NEW YORK–Chase Carey, named by News Corp [NYSE: NWS] Chairman Rupert Murdoch in April to head Hughes Electronics [NYSE: GMH] should News Corp’s acquisition of Hughes succeed, has upbeat view of what the future might bring.

Carey told attendees at the SkyForum conference here last week that U.S. satellite TV operators could increase their existing 20 million subscriber base to 30 million by exploiting the coast-to-coast delivery advantages of the technology compared to cable operators. To that end, News Corp would bring to the U.S. market a “real entrepreneurial spirit,” as well as a proven track record of innovation and knack for building media businesses, he said.

Australia-based News Corp is prepared to make the investments necessary to maximize the potential of Hughes, Carey said. He offered a lengthy list of examples of how News Corp had taken bold risks that paid off.

One example was News Corp’s launch of Fox Network [NYSE: FOX] during the 1980s in the face of three entrenched U.S. broadcast competitors. The network is now ranked No. 1 in the key U.S. viewer demographic of people aged 18 to 49, he said.

In the 1990s, News Corp. introduced the Fox News Channel to compete with the dominant Cable News Network (CNN). Fox News Channel today is the most watched news channel in the United States, he bragged. Further, News Corp has taken on popular U.S. sports network ESPN by integrating a number of regional sports channel, he added.

News Corp also has expertise in building and operating satellite TV platforms elsewhere in the world, from the United Kingdom to Asia and Latin America, he said.

Carey cited the transition of News Corp’s U.K.-based satellite TV provider BSkyB to digital technology from analog as a prime example of the company’s willingness to invest in its subsidiaries. BSkyB converted from an analog platform to digital during 1998 and boosted the number of channels offered by the service from a capacity-constrained 25 to a robust offering of 140, he said.

In the first 30 days following that transition, more than 100,000 digital decoders were sold. The next year, BSkyB offered free set-top boxes and satellite dishes to help speed the conversion and was rewarded with 1.2 million new subscribers in 10 months, he added.

In 2000, BSkyB launched the world’s first interactive news service, Sky News Active. Since then, BSkyB has introduced additional interactive features that include online shopping, banking, e-mail and games.

“These kinds of innovations are part of the reason BSkyB has been able to hold its churn level well below one percent per month,” Carey said. “By applying what we’ve learned on the other side of the pond, we can lower churn even further and free up resources for research, development and marketing.”

News Corp also will bring important size and scale to the satellite business through its combination with Hughes. “We will be able to capture economies of scale in areas like set-top-box manufacturing,” Carey said. “More importantly, we will have a scale that enables us to continue to lead in the development, integration and deployment of new technologies like PVR [personal video recorder]-focused content, advanced electronic program guides, interactivity, new set-top-box technologies, as well as the next generation of features.”

Carey said, “We need to make our business more efficient, effective and faster growing for all of our partners …We need to aggressively develop all channels, and retail has to play a critical and important role in a relationship that works for both of us.”

As advanced services, interactive offerings and new set-top-boxes are rolled out, retailers will be needed to pick up a remote and see the new capabilities first hand, Carey said. For those reasons, retailers will continue to be a significant force in the distribution mix at DirecTV, he said.

Problems With Pegasus

If at the helm of Hughes, Carey said the company would make investments to grow the company’s cash cow DirecTV business, but its financial resources would be used prudently. For example, Carey said that he would not pay more than a fair price to acquire subscribers now served by Pegasus Communications [Nasdaq: PGTV]. Pegasus has a contract to sell DirecTV services directly to rural subscribers in the United States. That arrangement has complicated DirecTV’s business and led to conflict between the two partners.

The Pegasus relationship with DirecTV is a “problem,” Carey said. Pegasus’ subscriber base, satellite TV revenues and cash holdings are all declining. Legal issues relating to the length of Pegasus’ contract with DirecTV and other matters should be resolved soon in court, he added.

“News Corp will make quick decisions [about Pegasus], but not foolish ones,” Carey said. “News Corp will value Pegasus based on the fair value of the cash flows. Current valuations of Pegasus defy the reality of these cash flows. News Corp is in line with DirecTV on this situation and will only be supportive of a transaction that is fair to the Hughes shareholders.”

Resolving the Pegasus matter with DirecTV ultimately may happen because it makes sense for both sides, said Jimmy Schaeffler, a satellite broadcasting and media consultant who heads The Carmel Group.

“Pegasus’ stock value is not worth as much as its real value in the form of 1.2 million subscribers that the company currently serves for DirecTV,” Schaeffler said. “Thus, News Corp has to position itself smartly to make the most out of what has become a cross it must bear, as well as a great opportunity. Pegasus is a cross because it sells DirecTV services directly to consumers in certain rural markets and keeps part of the continuing revenue stream that otherwise would go solely to DirecTV. Pegasus is an opportunity because it offers valuable subscribers that News Corp could buy outright if can negotiate a fair price.”

Despite signs that satellite TV growth is slowing, Carey said the best days for the industry may well lie ahead.

–Paul Dykewicz

(Andrew Butcher, News Corp, 212/852-7070)