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The Incredibly Wide World Of Rupert Murdoch's Top Gun

News Corp. President and COO Peter Chernin sits atop the most vertically integrated of the major media conglomerates as well as the most international. With $17.5 billion in revenues in 2003, News Corp. is the seventh-largest media company in the U.S., behind Time Warner, Disney, Viacom, Comcast, Sony and Vivendi Universal.

Chernin has a great view of a bevy of assets from his perch. He reports directly to company founder and Chairman Rupert Murdoch, and everybody else reports to him. While others bemoan the rapid changes that have forever altered the U.S. media industry, he speaks of innovation and adaptation and recognizes clearly that, in this business, if you can't keep up with the market and the technology, you die, simple as that.

With that in mind, Chernin has been the champion of both personal video recorders and copyright protection for digitally delivered programming, of DVD compilations of Fox TV shows and of movies-on-demand over the Internet. But he's also a fan of more-traditional media. He pays close attention to what's going on at Fox Broadcasting and knows each show on the new fall schedule as well as Fox TV Group Chairman Sandy Grushow or Fox Entertainment President Gail Berman does. "They are all my children," he says.

With Murdoch's long-attempted purchase of DirecTV about to come to fruition, Chernin is about to add another business to the list of companies he helps Murdoch oversee. The addition finally gives News Corp. the national delivery system Murdoch has been seeking and will help expand News Corp.'s reach into the U.S. pay-TV market.

Last week, Chernin sat down with Los Angeles Bureau Chief Paige Albiniak to discuss the rapidly evolving media industry and News Corp.'s role in it. An edited transcript follows:

Let's start with DirecTV. Assuming the DirecTV acquisition closes by the end of the year, as expected, what's the advantage of owning DirecTV for News Corp., and do you see any global integration of News Corp.'s DBS platforms?

One, we think DirecTV is a good business that we can help grow. Two, we think there are advantages to be gained from the breadth of our DBS holdings, even if it's just in the area of best practices. And we think there are advantages with Fox and vice versa. We think we can launch new channels. We think we can bring new programming and creativity to DirecTV, and we'd like to have a seat at the table in the U.S. pay-television business.

We'll become more of a programmer, but not in conventional terms. DirecTV is ultimately a distribution platform. But I think we can bring creativity to it.

I'll give you a good example, which is that, subscribers of NFL Sunday Ticket on Direct TV who have a personal video recorder, who have a DirecTV-TiVo box, can now download a half-hour highlights show at midnight on Sunday night. It gets stored on your hard disk so that, on Monday morning, you have highlights of all the NFL games from the previous day.

I'm not sure that's programming. but it's also more than just pure distribution. I think there are lots of opportunities to use PVRs to be innovative in essentially programmatic areas.

Do you expect to be giving away PVRs as part of the DirecTV system?

We will be very aggressive with PVRs. But it depends on what you mean by "giving away." Do we give them to our highest-end subscribers? Do we give them to people who sign up for two years? We believe PVRs are a great churn reducer and a great service. What the pricing mechanism is remains to be seen.

Fox Entertainment President Gail Berman a few weeks ago said the networks need to be looking over their shoulders because the way viewers receive advertising is changing. Fox's advertising revenue might be threatened at the same time your company is supporting PVRs, which could cause viewers to stop watching commercials. How do you reconcile that?

I think it's an easy reconciliation. If we felt Direct TV had the ability to control the spread of PVRs in this country, we might decide differently, but we don't feel that way. Technology marches forward. We would never try and disadvantage DirecTV to protect something that is unprotectable. PVRs are coming. We hope owning DirecTV will put us in a better position to understand how consumers use PVRs and to react accordingly.

Any specific ideas on how you do that?

I don't believe DirecTV should have a 30-second skip button. I believe they have to have a fast-forward function but not a 30-second skip, which is just a pure commercial-skipping device. I also think there are questions of how long people should be able to store a program on their hard drive.

On the Fox side, I think the implications of PVRs fall into two areas.

From a marketing perspective, PVRs will have the same impact as all other technology. What technology has done to the television business is to give people greater choice and greater control. So people went from a world of four channels to a world of 200-300 channels. That means they'll go from a world of 200 channels to a world of 200 hours stored on a hard disk, giving them more choices and more control. The real answer to that is to be innovative and to have a very strong brand. I think, in both those areas. we feel good about Fox's position.

From an advertising point of view, I think we're all going to have to be more innovative.

For example, there was a survey done of PVR owners and the Super Bowl last year. PVR owners watched all the ads and some of them a second time, because there's a sense that those Super Bowl ads are vastly entertaining. I think that says you had better make more-entertaining ads.

Two, I think product placement is an area we're all playing in more aggressively. Three, something we are already doing is working with Ford on the premiere of 24
, which is commercial-free but will involve much longer messages from Ford that are going to be advertisements that are entertaining but are longer. So what may be challenged is less the world of advertising than the world of three- to four-minute pods filled with 30-second commercials. It may be that there are three-minute mini-films for products, and there also may be five- and 10-second commercials.

I think we're all going to have to be more innovative, and in the long run that's a positive thing for both industries.

After consolidation, synergy
is a word that has been bandied about a lot, although every company seems to deal with its so-called synergy differently. How does synergy operate within News Corp.?

I'm not sure synergy was ever a big vogue thing here. But I think this company is remarkably straightforward. There are obvious things you do if you have a big company that make sense to the company as a whole. I'm not sure I'd use the word synergy, but I think this company is unparalleled in terms of the things we all do to help out different parts of the company.

The easiest place to look is at television production. I don't think there is any company in the industry that has as well-integrated a system of producing for itself. About 50% of Fox's shows are produced at 20th Century Fox Television. The other 50% comes from the other studios. I think if you compare that with CBS-Viacom on a production level or with ABC-Touchstone, there's no comparison to what we've done.

I'll give you another example. If you look at the use of the broadcasting business to build a cable business, I don't think there's anybody that comes close to this company. This company was probably late to get into the cable-programming business, but, in a little more than decade, we've used our synergies to build a state-of-the-art cable business.

It's not like Viacom, where they had those networks for 20 years, or Time Warner, where they bought the Turner networks, or Disney, where they bought ESPN. We've built those things from scratch, and we built them largely synergistically.

NBC has had some luck integrating its programming assets so far. Do you see more close integration of your programming assets going forward?

We're happy with the way everyone operates, but we will consistently look at ways to maximize our programming. I'm not convinced it's repurposing as it's done right now. If you look at 24 and FX, repurposing 24 in the week after it premiered on the network didn't make enormous sense. On the other hand, running a 24 marathon of the previous year's episodes as a launch pad for the DVD release of 24, which is incredibly important for us, and for the next season of 24, which is incredibly important for us, makes a lot more sense.

Is there ever a point in which it makes sense to deliver all these products online?

We will deliver our products in any form and any format we think is protectable and potentially profitable. We are starting to deliver some of our products online, but I'm less bullish about that because I think most Americans already have a device on which they want to consume entertainment and it's called the television set. There are good delivery mechanisms to the television set between cable and DVDs and satellite and over-the-air broadcasting. I'm not sure there's a huge market for people who want to receive things on their computer.

That being said, piracy is an incredibly serious problem and all of us in the video entertainment business need to be aggressive about fighting its potential impact. I think we can have a product with a very flexible business model, but the most flexible business model in the world is pretty tough to compete with: free.

There's a lot of talk about whether the broadcast networks can survive because free over-the-air broadcasting is sort of an antiquated business model. Do you think it's possible to translate the business model into something new that can sustain itself?

Sure. First of all, I think one thing that has happened in the past 25 years in this country is that people went from believing television was free to believing it's something you pay for. So this big hurdle has been overcome.

I find this current brouhaha in Washington about the media-ownership rules to be an incredibly naive view of the television landscape. Incredibly naive. To be fair, News Corp. believes adamantly that these regulations are anachronistic, but many of the regulations they're talking about have no impact on us. More important, I think members of Congress, and I've said this to a number of them, ought to be far more concerned with how they protect the broadcast industry and how they maintain the strength of free over-the-air broadcasting for all Americans. They should be far more concerned with that than they should be about regulating broadcasting.

Do you think that, if national TV-household reach stays capped at 45%, that's a step toward protecting broadcasting?

I think it's a step towards protecting it, but, ultimately, I think there should be a second revenue stream for broadcasting.

And how do they get that?

I think that's a tough one. Is it retrans? Is it an antitrust waiver for networks or stations to negotiate together with cable? I think there's a number of ways to do it. I'm sure that what the cable companies would tell you, and with some legitimacy, is that broadcasters have created value from retransmission fees. It has been in the form of creating cable assets.

If News Corp. ended up with stations that cover 45% of the country, would we see any change in News Corp.'s commitment to local news?

No, if anything we'll increase it. But we are not necessarily anxious to buy a lot more television stations. We're not anxious to get up to 45%. We are believers in big markets and in duopolies, and we'd like to continue to grow in those areas. But I'm not sure we're a buyer of 20 small-market television stations if the cap increases.

Let's talk about Fox for a minute. What are your expectations for Fox this year? Do you think you'll beat NBC?

I don't know. That's our goal, but I'm not in the business of making predictions. I think we've got some very good shows, and we're going to work hard to launch them. I think we have a much more balanced and stronger schedule than we had going into last year, or the past several years.

Would you ever consider expanding Fox's prime time to 11 p.m.?

No. I think, if Fox were to expand its hours of coverage—and that is something that I think about—then I'm not sure if going to 11 o'clock is the right place to do it. I'd rather see us go to late-night first or do some morning stuff. I think there's something very valuable on a local level about having a 10 o'clock news when everybody else is in entertainment programming.

Why doesn't Fox go to a morning and a late-night programming block, since those dayparts are such profit centers for the other networks?

We have looked at it. Years ago, we had some pretty noticeable failures in late-night. One of the things that is telling is how much stability there is in those time periods. You've had CBS for 15-20 years trying to get a tiny little toehold in the morning area against the Today show. The Tonight Show has been dominant for 30-40 years. These are very difficult habits to break, and so, when you look at them—and we constantly look at them—we don't want to be too cavalier about how easy it is to do.

How do you think the NBC-Universal deal will impact the studio system in Hollywood?

I don't think it has much impact. Universal has not been a key supplier to Fox or to anybody over the past couple years other than Law & Order. So I don't think that there are negative implications there. NBC has announced they'd like to follow the Fox model and supply everybody.

From a 20th Century Fox Television perspective, I don't think we see any barrier to our ability to sell shows. From a Fox Broadcasting perspective, we have a distinct identity so we think outside suppliers will continue to find it attractive to create and produce shows for us.

I think it has worked well for 20th Century Fox to provide half of Fox's schedule, while it's often pointed out that this sort of synergy hasn't worked so well at Disney and ABC, for example. What's your take?

I think it has worked well because we have no rules. There's not a rule that says [20th Century Fox TV] has to provide half of Fox's schedule. I think it works well because the network opens their doors every morning and tries to find the best television shows they can. The network has never bought a show from Fox that doesn't interest them. Never. But they've certainly canceled lots of TCFTV shows. Last season, Girls' Club and Firefly were the first two shows to be canceled so there's absolutely no favoritism because it would be stupid to do so. You can't legislate creativity, and, from the studio perspective, it's a logical business model that says, "There's a sister network there. You should probably try and make deals with writers to create those shows for them. There's a pretty good first stop there."

What part of the company do you like running the best? Is there anything you prefer to do?

I probably gravitate towards those that are most creative, but all these businesses are creative. The nature of a job like this is that you trade in-depth involvement in individual businesses for a much larger scope and playing field. That is inherently exciting, challenging and fulfilling to me. I think what you do is try to balance a large company. What makes it exciting is the breadth, scope and challenge of it.

Ultimately, all the pieces of this company are more unified in a simplistic fashion than may be apparent. Every piece of this company is essentially about the same thing, which is that we are in the business of creating entertainment and news and information in multiple formats and distributing them to as many people around the world as we can. In that sense, every moment of the day is the same: I'm always trying to make sure we create the best content. That's no small endeavor. It's hard to create good content and then try to make sure we market it and distribute it as effectively as possible. Everything I do every minute of the day is somehow involved in that.

Contributing editor Paige Albiniak has been covering the business of television for nearly 25 years. She is a longtime contributor to Next TV, Broadcasting + Cable and Multichannel News. She concurrently serves as editorial director for entertainment marketing association Promax. She has written for such publications as TVNewsCheck, The New York Post, Variety, CBS Watch and more. Albiniak was B+C’s Los Angeles bureau chief from September 2002 to 2004, and an associate editor covering Congress and lobbying for the magazine in Washington, D.C., from January 1997-September 2002.