WASHINGTON — Rupert Murdoch’s deal to sell $1.1 billion worth of satcasting assets he jointly owns with MCI to Primestar Partners — a consortium of the five largest U.S. cable companies — was dealt a possibly fatal blow Tuesday when the Justice Department announced that it had asked a federal court to block the sale.
In recent weeks Primestar had claimed that it was negotiating a possible settlement with the Justice Dept., but antitrust lawyers shocked the satcasting company Tuesday with the announcement that the deal is unacceptable in any form. “This is a full stop challenge in federal court,” said Joel Klein, the Justice Dept.’s top antitrust attorney.
Primestar, which is jointly owned by TCI subsidiary TCI Satellite Entertainment, Time Warner, Comcast, Cox and MediaOne, is the least likely candidate to take over the DBS license, said Klein, especially in an era when regulators are looking to the satellite industry to offer competition to the cable industry — an industry which has been hiking subscriber fees at four times the rate of inflation.
The five cable partners involved in Primestar control 60% of all cable households and are the “one group that has no interest in eroding the cable monopoly,” said Klein.
Klein claims that Primestar’s cable owners were hoping to discourage competition in their industry by gaining control of the satellite assets controlled by a News Corp./MCI joint venture known as AskyB. If the Justice Dept. succeeds in its efforts to derail the Primestar deal, it will force Murdoch to look for yet another partner. After paying $682.5 million for the satellite license at a government auction, MCI lost interest in the DBS business after it became a takeover target itself.
Murdoch first turned to EchoStar as a potential partner, but that DBS partnership fell apart in acrimony. EchoStar, which now has approximately 1.5 million DBS subscribers, claims Murdoch exited the deal after cable companies threatened not to carry News Corp. cable programming if he proceeded. Immediately after the EchoStar deal fell apart, Murdoch announced that he had reached a deal with Primestar.
But during his Tuesday press conference, Klein said he would prefer a deal between AskyB and an existing DBS service. “It would be better for consumers,” said Klein.
Tuesday announcement could not have come at a worse time for Primestar, which was expecting Wall Street to set a $400 million price tag on a bond offering later in the afternoon. Primestar prexy Dan O’Brien said the bond offering would be delayed until Thursday or Friday. O’Brien also vowed to fight the Justice Dept. in court, although it was not clear Tuesday if News Corp. has the same interest in a drawn out legal struggle. O’Brien vowed to fight the Justice Department in court even before his legal counsel had time to read the Justice Department’s complaint.
O’Brien said he was “surprised” and “shocked” by the announcement, especially since he was not informed until hours before Klein announced that he would be holding a press conference on the matter. When rumors began spreading around Washington Monday night that an announcement was imminent, lawyers for Primestar downplayed the possibility insisting they would been informed ahead of time.
News Corp. officials were unavailable for comment by press time. A spokeswoman for MCI said the next logical step is to take the deal to court. MCI and News Corp. are also likely to be looking for other buyers in the meantime, several sources predicted.
Primestar says it needs the AskyB satellite license because it would allow the medium-powered satellite company to enter the high-powered DBS business. Currently, Primestar offers its subscribers a medium-sized dish which is not popular in urban or suburban areas. In contrast, EchoStar, DirecTV and USSB have signed up a total of 5 million subscribers with their pizza-sized reception dishes that can fit on a windowsill. Many of those subscribers live in urban and suburban areas where a larger satellite dish is less acceptable.
While O’Brien said his company would continue managing its medium-powered business, he insisted that the future of the DBS business lies with the high-powered signals that allow subscribers to use the smaller dishes.
Now that the Justice Department has decided to block the deal in court, many expect the Federal Communications Commission to weigh in. The FCC has looked at the same deal and has raised similar questions about the wisdom of allowing an entity owned by cable companies to control the last remaining of three high-powered DBS licenses. In a statement released Tuesday afternoon, FCC chairman William Kennard said, “As I have said from my first day as chairman, this transaction raises significant competition issues. The Justice Department’s action today confirms that view.”
One of Primestar’s outside attorneys predicted Tuesday that the issues are far from resolved. “There is not going to be anything fast about this,” said Joe Sims of Jones Day, Reavis and Pogue.