Yang in Washington, Kerry Capell in London, and Manjeet Kripalani in Bombay

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