News Corp’s completion of its long-anticipated acquisition of Hughes Electronics [NYSE: GMH], its coveted satellite television unit DirecTV, and other subsidiaries offers a host of potential advantages for the combined organization.

Under new ownership, DirecTV is likely to intensify its push toward interactive services and high-definition programming. However, it is unclear whether News Corp will develop opportunities at the other Hughes units — broadband service provider and set-top box manufacturer Hughes Network Systems and satellite operator PanAmSat [NYSE: SPOT].

As expected, U.S. regulators placed certain limitations on News Corp and its business units to prevent potential marketplace abuses. For example, News Corp will not be allowed to offer any existing or future programming on an exclusive basis to any pay-TV operator. Likewise, DirecTV will not be permitted to enter into exclusive distribution relationships with News Corp or its Fox Entertainment Group [NYSE: FOX].

Regulators also required that any programming carriage disputes involving News Corp or one of its affiliates be resolved through arbitration, at least for the next six years, according to Vijay Jayant, a satellite and cable analyst with Lehman Brothers. In addition, DirecTV is required to extend its delivery of local channels to 30 additional markets by year-end 2004, beyond the 100 markets where the company planned to offer local signals by the end of June.

With those regulatory requirements clear, News Corp will be free to revamp DirecTV’s customer service and installation operations, Jayant told his clients in a recent research note. News Corp is expected to price aggressively to boost revenues and entice subscribers to keep their service by enhancing functionality through digital video recorders (DVRs) – also known as personal video recorders (PVRs) – user-friendly electronic program guides and similar steps, he added.

News Corp likely would introduce DVR technology from its NDS Group, but not sever ties with TiVo [Nasdaq: TIVO], Jayant predicted. The ease with which a viewer’s favorite programs can be recorded will be maintained and possibly enhanced, he added.

DirecTV’s operations under News Corp’s ownership will focus on introducing a limited amount of new technology aimed at providing the greatest payback, said Steve Blum, president of Tellus Venture Associates, a satellite broadcasting consulting firm based in Marina, Calif. When no clear payoff is evident, News Corp tends to maintain the status quo to await technology advances that cut the costs of service, he said.

A sharpened focus on DirecTV’s strengths would be a likely result from News Corp’s ownership, Blum said. One example is News Corp’s plan to expand DirecTV’s existing thrust into DVRs.

An area where News Corp should be expected to tread carefully is in rolling out high-speed broadband services, Blum said. News Corp’s broadband investments thus far have been limited to a couple of pilot projects.

“I would expect News Corp to put broadband ventures on hold and focus on television,” Blum said.

News Corp, however, is inheriting one of the world’s most ambitious satellite broadband investments with its purchase of HNS and its SpaceWay venture. SpaceWay is a $1.8 billion high-speed broadband project that is scheduled to launch and begin commercial service this year.

SpaceWay Mission

“It would be consistent with past practices and statements for News Corp to devote SpaceWay resources to its television business, for example, and that’s what I would expect,” Blum said.

SpaceWay satellites will be launched and begin commercial broadband services later this year. Part of SpaceWay ‘s capacity may also be used to expand DirecTV’s capacity. “We are evaluating that opportunity,” said Bob Marsocci, vice president of corporate communications at Hughes Electronics. Still undecided is how much capacity might go to video services, compared to the system’s original emphasis on broadband services, he added.

The new management named by News Corp to head Hughes Electronics and DirecTV has not had a chance to change the direction of any of the business units yet. Regulatory approval of the merger was not received until late last month and the deal did not close until several days later. As a result, new leaders at Hughes Electronics and DirecTV just started their jobs at the beginning of the year, Marsocci said.

Chase Carey, a veteran News Corp executive, became the new CEO of Hughes Electronics, while Mitchell Stern was transferred from his post as chairman and CEO of News Corp’s Fox Television Stations to become president and CEO of DirecTV.

“My job from day one will be to marry the best entertainment offerings with the most advanced and appealing technologies for the more than 12 million DirecTV subscribers,” Stern said. “Viewers can expect an even better DirecTV, featuring greater programming choice, digital video recorders, more high-definition channels, more interactive services and enhanced customer service.”

Eddy Hartenstein, who had been DirecTV’s chairman and CEO, is now vice chairman of Hughes Electronics. Roxanne Austin, who formerly was president and chief operating officer of DirecTV, resigned late last year.

Despite the leadership changes, News Corp is “very much aligned” with DirecTV’s strategy of expanding the number of markets offering local channels, increasing HDTV programming, adding new interactive programming services and aggressively promoting DVRs, Marsocci said. In fact, News Corp officials want to give the DVRs new features and services, he added.

Indeed, plans exist for HNS and other set-top box manufacturers to develop advanced receivers. One example is a new high-definition-DVR that would offer high-definition capabilities through a single set-top box by the end of the first quarter, Marsocci said.

New Services

New features and services for DVR products also should be expected. For instance, niche content could be downloaded to DVR customers. If a subscriber loves a particular kind of content, such as health and fitness programming, those kinds of shows could be downloaded to that subscriber’s DVR receiver, he added.

The merger with News Corp opens up additional ways to use the SpaceWay capacity by offering multi-media services either to homes or businesses, said Arunas Slekys, vice president of corporate marketing at HNS.

“The combination with News Corp represents a big opportunity for HNS,” Slekys said. “Our management team continues intact and I don’t see our business model changing at all. It gives us a chance to grow faster than we otherwise could have done.”

The biggest challenge may be figuring out the most advantageous ways to reap the rewards of a merged company as quickly as possible.

Of the estimated 30 million households not reached by terrestrial broadband systems, the immediately addressable satellite broadband market in the United States is between 2 million to 3 million users, estimated Slekys, citing a recent study by Northern Sky Research. The addressable market for satellite broadband likely is about the same size in Europe, he added. Satellite broadband opportunities also are significant in other parts of the world.

Both News Corp and HNS will benefit from the merger, Slekys said. News Corp’s global satellite TV customer base exceeds 300 million and offers the potential for HNS to build more set-top boxes, as well as to sell more services to both consumer and business customers, he added.

The increased volume would help to drive costs down and make the services more affordable for all users, Slekys said.

HNS’ DirecWay Internet access business will be the beneficiary of this trend, but it will take some time to figure out how to best seize the opportunity, Slekys said. One possibility is to bundle the DirecTV satellite TV service and DirecWay Internet access to compete more effectively with cable, he added.

“In electronics, volume drives down costs,” Slekys said. With News Corp’s global satellite TV operations, HNS has a much bigger opportunity to leverage the DirecWay Internet service with satellite TV throughout the world, he explained.

Reduced costs also would help to remedy the problem of higher prices for satellite broadband than DSL or cable modem services, Slekys said. While satellite broadband has been priced in the range of $50-$60 a month, DSL and cable often have been charging roughly 20 percent to 30 percent less than that.

“Satellite TV is a great service to combine with broadband Internet,” Slekys said. With DirecTV generating revenues of more than $60 per subscriber each month, adding DirecWay broadband capability to that existing customer base using a single antenna installation would yield upward of $100 a month, he added.

Since installation costs account for a big chunk of the Internet connection expense, HNS is also working to improve the self-install attributes of its user terminals, Slekys said. A related cost-reducing move is the ongoing development of multi-dwelling unit installations aimed at boosting the number of satellite broadband customers per terminal, he added.

These increased efficiencies will help HNS take a serious run at the cable and DSL incumbents, Slekys said.

PanAmSat’s Prospects

PanAmSat offers global satellite capacity that caters to broadcasters and is particularly strong in North America. A possibility exists that News Corp could use PanAmSat satellite capacity to enhance its global services, but no such plans have been unveiled yet.

Another outcome is that PanAmSat could be sold as part of an expected consolidation among fixed satellite service (FSS) operators worldwide. It is much less likely that PanAmSat would be a buyer of another FSS operator, since News Corp may choose to exit that segment of the satellite business. News Corp has no other FSS operations in its global empire and may want to focus on its strengths in satellite TV and programming content.

PanAmSat’s conventional FSS business is under tremendous pressure because of industry-wide excess transponder capacity, said Roger Rusch, who heads the TelAstra satellite consulting firm in Palos Verdes, Calif.

“This acquisition makes News Corp a more vertically integrated company so that it will be able to exercise some internal efficiencies that we cannot imagine from the outside,” Rusch said. “The summary is that there will undoubtedly be personnel changes. We would expect layoffs, cost cutting, and restructuring. No doubt the effect will benefit both the business and its subscribers, but there will be a price paid by some current employees.”

–Paul Dykewicz

(Vijay Jayant, Lehman Brothers, 212/526-6019; Steve Blum, Tellus Venture Associates, 831/582-0700; Bob Marsocci, Hughes Electronics, 310/726-4656; Arunas Slekys, Hughes Network Systems, 301/428-5502; Roger Rusch, TelAstra, 310/373-1925)