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Lean, Mean Sat TV

DirecTV's Chase Carey says he'll put the squeeze on programming costs, streamline ops 1/04/2004 07:00:00 PM Eastern

Small Operators Say FCC Provisions Will Help Them Stay Competitive

Small Operators Say FCC Provisions Will Help Them Stay Competitive

FCC Democrats and public advocates say the federal restrictions on the News Corp./DirecTV deal don't go far enough, but small cable operators are thrilled with new limits, approved by a 3-2 vote on Dec. 19 along party lines.

"The conditions will have a huge leveling effect," says Matthew Polka, president of the American Cable Association, which represents independent cable systems with no programming holdings.

Not only did the FCC weaken News Corp.'s leverage in programming distribution contracts by forcing disputes with any cable system to an outside arbitrator, but special restrictions were aimed at benefiting systems with fewer than 5,000 subscribers—one of ACA's key constituencies.

Specifically, small cable companies have the right to request to bargain collectively for rights to broadcast stations and regional sports nets, a provision that will make them better able to bargain for the kind of volume discounts given major multiple-system operators like Comcast and Time Warner Cable.

Also, News Corp. cannot tie retransmission consent for carriage of a local Fox station to carriage of its cable nets or any other programming.

Both provisions "are a very big thing for us," Polka said.

The right to arbitration, even though it applies industry-wide, is especially helpful to small operators, he added. "Fox has always been able to use retransmission consent and its ability to pull a local station signal to gain enormous leverage. Now we've got the ability to call them on it and let the arbitrator judge whether the conditions are onerous."

FCC Chairman Michael Powell said the conditions imposed will allow consumers to obtain the new services and other innovations the company promises to offer consumers while ensuring that News Corp. will not be able to abuse its market power against competitors. "News Corp. has a history of taking significant risks and introducing new and innovative media services. Enhanced competition will increase pressure to improve service and lower prices for both cable and satellite television subscribers."

Democratic Commissioners Michael Copps and Jonathan Adelstein opposed the deal, arguing that News Corp. will have unprecedented, and harmful, reach across nearly every major media sector: TV distribution, broadcast network, TV stations, cable networks, major film- and TV-production studios, as well as print, video backhaul and electronic programming guides.

Making a play on the name of the company's Fox TV network and production studio, Adelstein said the FCC conditions don't go far enough. "Deciding whether a fox should guard a hen house is a far more serious exercise than this order reflects."

Media watchdog Jeff Chester predicted the deal would give media conglomerates even more power over TV programming. "Now Fox and the cable giants such as Comcast, Cox and Time Warner will be able to create a cozy 'Cosa Nostra'-style deal that carves up the digital TV marketplace for themselves."

The folks at the National Cable & Telecommunications Association said the merger will make the multichannel market more competitive. "Rupert Murdoch is a tough competitor, so adding his global media assets to DirecTV makes DirecTV a very formidable competitor," said NCTA President Robert Sachs.

Polka said ACA will now fight to apply the small-cable protections to other cable programming suppliers. "Other conglomerates still exert the same pressure on our members."

The arbitration clause was included after cable operators big and small voiced concern that News Corp. would have leverage to demand extremely high prices for rights to its programming. If a cable operator in a particular market refused to go along, News Corp. would always be assured of carriage for its programming there on DirecTV.

News Corp. officials said the conditions, "as we understand them," would not have a negative affect on their plans for DirecTV.

Among the specifics of other conditions:

  • All the company's multichannel programming networks must be offered to competing cable and satellite-TV providers on a non-exclusive and non-discriminatory basis. Competing pay-TV distributors that believe they're getting a raw deal may file a program-access complaint at the FCC.

  • TV stations owned by News Corp. and affiliates for which it negotiates retransmission consent must be offered to cable and satellite-TV providers on the same basis as News Corp.-owned multichannel networks. Also, satellite-industry rules requiring good-faith negotiations for broadcast carriage rights remain in effect for News Corp as long as cable program-access rules are in effect rather than expiring in 2005 as they do for the rest of the satellite industry.

  • Disputes between News Corp. and cable/satellite carriers over rights to broadcast stations and regional sports networks will be settled by the American Arbitration Association. News Corp. may not withdraw programming during disputes over expiring contracts but is under no obligation to make new programming available to a carrier before an initial contract is signed. The arbitration requirement expires December 2009, when the FCC will consider an extension.

By the end of 2004, DirecTV must offer local TV stations in the top 130 markets. That's 30 more than the company had expected.—Bill McConnell

Sidebars:

Small Operators Say FCC Provisions Will Help Them Stay Competitive

With News Corp. now firmly in charge, look for big changes in the way DirecTV operates in 2004. That means a leaner management and a tough negotiating stance with cable networks when it comes to licensing.

Chase Carey, the News Corp. veteran running the show, has set a series of goals in the next 12 months designed to get the pay satellite-TV service growing faster.

In an interview with BROADCASTING & CABLE, Carey sent out an unmistakable signal that, like big cable MSOs, he's out to slow the rise in programming costs.

"We're the second biggest distributor in the U.S. and the biggest distributor on a worldwide basis," he said. "We should have the economics of scale that come with that to create a level of efficiency and focus that is a competitive advantage."

In fact, only Comcast is bigger than DirecTV, which has 12 million subscribers. Within four to eight years, though, Carey wants DirecTV in 20 million homes, which would make it just slightly smaller than cable's biggest gun.

News Corp.'s $6.6 billion deal to buy control of DirecTV parent Hughes Electronics passed regulatory muster on Friday, Dec. 19, and News Corp. completed the purchase over the following weekend, officially positioning Carey as CEO of Hughes.

Upon completion of the transaction, News Corp. transferred its stake in Hughes to subsidiary Fox Entertainment Group. Mitch Stern, the former head of the Fox Station group and Twentieth Television, is set to manage the satellite service as CEO of DirecTV, reporting to Carey.

He succeeds Eddie Hartenstein, who drops all operating duties for the corporate position of vice chairman at Hughes.

Job one is to get those 8 million new subscribers. To get there, Carey acknowledges, a number of shorter-term goals have to be achieved first, such as:

  • Standardizing set top boxes across the company's subscriber base.

  • Expanding service to 130 markets, from 60 now.

  • Adapting the interactive technology of News Corp.'s European satellite operation, BSkyB, starting with news and sports programming.

  • Standardizing DirecTV's electronic program guide by midyear.

  • Significantly overhauling the customer-service operation.

Maximizing cost-efficiencies is also high on Carey's priority list, although that's more of an ongoing concern than a goal with a specific timetable.

"DirecTV has operated under a somewhat cumbersome construct," Carey said, "with Hughes as a corporate parent and General Motors above it as a corporate parent."

That setup has bred a certain level of bureaucracy that is antithetical to the way that News Corp. companies typically operate. "We need to develop a leaner and more agile entity focused on operations," said Carey. "News Corp. is a company that historically has been driven by operating executives."

DirecTV has already made some head-count reductions, he noted. To the extent that there are more, "I think a lot of it is based on effective, fast decision-making and a clear delineation of operating responsibilities."

Translation: If you're part of DirecTV's mid-level pencil-pushing bureaucracy, be worried.

Carey is circumspect on marketing specifics, but basic math tells him the nation is "pretty much penetrated. There aren't that many new homes to get, so mostly you're competing with existing distributors and you have to compete against both" cable and satellite operators.

He believes that DirecTV can add between 1 million and 2 million subs a year, so it could take four to eight years to reach 20 million subscribers.

An obvious question, and one that Carey artfully dodges, is whether DirecTV will start a price war to gain market share. "We'll compete on value. Price is a component of value. If you provide a great experience with great service at a fair price, that's a great value."

Currently, he noted, DirecTV is giving away satellite dishes and three boxes. How long that will last is unclear. "That's something that's determined in a competitive marketplace at a point in time."

One area in which DirecTV expects to "lead" the market is with personal-video-recorder technology. Already, he said, DirecTV has a PVR in the market that allows viewers to view one channel while recording another. EchoStar, he pointed out, doesn't have that capability.

Whether or not TiVo remains a long-term partner in the PVR business remains to be seen. A News Corp.-affiliated company, NDS, is also in the PVR business.

"TiVo has unique features and a strong brand in the marketplace," Carey observed. "We look to build on that relationship. But, at the same time, we need to look at the breadth of options in the PVR space. NDS has a PVR, and there are others. We need to be a leader. At the end of the day, we will choose a path we believe enables us to be that leader."

On the interactive front, DirecTV subscribers will be choosing their own camera angles for sports replays and sorting through reams of statistics and other data on their favorite players fairly soon. They'll also be participating in a variety of news polls and be able to check weather and traffic. Transactional and other services will also be introduced throughout the coming year, he said.

"Clearly a place where we'll tap into BSkyB is interactivity," he said, calling it the "most advanced interactive service in the world."

But the company plans to add many interactive features outside of news and sports throughout the coming year, said Carey.

As for speculation about a possible merger of DirecTV and News Corp. satellite services in Latin America, Carey admits it makes sense on paper but many local issues have to be addressed before it happens.

Hughes also owns PanAmSat, which leases satellite space to other users, and may be a business News Corp. wants to sell. But Carey said that's an open question he's in no hurry to answer.

Small Operators Say FCC Provisions Will Help Them Stay Competitive

Small Operators Say FCC Provisions Will Help Them Stay Competitive

FCC Democrats and public advocates say the federal restrictions on the News Corp./DirecTV deal don't go far enough, but small cable operators are thrilled with new limits, approved by a 3-2 vote on Dec. 19 along party lines.

"The conditions will have a huge leveling effect," says Matthew Polka, president of the American Cable Association, which represents independent cable systems with no programming holdings.

Not only did the FCC weaken News Corp.'s leverage in programming distribution contracts by forcing disputes with any cable system to an outside arbitrator, but special restrictions were aimed at benefiting systems with fewer than 5,000 subscribers—one of ACA's key constituencies.

Specifically, small cable companies have the right to request to bargain collectively for rights to broadcast stations and regional sports nets, a provision that will make them better able to bargain for the kind of volume discounts given major multiple-system operators like Comcast and Time Warner Cable.

Also, News Corp. cannot tie retransmission consent for carriage of a local Fox station to carriage of its cable nets or any other programming.

Both provisions "are a very big thing for us," Polka said.

The right to arbitration, even though it applies industry-wide, is especially helpful to small operators, he added. "Fox has always been able to use retransmission consent and its ability to pull a local station signal to gain enormous leverage. Now we've got the ability to call them on it and let the arbitrator judge whether the conditions are onerous."

FCC Chairman Michael Powell said the conditions imposed will allow consumers to obtain the new services and other innovations the company promises to offer consumers while ensuring that News Corp. will not be able to abuse its market power against competitors. "News Corp. has a history of taking significant risks and introducing new and innovative media services. Enhanced competition will increase pressure to improve service and lower prices for both cable and satellite television subscribers."

Democratic Commissioners Michael Copps and Jonathan Adelstein opposed the deal, arguing that News Corp. will have unprecedented, and harmful, reach across nearly every major media sector: TV distribution, broadcast network, TV stations, cable networks, major film- and TV-production studios, as well as print, video backhaul and electronic programming guides.

Making a play on the name of the company's Fox TV network and production studio, Adelstein said the FCC conditions don't go far enough. "Deciding whether a fox should guard a hen house is a far more serious exercise than this order reflects."

Media watchdog Jeff Chester predicted the deal would give media conglomerates even more power over TV programming. "Now Fox and the cable giants such as Comcast, Cox and Time Warner will be able to create a cozy 'Cosa Nostra'-style deal that carves up the digital TV marketplace for themselves."

The folks at the National Cable & Telecommunications Association said the merger will make the multichannel market more competitive. "Rupert Murdoch is a tough competitor, so adding his global media assets to DirecTV makes DirecTV a very formidable competitor," said NCTA President Robert Sachs.

Polka said ACA will now fight to apply the small-cable protections to other cable programming suppliers. "Other conglomerates still exert the same pressure on our members."

The arbitration clause was included after cable operators big and small voiced concern that News Corp. would have leverage to demand extremely high prices for rights to its programming. If a cable operator in a particular market refused to go along, News Corp. would always be assured of carriage for its programming there on DirecTV.

News Corp. officials said the conditions, "as we understand them," would not have a negative affect on their plans for DirecTV.

Among the specifics of other conditions:

  • All the company's multichannel programming networks must be offered to competing cable and satellite-TV providers on a non-exclusive and non-discriminatory basis. Competing pay-TV distributors that believe they're getting a raw deal may file a program-access complaint at the FCC.

  • TV stations owned by News Corp. and affiliates for which it negotiates retransmission consent must be offered to cable and satellite-TV providers on the same basis as News Corp.-owned multichannel networks. Also, satellite-industry rules requiring good-faith negotiations for broadcast carriage rights remain in effect for News Corp as long as cable program-access rules are in effect rather than expiring in 2005 as they do for the rest of the satellite industry.

  • Disputes between News Corp. and cable/satellite carriers over rights to broadcast stations and regional sports networks will be settled by the American Arbitration Association. News Corp. may not withdraw programming during disputes over expiring contracts but is under no obligation to make new programming available to a carrier before an initial contract is signed. The arbitration requirement expires December 2009, when the FCC will consider an extension.

By the end of 2004, DirecTV must offer local TV stations in the top 130 markets. That's 30 more than the company had expected.—Bill McConnell

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