NYT Article on D* & declining state of DBS

Tom Bombadil

Supporting Founder
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Supporting Founder
May 5, 2005
Chicago-Milwaukee Region
Satellite TV’s 3-Headed Rival: Cable Plus Internet Plus Phone

For two decades, Rupert Murdoch worked to become king of the cosmos, launching a ring of satellites that hover over five continents. He wanted to make sure he could beam his movies, networks and sports programming directly to viewers without being beholden to cable television operators.

But Mr. Murdoch has apparently decided that 22,240 miles — the altitude of a communications satellite — is too great a distance from his customers, at least in the United States. Mr. Murdoch, who controls the News Corporation, has been discussing trading his shares in DirectTV to John C. Malone’s company, Liberty Media, in return for Liberty’s stock in Mr. Murdoch’s company.

The deal is about control: Mr. Malone has been accumulating an ever-larger stake in the News Corporation, raising concerns about a potential takeover, and Mr. Murdoch wants to buy back the shares. And, of course, Mr. Murdoch, like most media executives, is eager to invest available capital in Internet properties, like the News Corporation’s social networking site MySpace.com, to develop the hottest advertising vehicles possible.

But the idea that Mr. Murdoch would be willing to surrender his stake in DirecTV, the largest American satellite broadcaster, also says a lot about the competitive pressures on the satellite business.

“Rupert is nothing if not a pragmatist,” said Craig E. Moffett, an analyst with Sanford C. Bernstein & Company. “Satellite has a tough road ahead and he has, for all intents and purposes, bet the company on an alternative vision, with Internet acquisitions like MySpace.”

During the last decade, DirecTV and its main domestic rival, EchoStar Communications, grabbed 27 million subscribers, a bit more than a quarter of the pay television market in the United States. While their growth is slowing, they are still doing well financially. In the second quarter, DirecTV earned $459 million, up 182 percent from a year earlier. Its revenue grew 12 percent, to $3.5 billion.

For many customers, however, there are better ways to get connected. Lowly wires, snaked across utility poles and buried under sidewalks, now can give people more viewing choices than satellites. And they can carry data into homes and back out, providing the Internet and voice services that cannot come from the sky.

The cable companies are finally reaping the benefit of the huge investments they made to rebuild their networks with fiber optic cables, capable of delivering hundreds of digital channels as well as two-way data traffic. And they are having great success in selling what they call triple-play bundles that combine television, Web access and Internet-based telephone service.

“Historically, satellite has had three advantages versus cable: it had better picture quality, more channels and a better price-value equation,” Mr. Moffett said. But digital systems have allowed the cable companies to improve quality and selection, and inexpensive Internet phone service has given them the edge on price as well.

To stay competitive, the satellite companies have to spend many billions of dollars to match those capabilities. They are even behind in the television market, which is rapidly shifting to high-definition signals. Retrofitting a satellite customer for HD requires both a new set-top box and a new rooftop dish, costing (according to Mr. Moffett) more than $500. Cable companies have to supply only a new box.

Comcast and other cable companies have started to attract a loyal audience for their video-on-demand services, which offer hundreds of pay movies and free television programs at the push of a button — far more choice than can be broadcast from a satellite.

It will be even more expensive for satellite companies to offer broadband data service, something Mr. Murdoch has acknowledged. His British affiliate, BSkyB, spent $374 million to buy Easynet Group, a high-speed Internet access provider, and it will spend $729 million to market the service. BSkyB is even offering basic broadband service free to subscribers. DirecTV has been talking about a similar offering in the United States, but it has not released details.

“It was always a quixotic vision to take a one-way platform like satellite and try to make interactivity to compete against a two-way plant like cable,” Mr. Moffett said. “They are left with the task of creating the illusion of interactivity.”

It might seem that satellite companies are natural allies with telephone companies, which offer voice and data services. And indeed DirecTV has a marketing partnership with Verizon. Yet both Verizon and AT&T have decided instead to become significant players in the pay television business, spending billions to wire neighborhoods with fiber optic lines that potentially can have more capacity than current cable systems.

It is yet to be shown whether the phone companies will see a return on these investments, but simply by trying they will make the competition harder for both the satellite and cable systems.

At the same time, ubiquitous broadband Internet service has started to remake the television business. During the last year, the networks, including News Corporation’s Fox channels, have started experimenting with selling downloaded versions of their programs through services like iTunes from Apple and offering some shows free over the Internet, along with advertising.

If these methods prove to be an effective way of distributing programming to a large number of viewers, then the fundamental reason Mr. Murdoch launched his ring of satellites — to provide unimpeded access to his programming — may no longer exist.

Indeed, Mr. Murdoch acknowledged as much in the News Corporation’s new annual report.

Broad distribution of its content “was the strategic imperative behind our entry into the satellite business, and that same imperative now propels us into the digital world,” he wrote in the chairman’s letter, suggesting that his postspace-age ambition may be even grander. “For the first time in media history,” he wrote, “complete access to a truly global audience is within our grasp.”

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