Will Rupe out-Fox the cablers?

Murdoch must spend big on DirecTV to best competish

Talk about stirring the pot. Rupert Murdoch’s latest deal has cablers, content rivals and public advocates running scared, even as some financial analysts slam the merger as too risky and too late.

Investors socked shares of Fox Entertainment, News Corp. and DirecTV parent Hughes the day after the $6.6 billion combo was announced on fears that as DirecTV dallied over the past 18 months, cable upgraded itself into America’s premier pay-TV venue.

The deal had been waiting on the shelf in plain view for three years – when Murdoch first started talks with GM to buy Hughes.

Most industry insiders foresee healthy competition with cable, given the success Murdoch has had with British satcaster BSkyB. They take the mogul at his word when he promises to attract a million subscribers a year to DirecTV, which already has more than 11 million subs.

If anything, News Corp.’s deal to buy Hughes, announced April 9, has pumped new life into the battle for U.S. TV viewers.

“With telephony, video-on-demand and modems, the offering in the cable universe is rich enough now that people might not migrate,” said media investor Thomas Russo.

Cablers certainly hope that’s the case. He noted that Comcast has already slashed churn — or customers who drop the service — at the AT&T cable systems it acquired last fall.

Yet many cable operators may be years away from offering a full lineup of new services to all their subscribers. Heavyweights Charter and Adelphia, for instance, are stumbling under financial woes, which leaves millions of potential customers who could be targeted to switch.

Thousands of Cablevision subscribers migrated to satellite over the past year after the company stopped airing Yankees games due to a tiff with the team owner, the YES Network.

Cable banks heavily on its ability to bundle services for consumers and send out one big bill each month.

That’s something Murdoch says he doesn’t buy. In fact, he and Chase Carey, the former Fox topper and News Corp. co-chief operating officer, say they’re not married to the idea of providing DirecTV customers with high-speed Internet access if it’s available to them more economically from some other source.

Carey, who ankled News Corp. when the first DirecTV deal crumbled, will return as CEO of Hughes, which will be a publicly-traded company folded into Fox Entertainment.

“Some people like bundling, but a lot of people prefer to pay their bills one by one,” Murdoch said. “I don’t like it. A bundle comes in at over $100 a month and when people feel they have to cut back, they are more likely to cut on high-end video service, not telephony.”

A big satcaster in the hands of a prolific programmer like Fox could be a powerful tool indeed.

Murdoch said he will likely use the platform to launch channels – a route that’s proved successful for others in the past.

One investor noted that TV and newspaper group E.W. Scripps launched its Fine Living network on DirecTV first – and the exposure to all those eyeballs gave the company’s cable programming biz instant credibility.

In addition, News Corp. has satellites all over the world, further driving synergy.

Murdoch and Carey see lots of low-hanging fruit in terms of lower costs and higher profits by boosting margins and reducing churn.

“There are a number of initiatives right out of the box, across the board — cost areas that should dramatically improve the market,” Carey said, like enhanced programming, lower overhead, better marketing and attention to customer service. He said DirecTV’s churn rate is ten points higher than BSkyB’s –and that each point is worth about $70 million.

He sees some “dramatic, immediate improvements” in Latin America where DirecTV is currently in Chapter 11.

“By the time the deal is concluded, the sub count at DirecTV will be comfortably in excess of 12 million and you can certainly hold me to that,” Murdoch said. He said he expects the deal to close by the end of 2003.

“Given his experience, he stands a better chance than most of making it work,” said analyst Dennis McAlpine of McAlpine & Associates.

With the room for improvement News Corp. execs outlined at DirecTV, it’s hard to believe their professions of faith in Hughes’ current management team.

“We recognize that team and are highly supportive of them going forward,” Carey said.

Hughes CEO Jack Shaw is the only one stepping aside, to make way for Carey. Hughes’ senior exec VP Eddy Hartenstein will become vice-chairman of Hughes and sit on the new board of directors, along with Murdoch, News Corp.’s chief operating officer Peter Chernin, chief financial officer David Devoe, Carey and six independent directors – five of whom Murdoch said are longtime friends of News Corp.

“He’s got to say that to keep the Hughes people there – although the reality is, where else are they going to go – to Charlie Ergen?” said one Wall Streeter referring to the chairman-CEO of DirecTV’s smaller and only rival, EchoStar.

“If Rupert can say overhead’s too high, churn’s not good, this sucks and that sucks, it’s certainly not an indication that I’d like to go to him and ask for a raise,” he added.

Murdoch insisted he has no plans to bring BSkyB topper Tony Ball Stateside to run Hughes, even though he acknowledges that the British satcaster will provide the template for polishing and running DirecTV.

Some Wall Streeters speculated that Murdoch’s older son Lachlan Murdoch might eventually assume a role at Hughes as he rotates through News Corp.’s various businesses on the path to succession.

For now, those who trust Murdoch aren’t too worried since “he’s the one who’ll be calling the shots in the end,” said one fund manager.

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