John Malone is one of cable’s fabled original cowboys, an entrepreneur, visionary and deal-maker who built up a cable company farsightedly called Tele-Communications Inc. into the largest system operator in the business. Now, the former engineer will use his intimate industry knowledge and experience to compete against his former colleagues.
Malone’s Liberty Media is about to snap up News Corp.’s 39% stake in one of the cable industry’s archrivals: DirecTV Group Inc., the nation’s biggest satellite provider, with 15.5 million subscribers.
A shrewd, bottom-line oriented strategist, Malone is expected to use his new distribution asset as a platform to maintain — and expand — carriage for his programming services, which include stakes in programmers Discovery Holdings, QVC, Starz and GSN. Wielding new clout with distributors, Malone may even buy more networks, or try to launch some.
With the future of DirecTV’s ownership decided, the technically astute Malone can also help DirecTV figure out how to use broadband access to the Internet to compete with cable’s ability to offer telephone services and on-demand programming. It’ll be his task to help DirecTV compete with cable’s triple play of video, voice and Internet services; and get a leg up in the nascent competition for high-definition TV viewers.
“You would think the first thing they [Liberty] would want to address is how to get back to competitive parity,” said one cable-industry veteran. “Cable is just kind of eating their lunch with VOD, HD and broadband, and packaging.’’
BACK IN THE SADDLE
Last week, Liberty Media tentatively agreed to an $11 billion transaction, to swap its stake in News Corp. for Rupert Murdoch’s 39% piece of DirecTV. Malone will also purportedly get three unspecified regional Fox Sports Net channels.
The deal will put cable pioneer Malone back in the saddle as a content distributor, not just a content owner. With DirecTV, he will be competing for subscribers against his former cable colleagues, but he will also gain clout for programming already being produced by Liberty holdings, as well as channels and services that he may want to launch in the future.
“Liberty could leverage the country’s second largest multichannel operator to enhance the value of the company’s significant programming assets, e.g. Discovery, Starz, QVC, guaranteeing carriage for existing and planned networks and providing a powerful promotional platform,” Jessica Reif Cohen, a Merrill Lynch analyst, wrote in a report last week.
He also could see DirecTV become the largest multichannel-television services company in the country, passing Comcast, which counts 24.1 million subscribers. Although many Wall Street analysts disagree, Reif Cohen and Jimmy Schaeffler of The Carmel Group are laying odds that Malone may secure regulatory approval to merge DirecTV with Charlie Ergen’s EchoStar Communications, operators of the No. 2 direct-broadcast satellite platform, Dish Network. That would create one huge, super-bird satellite company — some 28 million subscribers strong — to compete against cable.
With Malone on the stage, “concerns about who would run the combined entity could be eliminated,” Reif Cohen wrote. With Murdoch, there had been worries about News Corp.’s ownership of content assets. The company owns such programming services as Fox News Channel, Fox Sports Net and its regional sports services, FX and others, which are crucial to cable competitors of DirecTV.
Liberty getting News Corp.’s DirecTV stake, didn’t phase the No. 1 cable operator last week, however. “There are no concerns,” said Comcast executive vice president David Cohen.
The American Cable Association, the lobbying group for small cable operators, was not so sanguine. The group plans to carefully scrutinize the proposed Liberty-DirecTV deal to determine if the group should seek a denial of the deal, or ask for strict conditions, according to CEO Matt Polka. Small cable companies would want to be sure they have access to Liberty programming, such as the sports channels picked up from Fox Cable Networks.
“Dr. Malone certainly is a cable guy,” Polka said. “But at the same time, he’s in this for his company and to make money and to provide value to shareholders, and to use whatever assets they have, to leverage those assets.”
Plus: Liberty, as controlling shareholder of DirecTV, will be in a better position when it tries to negotiate carriage renewals for its networks with cable distributors such as Comcast.
For example, DirecTV could withhold a renewal for a Turner network owned by its sister company, Time Warner Cable, or delete a Comcast-owned network, like E!, if those cable operators declined to renew a carriage deal for Discovery Channel. Or Liberty could promise to launch new Comcast networks on DirecTV in exchange for carriage renewals.
“It may give him [Malone] a little more of an ability to wheel and deal with Comcast, and Time Warner, just because he’s got more cards in the deck,” said the cable-industry executive.
NO SLAM DUNK
But it’s not a slam dunk, several analysts said. Since Liberty will not own all of DirecTV, it can’t just use the satellite provider to blithely advance the agendas of its networks.
“If you use the platform to launch new channels and do that sort of thing, since you’re not a majority owner, you just come under a lot of scrutiny, [like whether] it is an arm’s-length deal, with the risk of lawsuits popping up,” said Kagan Research analyst Derek Baine.
News Corp. didn’t have carte blanche to use DirecTV to its advantage, noted Sanford C. Bernstein & Co. analyst Craig Moffett.
“In practice, Liberty control of DirecTV would amount to ensuring carriage of Liberty programming by DirecTV, and it could potentially use DirecTV as a competitive threat to cable operators to coerce carriage by cable on more attractive terms,” Moffett wrote. “The arm’s-length negotiation required to ensure 'fair’ carriage deals, however, limited News Corp’s ability to exercise this advantage [itself].”
Is Malone trying to recreate TCI in one fell swoop, by taking over DirecTV?
In building up TCI, Malone used control of its pipes to launch many of cable’s best-known channels, including Discovery Channel and BET.
“I’m sure he’ll do some creative things, but you can’t start BET and Discovery and all that,” said Janco Partners media analyst Matt Harrigan. “I don’t think that makes a lot of sense [now]. The only nice content point is that you can move QVC to a much-better channel position. That’s a little tactical tweak.”
More pressing, when it comes to delivering content, may be finding a broadband pipe — some kind of high-speed Internet access — to go with DirecTV’s satellite-delivered TV. Now, Malone will have a say in that strategy.
Last January, Murdoch was the first to say publicly that DirecTV would unveil its broadband game plan in a few months. DirecTV officials have talked about using wireless technology, like WiMax, for broadband service.
On the on-demand front, last February, at a presentation in New York for investors, DirecTV officials described a plan to launch a video on-demand download service, which they dubbed “DirecTV Flix.”
At one point, DirecTV officials said those offerings, broadband and VOD, would be available this year. That hasn’t happened.
Both DirecTV and EchoStar earlier this year struck deals with WildBlue Communications, which Liberty has a stake in, to offer satellite-delivered Internet-access service. But that has been for rural parts of the country, where high-speed Internet access is sparse.
DirecTV has several deals in place with phone companies, such as BellSouth, offer a combination of phone, Internet and video service to consumers. Rolling out another national broadband services is expensive — and fraught with risk.
“The greatest broadband play for DBS right now are the telcos, and that will remain so for some time,” said Bruce Leichtman, president and principal analyst of Leichtman Research. “Having a third broadband service nationwide would be a very difficult proposition.”
Murdoch has often been willing to suffer losses to gain market share in a particular business, such as the newspaper business. But Malone is not, according to Harrigan.
“At the end of the day, if they [Liberty] decide that there’s really no broadband strategy that generates an economic return, he’s not going to do it,” Harrigan said.
“He can work more closely with the Bell companies or whoever he has to work with,” he said. “That may not be the optimal solution, but it beats building a broadband network where you’re the third of fourth guy in the market and you’re not getting any return on investment. If it was easy, this would have been done a long time ago.”
Cable now also has the advantage over direct-broadcast satellite of providing on-demand programming to subscribers. A delay in the deployment of DirecTV’s new HD-DVRs apparently has put a crimp in the satellite provider’s on-demand plans.
“DirecTV’s inability to dedicate a data stream [or video stream, as the case may be] to an individual subscriber is likely to become an increasingly significant liability in the future,” Moffett wrote last week.
After the HD-DVR delays, DirecTV is now producing 3,000 of those boxes a day, according to a company spokesman. A $100 rebate offer to customers on the HD-DVR boxes, taking its price to down $199, will be reinstated Dec. 13.
Moffett wrote that DirecTV “has sharply underspent on HDTV upgrades, creating a large potential 'upgrade liability’ that will push retention marketing up significantly if DirecTV is to catch up to cable.”
Catching up to cable — and getting ahead of it — will now be on Malone’s agenda.
Mike Farrell and Ted Hearn contributed to this story.
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