News Corp-Hughes Deal Draws Fire

Consumer groups and broadcasters took aim at News Corp’s [NYSE: NWS] proposed acquisition of Hughes Electronics [NYSE: GMH] last week by demanding that restrictions be placed on the combined organization to prevent market power abuses.

The proposed merger between media giant News Corp. and Hughes, including its DirecTV direct broadcast satellite (DBS) unit, could result in consumers paying higher prices as well as less diversity in the voices having access to the media marketplace, said Gene Kimmelman, senior director of advocacy and policy at the Consumers Union. Consumers are likely to suffer harm if antitrust officials do not impose substantial conditions on the merger, he told the Senate Judiciary Committee’s subcommittee on antitrust, competition policy and consumer rights last week.

Since passage of the 1996 Telecommunications Act, cable rates have risen over 50 percent, and Federal Communications Commission (FCC) data show that satellite competition is not creating downward price pressure, Kimmelman said.

Despite the promise of more diversity from technologies such as the Internet and satellites, just five media companies control nearly the same prime-time audience share as the Big Three networks did 40 years ago, he added.

The result is that the market for news production and distribution is becoming more concentrated and the combination of News Corp, its affiliates and DirecTV would exacerbate the problem, Kimmelman said.

DirecTV Chairman and CEO Eddy Hartenstein told the subcommittee that that the split-off of DirecTV’s parent company, Hughes Electronics [NYSE: GMH], from General Motors [NYSE: GM] would aid U.S. consumers. News Corp’s purchase of GM’s interest in Hughes would give DirecTV the financial resources to improve its service offerings and to provide enhanced competition to cable TV operators, he explained.

Despite the rapid growth of direct broadcast satellite (DBS) service since 1994, cable remains the dominant provider of multichannel pay TV in the United States, Hartenstein testified. Cable operators serve approximately 69 million subscribers and pass an estimated 97.5 percent of U.S. households, he added.

“Mergers and acquisitions of cable operators, as well as the trading and swapping of systems, have resulted in a significant consolidation and clustering of cable operations,” according to Hartenstein. “Currently, the 10 largest cable operators serve about 85 percent of all U.S. cable subscribers.”

Steve Blum, president of satellite-broadcasting consultancy Tellus Venture Associates, said the prospect of News Corp using DirecTV as a platform to promote its programming is not as dire as the Consumers Union suggests.

“DirecTV is a long way from controlling the U.S. pay television industry, and using it to [exclusively] promote News Corp programming has the potential to do as much harm as good to both DirecTV and News Corp,” Blum said.

The Consumers Union’s “real objection” is that U.S. media ownership is becoming increasingly concentrated. “Piecemeal opposition to individual mergers that have the potential to significantly increase shareholder value and lead to more and better service to the public won’t help its cause,” Blum said.

The proposed merger between News Corp and Hughes also drew complaints from the National Broadcasters Association (NAB). The NAB asked the FCC to impose restrictions that would prevent the combined company from transmitting a national Fox channel feeds to DirecTV subscribers in markets already served by local Fox broadcast affiliates.

Protections for local broadcasters are needed because the merger would create a distribution and content company with “extraordinary power,” the NAB explained in comments filed with the FCC.

“By bypassing local affiliates, News Corp would 1) realize immediate cost savings by reducing or eliminating retransmission consent payments and 2) gain advertising revenue that would otherwise have gone to local stations.”

–Paul Dykewicz

(Bob Marsocci, DirecTV, 310/662-9986; Gene Kimmelman, Consumers Union, 202/462-6262; Steve Blum, Tellus Venture Associates, 831/582-0725)