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The Liberty Media chairman could forge another empire if he gets control of the satellite TV outfit. But his plans have been hush-hush

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What does John Malone see in satellite television that Rupert Murdoch missed? That's the $10 billion question that has media experts puzzled, now that the onetime cable supremo is negotiating to secure a 38% controlling stake in DirecTV Group (DTV) from Rupert Murdoch's News Corp. (NWS).

After some heady growth, satellite TV in recent years has turned into a lousy business, tripped up by the resurgent phone and cable companies with their "triple play" offerings of phone, TV, and broadband service. Indeed, DirecTV and its rival EchoStar Communications (DISH) have been signing up fewer subscribers in the last 18 months than in the super-heated prior decade, a trend that analysts say shows no sign of reversal.

WHAT WE KNOW. "The satellite business is deteriorating," says analyst Craig Moffet, whose Stanford C. Bernstein & Co. has sell ratings on DirecTV and EchoStar. Then again, Malone, 65, has always had a few tricks up his sleeve. His Liberty Media (LINTA) has a new chief executive, former Oracle (ORCL) president Gregory Maffei, who has been busily striking deals to beef up the company's media properties. Malone also may have a way to offer broadband to DirecTV subscribers.

And Malone, say intimates, sees a big exit strategy down the road that will likely mean merging the two satellite companies when telcos gear up to provide the kind of competitive television service that could prompt federal regulators to approve a merger of the two players.

What exactly Malone wants with DirecTV is open to conjecture. He hasn't said anything publicly about the possible agreement, although sources in both camps say Malone and Murdoch have been talking for more than a month about using the DirecTV stake to unwind Liberty's position in News Corp.

The outline of the deal: Malone would swap Liberty's 19% stake in News Corp. for its 38% controlling stake in the satellite TV company. For Murdoch, who would likely retire Liberty's 19% stake—which would also boost his own stake via fewer outstanding shares—the deal gives him some breathing room from an investor whose mere presence forced News Corp. to erect a poison pill defense.

TAX TRADEOFF. For Malone, who never met a tax loophole he didn't like, the deal has immediate benefits: using an arcane tax law for "cash rich assets," he could shelter the capital gains on his two-year-old News Corp. stock to the tune of $3 billion, some analysts believe. Moreover, DirecTV also generates roughly $100 million a month in cash flow, which Malone could use to take the company private and then add on more debt to go shopping, figures UBS (UBS) analyst Aryeh Bourkhoff.

"Rupert was more interested in keeping cash on hand," he says. The deal swap could also signal that Malone, who has stayed largely out of the media spotlight since selling off his Tele-Communications cable operations to AT&T in 1999, may finally be willing to build the media company his shareholders have desperately craved.

Malone's Liberty Media has long traded at a discount to its assets, say Wall Street followers, because it was a hodgepodge of investments with no real strategy. Since coming aboard last year as Liberty's CEO, however, Maffei has beefed up Liberty's online presence by buying Internet retailer Providence and has taken a 54% stake in computer game company FUN Technologies.

SWAPPING STAKES. To give Liberty's Starz (LCAPA) pay TV operation the ability to produce its own programs, Maffei acquired TV and film production company IDT Entertainment. He's also looking to swap Liberty's 3% stake in Time Warner (TWX) for assets that include the Atlanta Braves baseball team, a move that will give him sports programming to sell to cable operators.

Adding DirecTV's 16 million subscribers to the mix would give Malone the distribution network he needs to get Liberty's content to viewers, without being at the mercy of the cable companies. He learned that lesson three years back, when cable giant Comcast (CMSCA) forced a renegotiation that reduced the revenue the cable giant paid to carry Liberty's Starz cable channels.

But DirecTV has so far signed up only 380,000 new subscribers, half its 2005 rate. Malone needs a killer app to get them back: broadband. He's likely to strike a deal with an outfit like Craig McCaw's wireless broadband company Clearwire, says Jimmy Schaeffler, CEO of the Carmel Group digital consultancy. Malone didn't respond to e-mail requests for comment, and Maffei wouldn't comment.

WILD IDEAS. Or Malone could turn to another Liberty investment, one-year-old, Denver-based WildBlue Communications, which provides satellite-delivered broadband services to 100,000 mostly rural homes. WildBlue just signed on to provide data service to DirecTV and EchoStar's rural customers.

The company is probably five years away from providing service to urban and suburban areas, says CEO David Leonard, and would need more satellites to do so. But the company could begin offering Internet phone service within six months, he adds.

Of course, talks between News Corp. and Liberty could still collapse. Over the last year, efforts to swap Malone's stake for TV stations or for News Corp.'s stake in the National Geographic Channel fell apart.

This time around, however, time seems to be running out. Malone faces a revamping of the tax rules that by next spring might make the DirecTV deal less lucrative, while Murdoch faces shareholder unrest over his anti-Malone poison pill. For Murdoch, a deal now would let him move on to building empires without looking over his shoulder. For Malone, it's the chance to show that the cagey dealmaker still has what it takes to play in the game