THE DISH ON DIRECTV

BY MAVIS SCANLON, K. C. NEEL AND JON LAFAYETTE

As News Corp. lobbyists mounted a stealth campaign to derail the proposed merger of EchoStar Communications and DirecTV last year, they found the American Cable Association to be an important ally. ACA's small- and rural-market operators had reason to fear a monolithic satellite company. So Matt Polka, the group's president, was more than happy to lend his support.

But he also warned that if regulators nixed the deal, giving News Corp. the chance to make another run at buying the largest satellite service in the United States, the ACA would be equally forceful in its opposition.

Last Wednesday, Polka got the chance to make good on his threat when General Motors and Hughes Electronics agreed to News Corp. chairman Rupert Murdoch's $6.6 billion bid for DirecTV.

Seeing the satellite service in the hands of one of the largest content companies in the world won't sit well with ACA members, and so the group quickly urged regulators to carefully examine the deal. ?We are concerned,? Polka says, ?because of the potential for misuse of that vertical integration.?

Small cable operators may have the most to fear from an 11.2 million-subscriber DirecTV under the aggressive management of News Corp. But they're not alone. EchoStar, which has raced ahead of DirecTV in subscriber gains, has plenty to lose. Large MSOs, despite their upgraded networks, will have to compete harder to retain and gain new customers. And programmers ? especially independents without large distribution networks that can be wielded as weapons when negotiating content deals with News Corp. ? could also be in a tough spot.

?There are so many major parts of the puzzle here,? says Jimmy Schaeffler, CEO of the Carmel Group. ?Rupert has more of them now.?

A local satellite presence ?is going to make competition tough,? he adds, referring to both EchoStar's and DirecTV's additions of local channels. ?The broadcasters are going to be challenged, the cable guys are going to be challenged and other satellite companies will be challenged.?

Programming access issues will be a critical factor as regulators review the deal in the months ahead. Washington insiders expect Murdoch will be asked to guarantee equal access to programming as well as to News Corp.'s distribution networks.

Last week Murdoch pledged, ?We will make our content available to all satellite providers as well as cable.?

Still, said a nervous programming executive who spoke on condition of anonymity, ?The status quo is about to get rocked.? Murdoch and News Corp.'s former co-COO Chase Carey, who was named CEO of DirecTV, ?know the rules, but they'll only play by some of them,? this executive added.

DirecTV could, for instance, question why some low-rated channels on basic get sub fees.

All this is still months away. News Corp. and GM said they expected the deal to close by year-end.

Cable industry observers expect Murdoch's influence to be felt almost immediately, however. DirecTV's reach can be extended by cross-promotion with TV Guide; News Corp. owns a large stake in the publication's parent. While DirecTV will be an eventual launch pad for new networks, some early moves Murdoch might make include repackaging channel lineups, rejiggering prices, adding ITV services and offering free equipment, especially DVRs, to lure new customers.

?Rupert says ?I'm not going to have exclusive programming?? on the DirecTV platform, says Schaeffler. ?But that doesn't mean he can't price [his packages] more attractively.?

Owning DirecTV ?works for [Murdoch] in a million different ways,? says a former News Corp. exec. ?If he wants to launch a cable network ? boom ? it happens. I think it's going to be hard to be a programmer not integrated with a big distribution machine, whether it be cable or satellite.?

Programming execs were reluctant to discuss Murdoch's move on the record. One senior network affiliate relations exec says that owning a distribution platform gives Murdoch leverage to get top dollar for existing services.

?When it comes to negotiating with other vertically integrated media companies such as Comcast and AOL Time Warner, deals will get worked out,? this programmer says. ?They take care of your programming and you take care of theirs.? That could put independent programmers in the rough. ?It gets more and more difficult as consolidation continues and leverage gets into the hands of more powerful people.?

Another senior programming exec said that the industry's focus is shifting from whether or not a network will be carried to how much distributors are willing to pay for programming. ?In the past, the best programming has always won. Now we'll see if it's going to be the leverage of the marketplace by more diversified companies.?

Joe Uva, chairman of OMD, says that Murdoch might use DirecTV as part of a global platform for multinational advertisers. ?You can do that today with MTV or CNN,? he says. ?It's an interesting thought.?

Murdoch might try to sell the space cable operators use for local avails to national advertisers if DirecTV's contracts with networks allow it. ?I would tend to think that DirecTV would have a more evenly distributed footprint of subscribers than any single MSO,? Uva says.

Alan Schulman, SVP and creative director at Universal McCann, says the deal could create two opportunities for advertisers: Murdoch has championed interactive television on his BSkyB satellite service in the U.K., and his international array of satellite services offers marketers a global ad buy. ?Some advertisers are very centralized in the way they buy their media globally,? Schulman says. ?In this case, the promise is there will be an opportunity to aggregate all those eyeballs with greater efficiency.?

Because of Sky's experience, DirecTV is ?going to be able to move more agilely and give us some faster ways to get clients involved in ITV,? Schulman adds.

Expansion into ITV should create opportunities for John Malone's Liberty Media, which owns OpenTV, the middleware platform used by BSkyB, DirecTV's Latin American operation and EchoStar. Liberty is also a major investor in WildBlue Communications, which expects to offer two-way, satellite-delivered high-speed Internet access services by next year.

Liberty is News Corp.'s largest investor behind the Murdoch family, with a 19% stake. Malone also backed Murdoch's effort to buy DirecTV by promising to buy $500 million in News Corp. stock.

?There's no indication that Liberty has used its influence to leverage OpenTV on DirecTV,? says Ian Olgeirson, an analyst with Kagan World Media. ?But it would be easy to connect the dots.?

Josh Bernoff, an analyst with Forrester Research, is more blunt. ?In exchange for the $500 million that Liberty Media kicked in to help finance this transaction,? he wrote in an April 10 brief, ?its OpenTV subsidiary will get the first shot at filling DirecTV's interactive needs.?

Bernoff predicts News Corp. will use Wink Communications' enhancements on Fox TV, Fox News and Fox Sports. Meanwhile, OpenTV's PlayJam games will likely run on DirecTV's set-top boxes. DirecTV already has a carriage deal with Wink, which Liberty bought and merged with OpenTV last year.

Things are less clear cut between DirecTV and WildBlue. Although Liberty is a major shareholder, EchoStar holds a small equity interest in WildBlue and has an affiliation deal with the company, according to WildBlue marketing VP Brad Greenwald. He says DirecTV has no deals with WildBlue at this time.

Still, WildBlue might complement Hughes Network Systems' Spaceway product, a broadband application aimed at large businesses, Olgeirson says.

It will be a few years before true two-way satellite broadband service becomes economically feasible, and that's a ?very large advantage? for the cable industry, says Carmel Group's Schaeffler.

Murdoch pledged to expand rather than sell off Hughes Network Systems, which runs Spaceway and Direcway, DirecTV's residential satellite broadband operation. But that operation will have just about 250,000 residential customers this year, according to Arunas Slekys, HNS's VP of corporate marketing, up from about 150,000 in 2002.

?Clearly today our cost structure is still higher than cable or DSL service,? Slekys says, referring to the $500 install cost.

Sloughing off cable's edge in HSD service, Murdoch said last week that ?broadband is not a killer app.? Meanwhile, other programmers and distributors will be waiting to find out which killer offerings he does have in mind.