How Rupert Plans To Counterpunch Cable

Murdoch's DirecTV may team with rival EchoStar to provide Net and phone service

Rupert Murdoch's fleet of satellites seem as if they're losing altitude. Profits were up at DirecTV Group Inc., the satellite operator of which Murdoch's News Corp. is the largest shareholder with a 34% stake (DTV ). But the growth in the number of new subscribers -- a measure of its future prospects -- slowed by a third last year.

That hurts, especially after battling for years and spending $6.8 billion to finally land his prize. The problem is that just as Murdoch took command, the satellite industry's soaring growth rate stalled as cable operators started winning back customers with all-inclusive monthly subscriptions that offer TV, broadband, and Internet phone service.

Now the 74-year-old Murdoch is gearing up to fight back. Hoping to team with his longtime archrival Charles W. Ergen, CEO of EchoStar Communications Corp. (DISH ), Murdoch is starting to put the pieces in place for a new $1 billion wireless data and voice network. The idea is to offer the same bundle of services that cable companies and, increasingly, phone companies have been using to lure away customers. Says Murdoch: "Cable has it, and we think it would be very powerful for us to have it as well."

Although DirecTV CEO Chase Carey says the company is exploring several options, sources say Murdoch and Co. are close to finalizing a deal to create their own broadband network using the latest Wi-Max wireless technology. That may mean cutting a deal with a company such as Clearwire Inc. or Sprint Nextel Corp. (S ) to get the wireless spectrum he needs to provide the service. Then he would have to lease cell towers to beam the spectrum over 10-mile-wide swaths to customers' newly modified satellite dishes. Once the signal enters the house, a wireless router, designed with the help of Intel Corp. (INTC ), would feed it to computers and phones. The box could also be used to beam TV programs to PCs, laptops, and portable devices for remote viewing.

As currently envisioned, the plan involves DirecTV and EchoStar creating a joint company, possibly acquiring key technology providers. So far the two satellite outfits are testing the process with New York-based WiNetworks Inc., an Intel partner whose patented technology is being tried out in Germany to create a Wi-Max residential Internet service. Motient Corp., a Lincolnshire (Ill.) business that handles the wireless data of UPS drivers and has holdings in companies that link satellites and land-based towers, is also a likely part of the venture, says UBS Investment Research (UBS ) analyst Aryeh B. Bourkoff.

Murdoch must throw his counterpunch fast, before the cable companies siphon off even more of his satellite customers. He's already late to the broadband party. By 2008 telcos and cable will provide high-speed access to nearly 71% of Americans, according to Bourkoff. And, increasingly, satellite is looking like an expensive alternative. Cable giant Comcast Corp. (CMSA ), for instance, says it won back 350,000 subscribers last year from satellite, thanks in part to its triple play for $99 a month to new subscribers. True, a similar package of EchoStar satellite service, voice, and data bundled by AT&T (T ) goes for about the same price. But that arrangement won't last forever as telcos begin offering their own TV programming via their phone wires. Says Comcast President Stephen B. Burke: "The competitive dynamics with satellite shifts quite dramatically with the triple play."

Little wonder that Murdoch and Ergen want to take control of their own futures. Neither is afraid to slash prices to win subscribers, and they may have to. "It's not like they have an option any longer," says Jimmy Schaeffler, president of digital consultant Carmel Group. "This isn't a game about crisp pictures any longer." No one knows that better than Murdoch

By Ronald Grover, with Cliff Edwards in San Mateo, Calif.

— With assistance by Cliff Edwards

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