To The Multimedia Victor Go The Spoils

By Jimmy Schaeffler

There’s another battle brewing in the seven-year-old U.S. satellite TV war between Direct TV and EchoStar Communications [Nasdaq: DISH]. That battle is the threatened U.S. invasion by foreign media power broker Rupert Murdoch and his News Corp [NYSE: NWS] behemoth, which has launched an effort to buy one of the U.S. combatants.

A factor in the battle is the effect on the balance of power that the 64 million subscriber-strong U.S. cable industry will have on the satellite TV war.

DirecTV Under Murdoch

Rupert Murdoch has a 75 percent chance of succeeding in acquiring DirecTV. The reason Murdoch has a good chance of succeeding where EchoStar’s Charlie Ergen failed in his bid for DirecTV is that this time no competitors are being taken out of the U.S. market.

Key issues Murdoch, NewsCorp CEO Chase Carey and his team at the Fox and General Motors’ Hughes Electronics [NYSE: GMH] will encounter in trying to get regulatory approval involve: 1) limits on media ownership and concentration, 2) must-carry and retransmission consent involving local broadcast signals, 3) national vs. local- into-local signal issues, and 4) restrictions on foreign ownership. (Their importance is rated in that order).

Part of the reason DirecTV owned by News Corp will overcome these concerns is because it promises more competition and more benefits for U.S. consumers. Most observers feel confidently that Murdoch will take his knowledge of global telecom (especially satellite), his knowledge of interactive TV, and his huge programming assets and put them to use in growing DirecTV in a most positive manner. Murdoch’s prowess in Washington is also expected to work in his favor when the real regulatory struggle begins in the halls of Congress, the Department of Justice, Securities & Exchange Commission (SEC) and, of course, the Federal Communications Commission (FCC).

Where Stands EchoStar?

Littleton, Colo.-headquartered EchoStar will have to focus like it never has before in order to compete with News Corp-dominated DirecTV. Looking at its first quarter financial and subscriber metrics, EchoStar appears poised to take on DirecTV under new ownership.

Ahead for EchoStar Chairman and CEO Ergen and company will be a newly-invigorated DirecTV, perhaps with some legitimate help from sister Hughes companies PanAmSat [Nasdaq: SPOT], Hughes Network Systems and the bankrupt DirecTV Latin America (which will now undoubtedly merge with another Murdoch owned-company, Sky Latin America). Although Murdoch has stated repeatedly that he will not make anti-competitive market decisions as the new owner of DirecTV, there will be many things that Murdoch will be able to do better – and more cheaply – than Ergen and cable.

The battle ahead then for EchoStar will be two-pronged: First, it will seek to outsell DirecTV when it comes to new subscribers to satellite TV. Second, EchoStar will, like DirecTV, be hard-pressed to keep drawing new subscribers from cable operators, who ultimately have been and will be the chief competition for U.S. satellite operators.

Cable’s Advantages

Slice it any way you will, U.S. cable has an advantage over U.S. satellite TV – it has bigger pipes to deliver broadband. The U.S. cable industry has spent $70 billion during the past five or so years to upgrade its infrastructure from analog to digital and be able to develop cable modems and an infrastructure that could add high-speed data and – eventually – telephony services, all on one bill and all from one cable line into the home. This is an advantage that cable will retain for at least several years, or until satellite providers can either: 1) develop their own answers to cable’s bundling solutions, and/or 2) ally with other service providers, such as telephone companies, to bring high-speed data, Internet and broadband into U.S. homes.

What Sayeth The Crystal Ball?

The Carmel Group recognizes that there will be a slowing of U.S. satellite TV growth over the next several years, as cable begins flexing its broadband muscle. One thing is certain – the U.S. video, audio, broadband and telephony consumer is the real winner in this battle. The consumer will not only survive, but will thrive.

In order to gather lucrative subscribers, and thus survive themselves, the U.S. multichannel video titans will have to provide price-competitive video packages. The companies will, more importantly, have to build “sticky,” or loyal, customers via bundled packages and new “bells and whistles,” such as high definition TV (HDTV), video-on-demand (VOD), interactive TV and digital video recorders (DVRs). The company, or companies, that do that best will not only win the battle, but the war.

Jimmy Schaeffler researches, analyzes and writes this monthly report. He is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and the monthly newsletters DBS Investor and Satellite Radio Investor. and a consultancy based in Carmel-by-the-Sea, CA (http://www.carmelgroup.com). The company specializes in telecommunications (e.g., cable, satellite, broadcast and wireless), as well as computers and the media. He can be reached at e-mail [email protected] or at telephone number 831/643 2222.