Stations to Feel DirecTV's Effect (Important insight on D* future!!!)

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silversurfer

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Stations to Feel DirecTV's Effect

Murdoch May Seek Cash From Cable for Local Signals

By Diane Mermigas

It appears Fox's control of DirecTV will alter conventional relations between the broadcast network and its television stations.

Fox could become the first major broadcaster to hold out for cash payments in new retransmission agreements with multichannel operators, given its fortified stable of Fox cable networks, DirecTV, the Fox broadcast network and its syndicated programs and theatrical films.

"Rather than taking money in the past, we've taken distribution for new cable channels. And it may be possible in the future that we will hold out for money," News Corp. Chairman Rupert Murdoch said in an interview. "That's up to the Fox stations and the stations group. It's a question of what they ask for and what the arbitrator has to say.

"The free broadcast industry needs retransmission. But we're not going to be the only pay operators in the world paying them," Mr. Murdoch said, referring to the nominal fee DirecTV and other satellite operators pay to some broadcasters-although not to major network-owned stations-to carry their signals.

"Broadcasters are not completely unified on this matter, so it's going to be very difficult. I think anyone who breaks through and gets it will be followed very quickly by the others," he said.

DirecTV will not be first in line to pay for Fox-owned TV signals. "Right now my answer would be no because I'm not sure why it would be good for us," Chase Carey, president and CEO of Hughes Electronics and its DirecTV unit, told TelevisionWeek.

Mr. Murdoch and other News Corp. and Fox officials conceded there is potential upside and downside in DirecTV's impact on Fox TV stations, which yield more than $1 billion in duopoly-driven annual profits.

"They will have to react to all multichannel providers, and I think the Fox stations will be able to distinguish themselves from other cable channels with many more hours of news each day. We're developing very strong live local news and talks shows for all our stations to go out over DirecTV and local cable," Mr. Murdoch said.

In the end, a DirecTV alliance also will mean extending the reach of many Fox affiliates. The company has pledged to spend $1 billion to upgrade its DirecTV technology to provide local-into-local TV station carriage by 2004, since it has proven to reduce satellite subscriber turnover and increase the amount of revenue spent per subscriber on overall services.

Some of its biggest media peers have good reason to fear News Corp. now that it has armed itself for global broadband warfare through DirecTV, which its Fox Entertainment Group already is wielding to raise the competitive bar and rewrite the rules of play.

Besides the retransmission issue, some interesting early challenges and opportunities appear to be shaping up between various factions under the News-Fox-DirecTV corporate umbrella. For starters:

w DirecTV will seek even lower license fee increases from ESPN than the average 7 percent increase over a new nine-year pact recently negotiated with Cox Communications.

"I think the only way to get program costs down substantially is to have some high-profile disputes," said Mr. Carey, who wants inflation rate hikes. "There are certain services we are paying too much [for] and certain services we shouldn't carry at all. You're going to have to have some fights."

w Fox will launch a personalized electronic newspaper in which viewers' sports, weather, news and other information preferences (such as horoscopes and traffic reports) will be downloaded, updated and ready for daily on-demand review. A suite of such customized, interactive services will tap content from News Corp.'s broadcast and cable networks, TV stations and newspapers-repackaged and repriced for broadband.

w Fox and the National Football League could make an end run around Walt Disney's Co.'s ESPN by creating a rival TV sports franchise, relying on the pricey football contracts that come up for renewal next year (TelevisionWeek, Feb. 23). "We'd have to proceed very carefully if we do it. We'd certainly do it with partners," Mr. Murdoch said. "We have to consider the capacity of pay television subscribers to pay for two ESPNs. It will depend entirely on the terms."

w On the programming front, DirecTV's highly sought-after NFL Sunday Ticket will go fully high definition. New cable networks-particularly niche versions of Fox's popular news and sports platforms-will be launched, as will a string of ethnic channels, culled from some of News Corp.'s international operations.

Some of Fox's most popular prime-time programs, including "American Idol," will get interactive extensions, allowing DirecTV subscribers to vote for and communicate with contestants.

"We're looking to distribute a broad array of content, whether news, sports or entertainment, local or national, backed by great marketing capabilities. We have a scale that dwarfs everyone else in the business, including Comcast. We're going to leverage that to make sure we get our program costs in line and the best price for product while developing new content," Mr. Carey said.

w News Corp. and Fox are striving to cushion their energetic embrace of personal video recorder technology in DirecTV's set-top boxes with limitations and standards that do not overly threaten the advertising revenue that is key to Fox's TV stations and broadcast network. They will include elimination of the 30-second skip button and place limits on the time allowed to download and store programs.

"At the end of the day, we have to have PVRs competitive with the marketplace," Mr. Carey said. "We do think the satellite and the broadcast industries have a shared interest here, especially as cable goes after the local advertising market."

The blueprint for much of DirecTV's new content, services and supports is being lifted from BSkyB, News Corp.'s 50 percent-owned satellite platform in the United Kingdom that after a decade of agonizingly slow growth will generate more than $1 billion in earnings next year.

"Growing DirecTV and our various operations is a 10-year process for this family, and there are a lot of complexities. We'll only get 10 percent of the way there this year because we are taking the time to do it the right way," said Peter Chernin, president and chief operating officer of News Corp. and chairman and CEO of Fox Entertainment Group.

In fact, taking control of DirecTV represents a "strategic watershed" for News and Fox, according to Credit Suisse First Boston analyst William Drewry, making for a "perfect and complete" set of global assets.

The real "payback" from years of acquiring and developing assets-such as TV syndication, BSkyB, Sky Italia, Star TV in India and Asia and now DirecTV-will be realizing true vertical integration.

Merrill Lynch estimates a $1 billion swing in operating income from Sky Italia over the next four years from $300 million in losses in fiscal 2004 to $665 million in earnings in fiscal 2008. BSkyB's contributions to News Corp.'s bottom line will grow from $58 million in fiscal 2003 to $350 million in fiscal 2005. The Fox cable networks will see $500 million in operating income this year triple to nearly $2 billion by 2007.

Net income from Hughes Electronics and its DirecTV unit is projected to grow at a five-year average of 39 percent through 2009 to $2.3 billion from about $440 million this year, with News Corp.'s 34 percent share equating to nearly $800 million within five years, Merrill Lynch estimates.

News Corp.'s track record for accepting short-term operating losses to create long-term value, its entrepreneurial risk-taking culture and extensive knowledge from launching satellite operations in a variety of countries will secure the success of DirecTV-driven activities across the entire company, Mr. Drewry said.

That could be why News Corp. and Fox officials said they are not deterred by the regulatory conditions placed on their acquisition of a 35 percent controlling stake in Hughes and its DirecTV unit last December. Among other things, those conditions include arbitration for third-party distribution disputes, a special committee to screen deals between DirecTV and Fox and nonexclusive access to Fox content.

"I think in some ways we were strengthened. We were rather surprised. I think people thought they were strapping us, but I think, in fact, the method and circumstances of arbitration leaves us some interesting possibilities," Mr. Murdoch said.

Even at this early juncture, it is clear Fox's control of DirecTV will alter conventional relations between the broadcast network and its television stations.

For instance, under the right circumstances, Fox could become the first major broadcaster to hold out for cash payments in new retransmission agreements with multichannel operators, given its fortified stable of Fox cable networks, DirecTV, the Fox broadcast network and its syndicated programs and theatrical films.

"Rather than taking money in the past, we've taken distribution for new cable channels. And it may be possible in the future that we will hold out for money," Mr. Murdoch said. "That's up to the Fox stations and the stations group. It's a question of what they ask for and what the arbitrator has to say.

"The free broadcast industry needs retransmission. But we're not going to be the only pay operators in the world paying them," Mr. Murdoch said, referring to the nominal fee DirecTV and other satellite operators pay to some broadcasters-though not to major network owned stations-to carry their signals. Cable operators have stalwartly resisted.

"Broadcasters are not completely unified on this matter, so it's going to be very difficult. I think anyone who breaks through and gets it will be followed very quickly by the others," he said.

Mr. Murdoch and other News Corp. and Fox officials conceded there is potential upside and downside in DirecTV's impact on Fox TV stations, which yield more than $1 billion in duopoly-driven annual profits.

"They will have to react to all multichannel providers, and I think the Fox stations will be able to distinguish themselves from other cable channels with many more hours of news each day. We're developing very strong live local news and talks shows for all our stations to go out over DirecTV and local cable," Mr. Murdoch said.

In the end, a DirecTV alliance also will mean extending the reach of many Fox affiliates, since the company has pledged to spend $1 billion to upgrade its DirecTV technology to provide local-into-local TV station carriage by 2004 as it is proven to reduce satellite subscriber turn-over and increase the amount of revenues spent per subscriber on overall services.

DirecTV has the highest average revenues per subscriber-$63.30-in the multichannel industry, Mr. Drewry said. That will grow beyond $70 per subscriber in several years without interactivity and new services. Even DirecTV's industry-low 18 percent subscriber turnover will slide to 15 percent, he said.

Over the next three to four years, subscriber growth could reach more than 16 million customers, which could be as much as 20 percent of the market by then, Mr. Murdoch pointed out.

By comparison, News Corp.'s BSkyB has grown to 35 percent share of the U.K. market, on its way to 50 percent.

The fortification of the broadcasting business by DirecTV is important since the Fox television stations and broadcast networks are the largest earnings contributors to News Corp.'s filmed entertainment group, even through their long-term earnings power already is threatened by rampant audience fragmentation fostered by the very cable networks that are a growing economic and competitive factor for Fox.

Grabbing more of the NFL's licensed football rights in the next contract negotiation for use on the Fox broadcast network and stations as well as cable networks and DirecTV could catapult News Corp.'s domestic distribution platform to an unprecedented stature. Such an effort would parallel the NFL rights grab that put the Fox fourth network on the map two decades ago.

As the owner of the largest TV station group and now the dominant satellite provider in the United States, Fox with DirecTV will set new standards for cross-ownership of broadcast and satellite outlets in the same major markets. Overall, experts contended Fox's advertising-only-supported owned-and-affiliated broadcast TV stations have more to gain than to lose from their alliance with DirecTV, which affords 90 percent coverage of U.S. households.

While principals say they have had only preliminary talks about the creation of an ESPN rival television sports entity, industry experts agree that the advantage could swing to Fox in the next round of football rights negotiations that begin later this year with a handful of broadcast and cable networks. While Fox is strapped with the debt and cost of the recent DirecTV acquisition, News Corp. has at least $3 billion in cash and cash equivalents and nearly $2 billion in annual free cash flow to fund growth and acquisitions, such as broader NFL rights. DirecTV's projected cash flow will grow by about 43 percent to $1.4 billion this year.

New leadership at News Corp. and Fox will trim at least 12 percent of DirecTV's operating costs this year on an $11 billion revenue base, eventually reaching $765 million in annual cost savings, Mr. Drewry said.

But a majority of DirecTV's steady bottom-line gains will come from growth, not cost cuts, so both DirecTV and Fox have strong enough financial footing to support a major NFL rights buy.

Comcast, which also has a well-funded and managed balance sheet, is on record as wanting to snare the NFL Sunday Ticket broadcast from DirecTV or Sunday football rights from ESPN, which Comcast would own if it is successful in its bid for Disney. There is speculation that Comcast and other major cable operators could support Fox's efforts to create an ESPN rival with NFL backing. "It's very important for us to do two things: to keep our relationship with the NFL, which is a very good one, and secondly, not to do it at a loss," Mr. Murdoch said. "It's open bidding. You just don't know. We don't know yet."

Owning and amortizing more of the NFL rights will help News Corp. avoid the nearly $1 billion write-down it took in sports-related losses several years ago, although Fox officials already have signaled to their affiliates that they will need more financial support from stations for all of its more competitive and costly prime-time programming in the future. Such a development would have a devastating economic impact on ESPN and its Walt Disney corporate parent.

Fox likely will seek a partner such as Comcast or another major cable operator who is fighting back ESPN's 20 percent annual license fee demands to share the financial load.

"We'll certainly be in a collaborative mood, but we're not going to be forming any cartel with our competitors against our programmers or anything like that," Mr. Murdoch said. Sources said Comcast, Cox and other cable operators have had very preliminary talks with Fox, as has the NFL, though all of the principals decline to comment.

Comcast is destined to become a sports partner with Fox no matter what, as it is negotiating to buy Cablevision's stake in the Fox Regional Sports Networks.

"We'd love that. They are very aggressive competitors," Mr. Murdoch said. "There are many things we could do either together or [as] joint ventures or … I don't know. We'll see."

"With the completion of the DirecTV acquisition, we now have what I believe is a near-perfect balance of assets-maybe one that Brian Roberts agrees with," Mr. Murdoch quipped during a recent earnings call with investors.

If Comcast is successful in its unsolicited bid to buy Disney, things could get more interesting, since it would then own ESPN. "There's probably going to be a hell of a row in Washington about media concentration this time, although I will tip that they will get [approval] probably with some of the conditions we had to agree to," Mr. Murdoch said. "ESPN would be the great prize there, but they would have nothing we couldn't do or grow into."

In any event, by using its existing base of Fox Broadcasting, successful regional cable sports networks and DirecTV, Fox could wage one of the biggest upsets ever in broadcast, cable and pay television. Successfully launching a rival ESPN sports television entity would be one way of keeping even high-priced sports off of paid tiered and a la carte platforms.

Mr. Chernin said he considers the challenges and opportunities posed by DirecTV an important extension of a network-affiliate relationship influx.

Broadcast networks and their owned-and-affiliated stations are learning how to share such content to the benefit of all concerned as the new multichannel arena continues to strain traditional exclusivity ties between networks and their stations.

In the case of a hit series such as "American Idol," the experience and economic returns from the show can be enhanced by interactive and other technology inside DirecTV's evolving set-top box.

All of Fox's local and national programming will be transmitted in high definition by 2006, and half of its prime-time schedule will be transmitted in high definition this fall.

However, Tony Vinciquerra, Fox Network Group president and CEO, conceded there is unrest among station owners about this unprecedented alliance. "I think some affiliates continue to be nervous about the DirecTV situation, but we are continuing to remind them that we need full distribution, and you are not going to get that in Direct TV. Also, News Corp. owns more than 80 percent of Fox and only 35 percent of DirecTV. The fact that News Corp. has $15 billion in the television station business means it's not going to do anything to hurt that," Mr. Vinciquerra said.

That is why Fox has been pushing hard in recent years to convert to a 52-week television year that will give programming the proper marketing, production and other support to ensure success. It's the $100 million swing factor-from having series fail at the start of the fall season to the ratings boost of "American Idol" four months later-that can cause Fox more grief.

"We're obviously concerned about the lag in ratings. Our priority has been to restore momentum at the Fox network coming out of baseball," Mr. Chernin said. "But Fox still will grow this year and we will beat projections."

"We are absolutely committed to broadcasting as a company and having a strong News Corp. with additional distribution platforms," he said. "While I feel good about our affiliate relations, I think overall, all networks and their affiliates are spending too much time grappling with each other instead of grappling with the future. The key to solving some of these broad issues in the future is to do lots of experimentation."

For the entire article click here
 
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Alan Gordon

SatelliteGuys Pro
Oct 20, 2003
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silversurfer01973 said:
In the end, a DirecTV alliance also will mean extending the reach of many Fox affiliates. The company has pledged to spend $1 billion to upgrade its DirecTV technology to provide local-into-local TV station carriage by 2004, since it has proven to reduce satellite subscriber turnover and increase the amount of revenue spent per subscriber on overall services.

Is this referring to 7s, the space at 72.5, SpaceWay sats, or something else that we don't know about yet.


~Alan
 
silversurfer

silversurfer

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I'm not sure exactly what they are going to use but I think it is just for the Fox affiliates...
 
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Alan Gordon

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Oct 20, 2003
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silversurfer01973 said:
I'm not sure exactly what they are going to use but I think it is just for the Fox affiliates...

What do you mean, just start adding a bunch of Fox affiliates up?! I wouldn't mind that. Fox is one of the worst channels for me to get in, even though I get a Grade A signal. If that's what it means, I'm not sure the other stations would like that though if they didn't get added.


~Alan
 
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fredfa

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Jan 12, 2004
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How about at least identifying the Mermigas article as being from TVWeek?
It is bad enough that we are stealing her entire article.
We could at least give credit.
 
silversurfer

silversurfer

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Her name is posted in the article and it is not the entire article
 
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fredfa

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Jan 12, 2004
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Well, "excerpting" 3,066 words of a 3,316-word article (92.46%) without generous attribution (not just a link) still feels a lot like stealing to me.
 
Stargazer

Stargazer

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It would make sense for them to add only the local Fox channels for most if not all the DMA's and the other networks that want added would have to pay them to get added to the satellite for their viewers in that DMA, to make up for the satellite launch. Having a Fox affiliate in each market would allow the viewers to only view that Fox channel giving the other channels a disadvantage until they pay to get put on the satellite.
 
dlsnyder

dlsnyder

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Sep 8, 2003
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It seems to me like this should be one of the biggest concerns from this article:

w News Corp. and Fox are striving to cushion their energetic embrace of personal video recorder technology in DirecTV's set-top boxes with limitations and standards that do not overly threaten the advertising revenue that is key to Fox's TV stations and broadcast network. They will include elimination of the 30-second skip button and place limits on the time allowed to download and store programs.

It sounds like they are going to tone down some of the Tivo functionality that many regard as central to its usefulness. With DirecTV really in the driver's seat now on what Tivo is going to do and not do this can't be good news.
 
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fredfa

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Jan 12, 2004
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Of course there is no 30-second skip button on Tivo.
However, the fast forward button is easily used to accomplish the same thing.
 
dlsnyder

dlsnyder

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Sep 8, 2003
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I don't have a Tivo myself but have heard about "secret codes" to unlock a 30-second skip feature. The thing that would bother me the most about this is a time limit on storing recordings. Unless I am mistaken currently you can protect a recording for an unlimited time. It sounds like they are worried about that capability eating into ad revenues somehow.
 
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beejaycee

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Oct 3, 2003
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fredfa said:
Of course there is no 30-second skip button on Tivo.
However, the fast forward button is easily used to accomplish the same thing.
This is accomplished with one of the "Select-Play-Select" codes:
Select-Play-Select-3-0-Select

Tah-dah! You now have a 30 second skip. This is one of the two that I use. The other is S-P-S-9-S which is the toggle to put a clock on the lower right-hand side of the screen. It also shows the remaining time in a recording.
 
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