Rupert in the sky with diamonds

If he seizes America's satellite TV market,


Eric Boehlert
May 21, 2001 11:30PM (UTC)

If Rupert Murdoch were a superstitious man, he would surely suspect by now that his efforts to become a dominant player in North America's direct-broadcast satellite business were jinxed. After several aborted attempts at cracking the satellite TV market, stretching over an 18-year period, the 70-year-old media magnate finally seems close to finalizing a complicated deal with Hughes Electronics to merge its DirecTV with Murdoch's Sky Global empire to create a $70 billion public company. If those protracted negotiations do pay off (they already collapsed once in February), DirecTV would become the jewel in Murdoch's ever-growing satellite television crown. With a flag in every developed continent, Murdoch's broadcast satellite empire would have the global reach his competitors could only dream about.

Convinced it's the answer to his cable competitors (most notably AOL Time Warner), as well as the foundation for the coming interactive television revolution, Murdoch has staked his News Corp.'s future to satellite TV. That's why the DirecTV deal, already nearly a year in the making, stands "as one of the most important of Murdoch's career," says Jimmy Schaeffler, television subscription analyst for the Carmel Group.

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But bids for world domination have a way of going awry. And just as Murdoch stands ready to exult, "Mine, all mine!" along comes Sen. John McCain, R-Ariz., who recently announced that if Murdoch and Hughes come to terms, he would like to examine the merger to make sure it doesn't consolidate too much media power in the hands of one man.

Murdoch's $30 billion media kingdom girdles the globe and includes vast chunks of American media, including the Fox network; 23 TV stations; the cable networks Fox News Channel, Fox Sports Net and FX; the film studio 20th Century Fox; the New York Post; and book publisher HarperCollins. The DirecTV deal would cement Murdoch's position as the most powerful media mogul on the planet. Not bad for someone who entered the business nearly half a century ago when he inherited two Australian newspapers from his father.

But critics are concerned that the DirecTV deal would give Murdoch dictatorial powers over the country's news and information flow. Broadcast satellite has been cable TV's fiercest -- some would say its only real -- competitor. Would that still be the case if its largest player, DirecTV, were owned by a company with vast cable holdings, such as News Corp.?

And as a brash conservative ideologue, Murdoch has never been timid about using his media properties, particularly his newspapers and TV networks, to help his political friends and hurt his foes. Fox News may trumpet its sense of balance, but this is the network that hired a cousin of George W. Bush's to track the votes state by state on Election Night, including Florida, which he called for Bush. (This helpful relative also found time to keep the Republican candidate up to speed on the latest electoral developments.) Murdoch also has a long record of kowtowing to China's dictatorship, including yanking the BBC's World Service Television from the China beam of a News Corp. satellite. Murdoch later conceded to the New Yorker, "The BBC was driving [the Chinese regime] nuts. It wasn't worth it."

Then there's the trashy tabloid tone to much of Murdoch's TV programming. Would Murdoch's domination of the broadcast satellite market further debase American television?

But media mergers are not approved or rejected on the merits of the company's content. And until recently, the DirecTV deal, which analysts now expect to be completed within a matter of weeks, seemed to be in no danger. Speaking to reporters on a May 9 conference call, News Corp. president Peter Chernin said he saw no regulatory hurdles ahead.

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That was McCain's cue. The next day the influential Republican chairman of the Senate Commerce Committee announced that if and when the satellite merger was finalized, he would likely hold hearings to explore any anti-competitive implications. Murdoch's acquisition, declared McCain, could result in "a consolidation of power the likes of which this country has not seen since William Randolph Hearst."

McCain's unexpected comment must have given Murdoch that old sinking feeling in his stomach. "Needless to say, luck has not been with him," says Schaeffler. "It's a concern any time the government sticks its nose in your business. It brings a lot of attention on your service and it means extra time and money on lobbyists and lawyers trying to get you results."

Murdoch immediately downplayed the Hearst comparison by pointing to the size of his media competitors. "Look at AOL Time Warner. We're a fraction of the size of that, and indeed look at CBS/Viacom," he told CNBC during an interview. Of course neither of those behemoths was built by one man, and neither is controlled by one man, the way Murdoch assembled and today governs News Corp.

There was something surprising about McCain's remarks in this age of massive media consolidation and cross-ownership. In the current climate, it's newsworthy when a high-profile politician even raises doubts about a multibillion marriage. "It's a pretty sad commentary," notes Gene Kimmelman, co-director of the Consumers Union in Washington, which has argued that these sorts of consolidations often don't aid the public.

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For the multifaceted McCain, his emerging role as Murdoch's regulatory nemesis seems a curious one, not to mention perhaps largely symbolic, since the Department of Justice and the Federal Communications Commission would have final say over any DirecTV deal. (Last year Senate Commerce Committee members passed a nonbinding resolution opposing the merger between United Airlines and US Airways; the deal was nonetheless approved.)

By most accounts McCain and Murdoch have a cordial working relationship. After all, Murdoch's Weekly Standard magazine was among McCain's most vocal supporters during the senator's 2000 presidential run. Murdoch's News Corp. has been a generous financial supporter of McCain's campaigns. And when McCain made his recent Hearst comparison, he quickly added, "Mr. Murdoch is a man I admire greatly. I have the greatest respect for him."

Indeed, in his ongoing campaign against the marketing of violent Hollywood films to teens, McCain rarely mentions Murdoch's name, despite the fact that his studio, 20th Century Fox, is one of the industry's biggest players. And McCain is currently working with broadcasters to loosen restrictions that prevent any TV network from reaching more than 35 percent of the U.S. audience -- a cap that is also being challenged by News Corp., which wants the FCC to raise that limit to 50 percent.

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In fact, in 1999 Mother Jones magazine reported that the high-level staffer on McCain's Commerce Committee who drafted the original proposal to ease that 35 percent cap was actually in business with a News Corp. lobbyist.

On the flip side, Charlie Ergen, CEO of the smaller satellite service EchoStar, and DirecTV's only real American competitor, has been a longtime McCain supporter. The Arizona senator helped Ergen and EchoStar lead the fight on Capitol Hill to gain access to local affiliates. For years satellite companies could not offer viewers their local NBC or ABC affiliate, a restriction that kept some viewers from switching from cable to satellite. Thanks to the Satellite Home Viewer Act, those local stations are now included on satellite menus.

Letters McCain wrote on behalf of EchoStar to federal regulators to help it gain access to local channels sparked controversy during the presidential primary, when critics suggested the senator used heavy-handed tactics on behalf of his contributors.

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Murdoch's proposed merger with DirecTV could cause real problems for EchoStar, says Kimmelman at Consumers Union. "News Corp. could try to undercut EchoStar by not selling them the Fox network or sell them Fox regional sports channel for distribution." (Because of the extraordinary cost of entry, analysts doubt a third satellite player would ever launch in the U.S.)

Senate Commerce Committee spokesperson Pia Pialorsi denies that Ergen's support for McCain prompted the senator's comments. "He's simply expressing concern about a major merger."

If nothing else, the pending congressional showdown illustrates just how powerful direct-broadcast satellite television has become. Originally designed in America to service customers in regions where cable television did not reach, satellite TV today, by offering more channels and clearer digital pictures, is quietly eating cable TV's lunch.

In less than 10 years DirecTV and EchoStar have grabbed 21 million subscribers away from cable TV, which currently has 69 million customers. In fact, DirecTV trails only cable giants AOL Time Warner and AT&T when it comes to providing home viewers with channel-surfing pastures. Unlike cable, though, satellite TV's business is growing at a clip of 20 percent each year. Analysts suggest Murdoch could double DirecTV's 10 million subscriptions in just five years by heavily marketing the service over his Fox news, sports and entertainment TV outlets.

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Satellite TV's allure comes from the endless stream of programming it provides -- everything to be found on the local networks and cable combined in addition to various packages offering up dozens of movie and sports offerings. And for consumers fed up with escalating cable fees, satellite TV -- or at least its most basic packages -- offers substantial savings.

From Murdoch's perspective, DirecTV would fit nicely with News Corp.'s BSkyB in Britain, Star TV in Asia, Sky in Latin America and PerfecTV in Japan. In all, there would be more than 70 million consumers in every corner of the world, paying subscription revenues to -- and buying entertainment, news and services from -- Rupert Murdoch.

Perhaps that's why Viacom president Mel Karmazin recently told a telecommunications conference audience that he was "not looking forward to the morning when I wake up and discover that the deal has happened. I hope it gets derailed."

That steady stream of satellite revenue would help Murdoch offset the up-and-down cycles of his other entertainment assets. For instance, last quarter News Corp.'s pretax profits fell 63 percent, thanks in part to its spectacular animated film flop "Monkeybone," which cost $70 million to make but brought in just $5 million at the box office.

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But can Murdoch finally get his hands on an American satellite TV company? He's come close before. Murdoch was one of the original four DirecTV founders when it launched in 1990. Soon pressed for cash and teetering on bankruptcy, Murdoch's News Corp. pulled out of the deal. (Ironically, it was mounting losses from Murdoch's BSkyB satellite business that precipitated News Corp.'s near meltdown in the early '90s.)

Later, in 1997, Murdoch moved to join forces with EchoStar, only to back out at the last minute. (EchoStar's Ergen sued; Murdoch countersued.) According to Schaeffler, cable operators pressured Murdoch to drop the deal, suggesting they might not carry his News Corp.'s programming on their cable systems.

"He has regrets," says Schaeffler about Murdoch's aborted EchoStar deal. "There's a passion for satellite. It's a success that's eluded him here."

Now Murdoch is trying to shepherd the complicated DirecTV alliance, which involves owner Hughes Electronics' parent company General Motors; Microsoft, which would invest $3 billion and oversee the software side of interactive TV; and Liberty Media, which would invest $500 million. Murdoch thought he had a handshake deal with Hughes in February, but terms of the deal leaked out and when Hughes stockholders protested the small premium they would have received, the deal was scuttled.

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Negotiations are reportedly back on track just as McCain is raising his red flag.

"When you own a media empire that large, the notion of expanding it extensively should raise competitive concerns, shouldn't be anything but a bumpy road," says Kimmelman, who suggests that with the possibility of hearings, a new wild card has been introduced into Murdoch's DirecTV saga. "Whenever the chairman of a committee steps out front, there's a chance other people will come out of the woodwork. You start with one afternoon of hearings and see where it goes. I think the more people who look at the facts, the more who will see a significant problem with it."

"When politicians start poking around multibillion business transactions," says Kimmelman, "you never know what'll happen."

No doubt that's just what Murdoch wanted to avoid.

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Eric Boehlert

Eric Boehlert, a former senior writer for Salon, is the author of "Lapdogs: How the Press Rolled Over for Bush."

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