With DirecTV, Murdoch finally has a global
satellite empire. Get ready for a fierce new media war
Five stories above the frenzied Twentieth Century
Fox studio lot near Los Angeles, Rupert Murdoch eases back in a leather sofa to
reflect for a moment. A bank of TV sets flickers nearby. "I am a blessed man
these days," says the 72-year-old News Corp. (NWS ) chairman, looking as fit
as ever in a French-blue shirt sans tie. After all, Murdoch has beaten
prostate cancer -- in remission now for three years. His two sons, Lachlan, 32,
and James, 31, hold top positions in the company, and daughter Elisabeth, 35,
may soon rejoin. So someone named Murdoch is clearly in the wings to succeed him
one day. Right on time for a late breakfast of fruit salad, Murdoch's third
wife, model-thin Wendi, 35, arrives with their 2-year-old daughter, Grace, a
cherub in a mandarin-collar dress. (A second girl, Chloe, was born to the couple
in July.) And Murdoch is just days away from departing for a two-week vacation
in his native Australia, where he'll visit his 95-year-old mother, Dame
Elisabeth. On this sun-scorched California morning, Murdoch is on top of the
world.
Yet Murdoch is feeling blessed by so much more. He just received a
phone call from his top Washington lobbyist, Michael Regan, with news that
federal regulators were set to announce their approval later that day, Dec. 19,
of News Corp.'s $6.8 billion acquisition of a controlling interest in DirecTV.
The agency's move would give Murdoch the missing link in News Corp.'s worldwide
satellite distribution system, creating the truly global media empire he has
dreamed about for years. All this, and his company is more financially sound
than ever. Still, Murdoch characteristically downplays his jubilation. "Don't
worry. We don't want to take over the world," he says with a wide smile across
his creased face. "We just want a piece of it."
Potent Mix That
same smile, the one that warms Wendi and Grace, sends chills halfway around the
world, from Hollywood to New York and beyond. Capturing a 34% stake in DirecTV
(HS ) and its 12 million
subscribers in the U.S. marks a pivotal turn in Murdoch's 50-year rise from
Australian newspaperman to one of the world's most powerful executives. He will
now oversee a media empire with businesses that generate $30 billion a year and
reach into just about every corner of the world. That's bigger than every U.S.
media player but Time Warner Inc. (TWX ). The pirate outsider
from Down Under, who prints Bibles and at the same time favors bare-chested
women in his London tabloids and sexy-and-salty TV shows, has always been
formidable as a publisher and TV programmer. But DirecTV is the crown jewel for
Murdoch, giving him a unique set of powers. No other media company controls such
a potent mix of programming and the means to deliver it to households from
Melbourne to Maine. "With the span of assets he's assembled, he scares the heck
out of just about everyone," says Leo T. Hindery, veteran cable operator and
currently head of Yes Network, a New York sports channel.
Consider
Murdoch's domain: His satellites deliver TV programs in five continents, all but
dominating Britain, Italy, and wide swaths of Asia and the Middle East. He
publishes 175 newspapers, including the New York Post and The
Times of London. In the U.S., he owns the Twentieth Century Fox Studio, Fox
Network, and 35 TV stations that reach more than 40% of the country. Fox's
National Football League broadcasts on Sunday afternoons are still some of the
highest-rated sports programs in the world. His cable channels include
fast-growing Fox News, which has zoomed past CNN in viewers, the FX general
entertainment channel, and 19 regional sports channels that in some markets
outdraw ESPN 2 to 1. In all, as many as one in five American homes at any given
time will be tuned into a show News Corp. either produced or
delivered.
Murdoch's unprecedented reach will ignite a new and decisive
phase in the media wars. Today, TV is delivered in three ways to the 108 million
homes in the U.S. with sets: cable, satellite, and over-the-air broadcast. Now,
Murdoch is girding for a battle that will pit satellite against cable for
supremacy as the carrier of choice -- and in the process could shift the balance
of power in the industry his way. Traditionally, creators of TV programming
battle for dominance against those distributing their shows. DirecTV makes
Murdoch a general in both the content and the distribution camps. "This is where
Rupert has always wanted to be," says Sir Howard Stringer, CEO of Sony Corp. (SNE ) of America, which sells
programming to Murdoch. "He's in an enviable position."
Murdoch coyly
says he's buying control of DirecTV to ensure that his own channels don't get
stomped by the likes of cable-distribution giants Comcast and Time Warner. But
it's the wily Murdoch himself who is set to become the more fearsome gatekeeper,
with increased say about what gets into people's living rooms and on what terms.
He'll be able to do so in two ways: No longer beholden to other distributors,
industry insiders predict, he will drive down the prices of others'
entertainment and sports programming. With so many viewers hooked up to DirecTV,
the argument goes, no programmer will dare risk getting kicked off his system,
so they'll bend. At the same time, he'll have leverage to force his cable and
satellite rivals to carry his programs -- at premium prices. Always willing to
wager big, Murdoch will also endure temporary losses to gain share. A possible
tactic: giving away $300 personal video recorder set-top boxes to lure cable
subscribers to DirecTV, a maneuver similar to one he used in Britain in the
early 1990s when he handed out digital boxes free to vanquish cable foes
there.
Not since newspaper magnate William Randolph Hearst in the first
half of the 20th century has one man had such means to shape mass media. Murdoch
dismisses this notion, saying: "Sometimes I get too much credit." But there's no
denying Murdoch has become the poster boy for all that is bad about Big Media.
For one thing, the Oxford-educated Murdoch loves to tweak the cultural
Establishment, using his scale to push tawdry programming out to the masses. His
tabloids regularly feature scantily clad starlets and sensationalist crime
stories, and his TV shows have cornered the low-brow market with their attack
dogs and fat fiancés.
What worries his critics far more is that Murdoch
is not shy about using his media outlets to pursue agendas, whether they're
politically conservative causes or his own business interests. Now his audience
will be much greater. Murdoch would deny he's a right-winger, and many
conservatives say such rivals as CNN and network news shows are liberal outlets.
But there's little doubt that he has made Fox News a soapbox for a collection of
shrill, right-of-center commentators like Bill O'Reilly and Sean Hannity.
Coverage on Fox and in the New York Post during the Iraq war was widely
criticized for being outright jingoistic and for eschewing the usual
journalistic distance.
Still, Murdoch is not above reversing his
positions to boost business. In his most famous about-face, he stripped the
outspoken British Broadcasting Corp. from his Star satellite network in China in
1994 after Chinese complaints, replacing it with Chinese-language films. He also
had his HarperCollins book unit publish a biography by Deng Xiaoping's youngest
daughter, Deng Rong, in a move, some critics say, to curry favor with Communist
leaders.
Slugging It Out No one hears the coming battle cry
more loudly than Brian Roberts, CEO of Comcast Corp. (CMCSA ), the country's No. 1
cable system -- with plenty of market muscle of its own. Right now, cable has an
important advantage, offering high-speed, two-way Net access, even phone
capability. Satellite is still mostly a one-way service. Murdoch understands
that edge all too well. Had he moved into satellite in the U.S. earlier, perhaps
"cable wouldn't have made those investments and would have been more
vulnerable," concedes Murdoch. Now both systems are scrambling to be big players
in hot new consumer technologies like the digital video recorder (DVR),
high-definition TV, and a host of gizmos that are making home entertainment the
new media frontier. As cable's foremost rival, Murdoch secures himself a seat at
the table as everyone from TV-equipment makers to sports leagues to Hollywood's
most powerful moguls slugs it out for consumers' loyalties. His new power is
also likely to spur further consolidation among cable's smaller players
scurrying for shelter from the big guns.
Murdoch's new power isn't
absolute, however -- not yet. To get approval for the deal, Murdoch agreed to
play fair. The Federal Communications Commission had already banned large cable
operators from discriminating against rival programmers, and Murdoch volunteered
to follow those rules. That means he can't muscle shows off DirecTV. And he must
submit to arbitration if cable operators accuse him of using his most popular
channels as bargaining tools, much as he did last year when he yanked Fox Sports
off the air in some Time Warner Cable markets in a contract dispute. Similarly,
his Fox unit forced RCN Corp. (RCNC ), a small Princeton
(N.J.) outfit that competes with cable and phone operators, to take Fox Sports
Español in Boston in order to get Fox's The Simpsons and NFL football.
The problem? RCN had no Spanish-speaking customers on its Boston system, says
John Murawski, director of programming for RCN.
But the restrictions are
temporary: They expire in six years, when Murdoch figures he'll have 6 million
more subscribers. The rules are "Band-Aids in several places," wrote FCC
Commissioner Michael J. Copps in his dissenting opinion, arguing that the
DirecTV approval was "putting too much power in one conglomerate's hands."
Anyway, Murdoch will probably find ways to gain advantage -- he always has.
"Rupert loves those loopholes," says Viacom ex-CEO Frank J. Biondi. "If he and
his lawyers can find one, he's going to use it"(table).
Even before
Murdoch got the nod, Big Cable was preparing for his juggernaut. "[Rupert] has
broadcast, news, sports, movies, cable channels, and now distribution. You'd
have to be crazy to not take that seriously," says Comcast's Roberts. "That's
going to cause a lot of people to reassess their businesses." The 44-year-old
cable boss recently struck an important deal, locking the bevy of must-have
Viacom channels, such as MTV and Nickelodeon, into his 21 million-subscriber
system for as long as five years. What's more, the deal also gives him Viacom
programming for Comcast's growing video-on-demand (VOD) business, a service that
could help cable hold on to its customers.
Family Business In
the 14 months since Comcast closed its $54 billion acquisition of AT&T
Broadband, Roberts has pursued decidedly Murdochian maneuvers of his own: He has
held firm on fees for pricey cable channels, won favorable deals for equipment,
and even begun to pressure Hollywood to blow apart its long-standing
movie-release formula so he can get movies ahead of video stores and sell them
over cable. Murdoch clearly has more programming, but Roberts is already working
to bulk up the content side of his empire, partnering with Radio One (ROIAK ) to launch a new
channel targeting African Americans and snapping up TechTV to cater to video
gamers. And on Dec. 2, he struck a deal with Chicago's major sports teams -- the
Bulls, Cubs, White Sox, and Blackhawks -- to create a new sports channel,
leaving Murdoch's Fox Sports Chicago, a partnership with Cablevision Systems
Corp., without its biggest draws.
It's all hardball for these two men,
both of whom are second-generation scions who sit atop family-controlled
businesses. Both would rather eat glass than lose. In their off hours, Roberts
swats away opponents in national squash tournaments, while Murdoch lets off
steam boxing with a personal trainer.
Yet the Aussie-turned-U.S.-citizen
has been warming up for this fight with cable for far longer. Look no further
than Britain to see how Rupert will be able to use his trifecta of pricing
power, programming clout, and indifference to losses to level his competitors.
Starting in 1989 with four channels and films from only half the Hollywood
studios, Murdoch eventually took a controlling interest in British Sky
Broadcasting Group. He proceeded to spend heavily on BSkyB, at one point losing
$1 billion to roll out digital boxes, giving viewers more than 400 channels and
the ability to shop or gamble over the telly, and even choose camera angles for
key sporting events. The Brits ate it up: Today, BSkyB has more than 7 million
subscribers, or about 30% of Britain's 25 million TV homes.
It wasn't
long before BSkyB's success helped to crush its largest cable competitors,
forcing one to liquidate and the other two into financial restructurings. The
cable companies didn't help themselves by spending lavishly in the face of the
competition, but Murdoch's newspapers also heavily promoted BSkyB, says Adam
Singer, former CEO of Telewest cable. "Competing against them is like running an
800-meter race every day and always getting the outside track," he says. What's
more, the hefty prices BSkyB charged its cable rivals for sports and movies
contributed "in some measure" to the cable operators' woes, as Barclay Knapp,
former chairman of NTL Inc., told local newspapers. Knapp didn't reply to phone
requests for an interview.
Now, Murdoch will get a chance to repeat that
performance in the U.S. Of course, American cable outfits are formidable, but
now Murdoch has a strong hand. Suppose Time Warner wants to raise the 78
cents-per-subscriber monthly fee it gets from DirecTV to carry its popular TNT
Channel. To squeeze those pennies out of Murdoch, the media giant may have
little choice but to cough up more than the 30 cents Time Warner Cable (TWX ) pays News Corp. for its
FX Networks. On the news channel front, a big fight is likely to erupt when
highly rated Fox News begins to push for a fee comparable to the 38 cents that
Time Warner's CNN commands, says CIBC Worldwide analyst Michael Gallant. Murdoch
won't comment on that, but he will surely press other programming companies to
cut fees. "We've inherited a lot of charges at DirecTV that are outrageous,"
says Murdoch. "If [programmers] want us to carry their channels, they are going
to have to promise they can get an audience."
Churning Out
Hits Hacking away at high costs will only benefit an already robust News
Corp. Less than a decade after nearly losing his debt-loaded company to his
bankers, Murdoch's empire is among the media world's healthiest outfits. Its
stock is up 38% in the past year, to about $36. Also in its most recent year,
the company reported net earnings of $1.1 billion, a 70% increase, on revenues
of $17.5 billion. That's not including sales from companies in which it has
minority stakes, such as BSkyB and DirecTV, bringing total revenues to more than
$30 billion. The movie studio is churning out hits like X2: X-Men United
and the budget Bend it Like Beckham that are selling well on DVD. TV
successes such as The X-Files, The Simpsons, and King of the
Hill are pulling in big bucks in syndication, and earnings by News Corp.'s
cable channels doubled, to $430 million, last year, boosted by ratings spikes at
Fox News and FX. Since the company used cash and stock for DirecTV, its debt
remains at about $9 billion.
Such health gives Murdoch flexibility to
invest in DirecTV. His plan is to add 1 million subscribers a year, using
technology as the lure. That challenge falls to Chase Carey, a former college
rugby player and onetime News Corp. co-chief operating officer. Murdoch put
Carey in charge of DirecTV when the two companies closed the deal on Dec. 22.
The 50-year-old exec aims to improve service and spend upwards of $1 billion to
offer local TV in all 210 markets by 2008 -- a big selling point in the drive to
lure customers away from cable, which shows local channels in every market.
Using excess feeds from NFL games on his Fox TV stations or from reporters at
Fox News Channel, DirecTV will soon give viewers the ability to choose their
angle at sports events or create their own video newsmagazines.
Murdoch
can make such pledges because he intends to buy new DVRs in bulk -- up to 20
million at a pop, says Carey, who figures mass purchases will drive the current
$300-per-box price to below $200. Pressed on whether he would actually give away
the boxes, Murdoch bristles. "[EchoStar Communications CEO] Charlie Ergen is
already giving away some of his boxes. We will be matching him," he says. "We
can't have him out there with a financially superior offering." At the moment,
DirecTV offers the machines for $99, a price that will likely drop, he
concedes.
Another trump card for Murdoch vs. cable: American football.
Right now, he shows National Football League games on his Fox Network and
inherits DirecTV's popular NFL Sunday Ticket package. By 2005, when the NFL's
contracts with cable and broadcast networks come up for renewal, rivals predict
Murdoch may just go for the battering ram -- snatching away the Sunday night
cable package by outbidding ESPN and putting it on cable rival Fox Sports
Network. News Corp. President Peter Chernin has been meeting with NFL
Commissioner Paul Tagliabue and the league's top media exec, Steve Bornstein, to
see how News Corp. can work more closely with the League.
Meanwhile,
Murdoch, strengthened by a solid balance sheet, hopes to unleash a barrage of
new programming to give News Corp. an upper hand. He plans to add new channels
to DirecTV, aiming to make them must-haves for cable operators as well. One
possibility: a history channel stocked with biographies that Fox's studio now
makes for the A&E channel. Fox News is considering a new business channel to
compete with CNBC. Or how about something more titillating, like an
all-Temptation Island Channel? Murdoch is pressing his troops to come up
with new, more enticing stuff. "Cable is so slow that it takes them six months
to figure out what they want," boasts DirecTV's Carey. "By that time, we'll have
a whole lot of new things that will make what they sell to us look pretty
tame."
Carey, Chernin, and other deputies have plenty of autonomy, say
insiders, but Murdoch is commander-in-chief. He runs his sprawling media empire
mostly by phone, doesn't like time-consuming meetings, and hates using the
Internet. Fresh from his 6 a.m. workout, he usually hits the phones by 7:30,
calling London and the Asian capitals. "I can talk to him four or five times a
day, easily," says Chernin, a member of the five-person Office of the Chairman
that meets each Monday morning -- often by phone -- after Murdoch has reviewed
The Flash, a weekly compilation of the company's performance over the prior
seven days. Murdoch's view is from 30,000 feet, say staffers, watching as the
pieces click into place. But he dives in when needed. When influential
shareholders opposed his plan to elevate son James to run BSkyB, Murdoch hopped
on his private 727 jet to wage a charm offensive, ultimately pushing through a
unanimous vote to put him in the job.
Longtime Nemesis As each
side draws blood trying to outdo the other with new services, consumers will
probably be the big winners. Cable execs, for now, are counting on their
systems' clear advantages over satellite and are hustling to roll out new
offerings such as video-on-demand, telephony, and high-definition channels. They
spent more than $75 billion over the past eight years to upgrade their systems
for the two-way technology that still eludes satellite. With Murdoch breathing
down their necks, many are scrambling to launch the nascent services quickly so
their customers don't defect. On Dec. 8, Time Warner Cable, with 10.8 million
subscribers, said it would accelerate its debut of phone service over its lines
in partnership with Sprint Corp. (FON ) and MCI.
Murdoch
will also be watching out for his longtime nemesis, EchoStar's Ergen, who has 9
million subscribers on his DISH Network. It was Ergen who handed Murdoch a rare
defeat three years ago, when Hughes Electronics, DirecTV's parent, accepted his
bid over Murdoch's. But Ergen's deal was rejected by regulators, largely because
of Murdoch's behind-the-scenes lobbying in Washington. Ergen has not forgotten.
For weeks he's been holding weekend meetings with his staff to figure out how to
block Murdoch's advance. The ex-professional poker player, who started in the
satellite business by selling dishes door-to-door, spends lavishly on promotions
and offers rock-bottom prices. "Charlie's the best in the business," Murdoch
says. "We just intend to be a little better." Ergen declined to comment for this
article.
Even at 72, Murdoch has the rare luxury of planning for the
future. Unlike, say, Michael D. Eisner, who is under pressure for his recent
lackluster tenure at Walt Disney Co., Murdoch's family-owned Cruden Investments
Ltd. owns 30% of News Corp. stock and maintains voting control. And he's
preparing his sons, James at BSkyB and Lachlan, who runs the company's newspaper
and TV station operations, to carry on. "I intend to be around as long as my
brain holds out, and my mother is doing very well at 95," says Murdoch. That's
daunting news for cable operators and other media moguls. With his new satellite
treasure, Rupert Murdoch may say he just wants a little piece of the world, but
everybody knows he is after much more.
By Ronald Grover and Tom Lowry With Catherine Yang in Washington,
Kerry Capell in London, and Manjeet Kripalani in Bombay
