In the intensifying tug of war between content providers and distributors, Rupert Murdoch’s News Corp. is the winner that takes all as a result of the company’s finally snagging a deal to control domestic satellite leader, DirecTV.
News Corp.’s acquisition of an effective 34 percent stake in General Motors’ Hughes Electronics and its DirecTV unit for nearly $6.6 billion in cash and securities will give the media giant a pivotal position in virtually every major content and carriage negotiation involving satellite, cable and broadcast platforms once it assumes control of DirecTV by early 2004.
While Mr. Murdoch seeks to satisfy Washington regulators by assuring there will be free and equal access to Fox product by competitive distributors and of all content competitors on DirecTV, the shrewd News Corp. chairman and CEO leaves no doubt about at whom he is chiefly taking aim with the unprecedented deal.
“Our efforts to reinvigorate the multichannel industry will help make satellite TV a viable competitor to cable,” Mr. Murdoch told investors following a General Motors board meeting April 9 at which the definitive agreement was approved. “More programming options, greater efficiencies, richer content, better customer service and compelling new technology will give satellite television its best chance to break cable’s still prominent hold on viewers.”
“We have every intention of being a fair player,” Mr. Murdoch said.
The merger will especially reposition News Corp. as a competitive counterpoint to Comcast Corp., which, in becoming the dominant U.S. cable operator, has begun to aggressively pursue reduced content costs. It began just weeks after it tripled in size when it acquired AT&T Broadband late last year, by leveling an across-the-board 10 percent reduction in cable network license fees and negotiating other lower or more value-oriented cost cuts based on its newfound scale. While Comcast is using its 22 million subscribers to increase its negotiating power with programmers, Fox will be relying on DirecTV’s 11 million subscriber base to ensure its programs get on the air at prices and terms that could yield record profits.
DirecTV is second only to Comcast in the number of multichannel subscription homes it reaches domestically.
“Having an ownership stake in a satellite platform with 11 million subscribers would give Fox leverage vs. cable operators in terms of renegotiating affiliate fee deals, and just as important, launching new cable network channels,” Merrill Lynch analyst Jessica Reif Cohen points out.
By being able to better control program costs and clearances, News Corp. takes command of the single-largest cost component for cable and satellite providers. Program costs generally represent as much as 40 percent of total video revenues for satellite operators and as much as 30 percent for their cable counterparts, growing 11 percent to 13 percent annually, according to Morgan Stanley analyst Richard Bilotti.
The real value in News Corp.’s owning and controlling a ubiquitous global satellite platform is its ability to produce and acquire content for less because of its scale and lack of competition in many places.
The DirecTV acquisition will give News Corp. the power to sell global programming and advertising while ensuring space for its own product. It will close the loop on a global launch pad for first-run and off-network syndication, which is expected to generate between $1.2 billion and $1.8 billion in earnings before interest, taxes, depreciation and amortization over the next six years. News Corp, can drive at least 40 percent incremental additional value out of its cable and broadcast channels by owning DirecTV, analysts estimate.
strategically poweful move
By virtue of already owning the largest and most powerful over-the-air broadcast TV group, a major Hollywood studio and syndication production unit, some of the most popular and fast-growing cable channels and now the dominant domestic satellite platform, News Corp. and moreover its Fox Entertainment Group, where DirecTV will be folded into its television holdings, become one of the biggest convergence plays in media.
Essentially, Fox will never be without a formidable distribution platform for its content, which it will always be able to negotiate for what it considers a fair price. That is no minor matter, considering the growing number of program licensing and carriage disputes that are hiking tensions between cable gatekeepers and major Hollywood or sports entities.
In fact, Mr. Bilotti observes that such vertical integration “is the most likely answer to the problem of how to improve the cost-effectiveness of scripted series,” by selectively multiplexing programs in or near their week of original telecast across many of the broadcast or cable platforms a media company controls.
But with Time Warner Cable’s being the obvious exception, News Corp. owns the depth of popular television and theatrical film content that most other cable operators, including Comcast, can only dream about. Chase Carey, a longtime New Corp. lieutenant who will serve as CEO of the Fox-controlled DirecTV, indicated Fox would be seeking to embrace many of the emerging interactive applications, such as personal video recorder and digital video recorder technology and high-definition television technology, to advance digital services and revenues.
“I think these are going to be really important and positive and parts of DirecTV’s business and its opportunity to create a unique consumer experience. I think we just have to be intelligent about when the market is mature enough to launch it in the right way,” Mr. Carey said on the same investor call.
News Corp. also is expected to aggressively price, tier and bundle DirecTV services, reflecting a strategy it has used to make its dominant BSkyB satellite service profitable in the United Kingdom.
Liberty Media Group, which owns a 19 percent stake in News Group and will bring at least $500 million of funding to the deal by buying News Corp. preferred securities, also will likely seek to have some of its prime content holdings reconfigured for DirecTV.
The long-awaited DirecTV deal may, in fact, turn out to be the most strategically powerful move ever made in media, given the diversified content and distribution base Mr. Murdoch can leverage to the hilt.
He also can strive to achieve the industry-high profit margins and cost cuts it has with other of its operations. DirecTV earnings is projected to grow 45 percent in 2003. But there was speculation even before the deal’s announcement last week that cost-conscience News Corp. eventually can cut between one-third and one-half of DirecTV’s costs without hurting its businesses due to overhead, operational and content synergies.
There also is the potential shuttering of DirecTV’s Latin America or broadband operations, both of which lose money, and a potential tweaking of Hughes Network Systems could realize more than $400 million in savings. News Corp. said it also will hold on to Hughes’ PanAmSat business for now, which generates healthy cash flow.
In the recent years that News Corp. has been deleveraging its balance sheet and bulking up on media assets it has been able to grow its overall annual free cash flow to more than $1.2 billion.
News Corp. executives declined to elaborate on the level of cost-savings and synergies the company will target the first full year it operates DirecTV in 2005 but said they expect the deal to swing from being moderately dilutive to slightly accretive over the next 18 months, reflecting huge cost cuts.