Weighing DirecTV's possibilities

[Gregg Lengling]

Here's a little exercise to help you appreciate why media executives are so anxious about Rupert Murdoch's deal to add the No. 1 satellite company, DirecTV, to his vast Fox movie and television empire.

Just imagine what people would worry about if Kraft Foods took control of No. 1 grocer Kroger:

 
 
Would Kraft pack Kroger's prime eye-level shelves with its Jell-O, Oreos, Tang, Miracle Whip, Cheez Whiz and Honey Bunches of Oats?

Would Kraft sell its foods exclusively at Kroger to beat Albertsons, Safeway and Wal-Mart?

Or would it just threaten to do so to get better prices from ConAgra, Nestlé and Sara Lee?

And so on. You could get dizzy weighing the possibilities.

But Murdoch's rivals, and others, can't afford to ignore the what-ifs — as the $6.6 billion DirecTV deal heads to the Justice Department and Federal Communications Commission for approval.

Among the many questions:

Will Murdoch raise DirecTV's rates — or slash them?
Unlike EchoStar CEO Charlie Ergen, whose deal to merge with DirecTV was blocked by regulators, News Corp. CEO Murdoch hasn't promised to cut prices.

"We want to create a fabulous consumer experience in terms of service, choice, quality of picture, breadth of offerings, technological innovations — really make it a great value," says Chase Carey, who would be CEO of DirecTV parent Hughes Electronics when the deal closes. "We'll have to see where the pricing is."

That leaves open the possibility of higher rates. Murdoch would have incentive to raise cash after paying a 22% premium for his 34% of Hughes.

Yet Murdoch also has a history of enduring losses to grab market share. He's doing that at his New York Post, which has built circulation by charging just 25 cents on weekdays and 50 cents on Sunday.

In the late 1990s, he built British Sky Broadcasting satellite service by giving digital reception equipment for free to new subscribers — a strategy that nearly ruined cable companies.

Will Murdoch corner the market for TV sports — or make consumers pay to see them?
He could if he wants.

The owner of the Los Angeles Dodgers already has more ways than anyone — including Disney's ESPN — to squeeze cash out of lots of sports events.

When it's time to bid for TV rights, Murdoch can offer to play the big events coast to coast on his Fox broadcast network or cable's FX, less-compelling showdowns on his 21 regional Fox Sports networks and other games on his 34 TV stations.

(That doesn't include the opportunities to beam shows internationally on his other satellite services, including British Sky Broadcasting, Asia's Star and Sky Latin America.)

Adding DirecTV will put Murdoch into a sports league of his own by giving him the flexibility to sell games directly to viewers willing to pay extra.

The satellite company already infuriates cable operators by offering its 11.3 million subscribers exclusive packages. DirecTV's NFL Sunday Ticket beams 13 regular season games to fans willing to pay $200. The Mega March Madness basketball offering provides any games in the first three rounds of the men's championship for $50.

Some analysts say Murdoch also can limit competition without lifting a finger. Team owners who are thinking about launching regional sports services patterned after the New York Yankees' YES Network might give up, figuring Murdoch would never let DirecTV carry a rival to his Fox Sports networks.

Will Murdoch hype digital video recorders — potentially causing havoc for broadcasters and cable operators?
He has a real conflict here. As the person running DirecTV, Murdoch has incentive to continue that company's ongoing push for subscribers to buy set-top decoders equipped with TiVo DVRs.

These units enable satellite broadcasters to compete with cable's video on demand. They easily record hours of movies or other shows on a hard drive for viewers to watch when they want, and skip backward or forward at will.

But as the owner of the ad-supported Fox network, Murdoch shares the broadcast industry's concern about DVR users using the technology to leap past ads.

Last week, Murdoch's team said it's going with the DVRs.

"We're certainly not going to put our head in the sand with DirecTV and say, 'We're going to offer a weaker service because we want to protect a different side of the business,' " News Corp. President Peter Chernin says. DVRs "are going to be a fact of life in the broadcasting business."

If Murdoch pushes the technology as aggressively as he promoted interactive TV at BSkyB, then other broadcasters may be tempted to start charging cable and satellite companies for retransmitting the programming.

That could run to about $1.50 per subscriber each month for each over-the-air channel — or $250 a year in a typical community with 14 channels.

Meanwhile, cable operators may decide that they must compete by buying and offering their own DVR-equipped decoders. That could send capital costs soaring just as the industry was hoping to scale back after spending more than $65 billion in seven years to upgrade systems.

Will Murdoch use DirecTV as a soapbox to promote his conservative politics as well as his other businesses?
The media mogul has never been shy about putting his personal stamp on Fox News, the New York Post, TV Guide, The Weekly Standard, HarperCollins Publishers and other properties.

You look. You decide.