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Media Brace for Fallout From News Corp. Hughes Takeover

Dec 22, 2003  •  Post A Comment

Forget visions of a new 800-pound gorilla. Think more along the lines of an 800-pound octopus.
That’s the assessment by one analyst of the impact of News Corp.’s deal to assume control over DirecTV parent Hughes Electronics, which was approved by the Federal Communications Commission in a partisan 3-2 vote, with the agency’s two Democrats, Commissioners Michael Copps and Jonathan Adelstein, dissenting. The $6.6 billion purchase of a controlling 34 percent stake from General Motors is expected to be approved shortly.
While the new ownership is widely expected to bolster DirecTV’s position as the No. 1 direct broadcast satellite operator in the United States, as News Corp. Chairman Rupert Murdoch tries to replicate the success he has had with his British satellite operator BSkyB, and elsewhere, many observers say the repercussions of the merger go far beyond that to impact players in a slew of arenas.
Indeed, News Corp.’s control of DirecTV will create a behemoth that likely will intensify the competition for customers between wired cable and satellite, with small multiple system operators seen as particularly vulnerable. DirecTV would be part of a U.S. programming powerhouse with a new distribution mechanism that could reach 20 million subscribers in the next 10 years, up from the current level of about 12 million.
Also affected could be the future of digital video recording, and in particular DVR manufacturer TiVo, which has a distribution partnership with DirecTV but could find itself left out in the cold if News Corp. decides to rely more on the DVR technology supplied by NDS Group, a News Corp. unit that has its own personal digital video recorder service called XTV.
“In the first six months alone, the change is going to be amazing,” said Jimmy Schaeffler, chairman and CEO of The Carmel Group, a media and telecommunications consulting firm. “[Mr. Murdoch] now has the kinds of assets from the standpoint of content that nobody has.”
As Mr. Schaeffler sees it, the centerpiece of Mr. Murdoch’s strategy-and, by extension, the key to his success-will be the set-top box that comes with the DirecTV service. Through that box, Mr. Murdoch will be able to bring to DirecTV’s subscribers everything from high-definition television and DVR service to interactivity.
Adi Kishore, an analyst at The Yankee Group in Boston, said one need only see what Mr. Murdoch did in Britain with BSkyB to get a sense of what might be in store for DirecTV subscribers. BSkyB owns broadcast rights to Britain’s dominant soccer league and has begun offering interactivity through its service, including gaming and shopping services.
Mr. Kishore expects DirecTV to be a lot more aggressive in its rollout of DVRs. He predicted DirecTV will introduce interactive features that build upon services already provided by the satellite operator. One could offer National Football League content on demand. “Their focus is going to be on the hardware and the software,” Mr. Kishore said.
That could add a new dimension to the ongoing fight between cable operators and satellite companies for customers. DBS operators have made significant inroads in many markets, largely by offering lower rates and all-digital service. In many markets they had an advantage because MSOs were slow to upgrade their systems. However, cable has begun to fight back with the so-called “triple play,” offering customers digital cable, high-speed data and telephone service as a way to deepen the customer relationship and cut down on customer defections, also known as churn.
The general sense is that while a more potent DirecTV might not shake the foundation of thriving MSOs who already have a major presence in their markets, smaller or weaker cable operators could find the ground shifting under their feet. “The muscle of News Corp. makes DirecTV more of a threat,” said Mr. Kishore. “But larger players like Comcast are not going to feel quite the impact that smaller MSOs will.”
That is a point that is not lost on Matthew Polka, president of the American Cable Association, a trade group that represents small and midsize cable operators. Mr. Polka said his members are bracing for News Corp. to use its increased size in ways that put the squeeze on smaller cable operators in areas such as retransmission consent and program access.
However, he thinks his members can fight the battle by emphasizing their ties to the community. “Fox and News Corp. are national, and we can always outlocal and outserve them because our members live and work where we serve,” Mr. Polka said.
A News Corp.-DirecTV combination could also hurt TiVo. Though the San Jose, Calif.-based DVR maker has a relationship with DirecTV and a high level of brand-name recognition, some analysts have suggested DirecTV’s tie to News Corp. could shorten the length of the DirecTV-TiVo partnership, as News Corp. opts to rely on NDS to provide DVR technology.
Here, analysts are split. Though they agree that DirecTV is likely to continue its relationship with TiVo, what shape it will take down the road remains a question. One analyst suggested that XTV, the NDS-based DVR, could serve as the mass-market product, while TiVo serves as a higher-end service. Another analyst said that if DirecTV used more NDS-based DVRs, TiVo’s stock price could drop enough that News Corp. eventually takes over the company. A TiVo spokeswoman didn’t return a call for comment.