Deconstructing News Corp Chairman Rupert Murdoch

By Sean Badding

The 36th and last Western Cable Show, held Dec. 2-5 in Anaheim, Calif., included the usual general sessions featuring CEOs talking about competition in cable and telecommunications, but it also featured a provocative panel discussion, called “Deconstructing Rupert: Competing in the New Satellite TV Age.”

Moderated by Leichtman Research President and Principal Analyst Bruce Leichtman, the panel included a variety of experts from the cable and direct broadcast satellite (DBS) sectors. A cable industry view by David Reed, CTO and senior vice president of planning at Louisville, Colo.-based CableLabs, discussed implications of the anticipated takeover of DirecTV and Hughes Electronics [NYSE: GMH] by News Corp [NYSE: NWS] in the near future. Matthew Harrigan, a senior research analyst at Denver, Colo.-based Janco Partners, presented a slightly less subjective view of the cable-satellite debate, followed by Carmel Group Chairman Jimmy Schaeffler. A pro-satellite view was delivered by Rainbow DBS Strategic Advisor Ed Horowitz, who is credited with much of the technical innovation that helped create the latest U.S. DBS service: the high- definition TV (HDTV)-centric VOOM operation launched in mid-October.

Leichtman’s Lead

Leichtman opened the panel by stating that competition between cable and satellite operators helps the consumer. He explained that cable still held the dominant position in the market with 67.5 million total subscribers on Sept. 30, compared to 20.9 million DBS subscribers – one out of every six U.S. TV households (TVHHs) receives DBS. In addition, one out of every three TVHHs with HDTV receives their signals via DBS, Leichtman added. Further, a total of 2.8 million and 2.1 million net new subscribers were garnered by DBS in 2001 and 2002, respectively. During 2002, however, the top 10 cable operators lost 750,000 net basic subscribers.

Leichtman identified “market saturation” as a factor both cable and satellite must address. Both satellite and cable operators are eyeing the remaining 20 percent of U.S. TVHHs that do not receive either cable or satellite services. These “chronic multichannel resistors” include the young, the poor, and those that steal signals, he explained. That untapped market is “very difficult” to turn into paid subscribers, he said.

Leichtman also calculated that churn for DBS is currently at an industry average of 20 percent annually.

Schaeffler’s Statistics

Schaeffler highlighted the misnomer in the panel’s title. “Nobody today will, as we mean it in this session, ‘deconstruct’ Rupert Murdoch. Rupert is here to stay and he is going to be very successful against a lot of you operators out there,” Schaeffler opined. Adding some perspective, Schaeffler identified five top challenges Murdoch will face when he takes over DirecTV. These include competition from cable operators that offer upgraded and bundle services, as well as from EchoStar Communications [Nasdaq: DISH] and Cablevision’s [NYSE: CVC] VOOM service. Additional challenges include: maintaining costs and financial metrics that satisfy Wall Street; curbing piracy; limiting executive management turnover; and using the advantages DBS holds over the cable industry today – customer service, solid financials, marketing, distribution, programming, advanced services, pricing, executive management and technology.

Expected areas of competition from News Corp and its affiliated companies will feature the delivery of HDTV, interactive TV (iTV), digital video recorders (DVRs), and more content ranging from broadband to local-into-local services, Schaeffler predicted. These innovations will be supplemented by other Murdoch moves into multiple dwelling units (MDUs), piracy safeguards and new set-top boxes. Cable operators from the five states that sent the most attendees to the Western Cable Show – California, Ohio, Florida, Colorado and New York – likely will lose a combined $320 million in 2003 revenues to DBS, Schaeffler forecasted. Nonetheless, it is important to note that the competition really boils down to a “market-by-market battle,” he said.

Harrigan’s Hopes

Capacity restrictions hamper DBS providers today and will continue to do so for the next five to eight years, especially for digital cable capabilities, said Janco Partners’ Harrigan. Limited capacity for DBS will be especially beneficial for cable when it looks to supply HDTV and video-on-demand (VOD) capacity for future subscribers. Harrigan focused specifically on capacity for two-way services, such as gaming. “Competition is bad, and competition is good. And if you are a poor operator, you’re going to get handed your head. But I think that longer term, this will increase the aggregate size of the business for the both the satellite companies and the cable companies.” He also noted the relative lack of HDTV emphasis by Murdoch-owned broadcasters thus far, indicating that much of the real, long-term threat to cable will come from EchoStar and Charlie Ergen, the company’s founder, chairman and CEO.

Reed’s Results

CableLabs’ Reed admitted that cable operators lost the technological high ground in recent years. However, he strongly emphasized the digital cable turnaround, permitted in large measure by standardization. The digital conversion allows nationwide implementation of more products and services. In the future, HDTV and iTV are two areas Reed believes hold enormous potential for companies and individuals looking to fuel cable’s growth. Cable will begin getting into more and more retail outlets, such as Circuit City [NYSE: CC], focusing especially on distribution of HDTV and local content.

VOOM’s Vision

Rainbow’s Horowitz said his company’s new VOOM satellite TV service has carved out a unique niche with its extensive HDTV programming line-up. “We’re not the third entrant into DBS, we are the first entrant into the business [offering] a comprehensive package of high definition television,” Horowitz said. As a result, the multichannel pie likely will grow and provide VOOM with a share of that market. Technology advances – especially the replacement of large, tube-based TVs with digital flat-screen TVs and computers – make VOOM possible. The technical innovation that allowed an upgrade in digital video compression from MPEG-2 to the pending MPEG-4 standard also will spur growth in the HDTV business, he said. VOOM’s delivery of 21 exclusive HDTV channels as a package to everyone subscribing to the service is a key reason why the company’s strategy will prove to be a success, Horowitz predicted.

Sean Badding is a subscription TV analyst at The Carmel Group, a publisher of industry databooks and newsletters and a consultancy based in Carmel-by-the-Sea, Calif. ( http://www.carmelgroup.com ).He can be reached via e-mail, [email protected] ), or by telephone, 831/643-2222.