Will Murdoch’s Satellite Venture Hit Escape Velocity?

Even Hollywood might have difficulty coming up with a plot with more twists and hurdles than media mogul Rupert Murdoch faces in his bid to launch a huge new satellite TV venture that would rival traditional cable TV.

The U.S. Supreme Court, the Federal Communications Commission, federal antitrust regulators and hordes of broadcast copyright holders may ultimately have an impact on Murdoch’s bid to challenge the $25-billion cable-TV market by using satellites to blanket the country with more than 500 channels of video programming--including programs from local broadcast stations--beginning early next year.

Murdoch, whose Australia-based News Corp. is the parent company of the Fox Broadcasting Network, announced Monday that he will invest $1 billion in cash and assets for a 50% stake in Echostar Communications Corp. and launch a direct-broadcast satellite service that would combine Echostar’s 430,000 U.S. subscribers and three dozen satellite transponders with Sky, Murdoch’s satellite television service.

Although Murdoch is viewed warily by media critics, his venture with Denver-based Echostar has generally been greeted favorably by federal regulators and consumer groups. They say the new service will provide sorely needed competition to incumbent cable operators and the regional Bell telephone companies who have been slow to engage in either video or telephone competition over their sprawling networks.

“It’s hard to bleed for someone like Murdoch, but we need more competition,” said Mark Cooper, telecommunications policy director for the Consumer Federation of America, a Washington-based consumer advocacy group. “If we can get someone to use satellite capacity to compete with John Malone [chairman of cable giant Telecommunications Inc.] and Time Warner, then I’m all for it.”

Added Thomas W. Hazlett, a former FCC official who is now a professor at UC Davis: “You have to go a long way to conjure up a downside to this [Murdoch] deal.”

But before Murdoch can face off against the cable industry, he must navigate a sea of changing federal regulations.

One of the biggest potential obstacles is that Murdoch’s investment in Echostar would give him control of two of only three direct-broadcast satellite licenses that provide full coverage in the continental United States and would reach from Canada to Argentina. Echostar and Hughes Electronics, which owns the leading DirectTV satellite service, were rebuffed by the FCC because they already held one of those slots during an auction of the last DBS licenses that was ultimately acquired last year by MCI Communications Corp. MCI has joined Murdoch on the Echostar plan.

FCC officials have indicated privately in recent weeks that they may soften their stance because they believe such consolidation may be necessary to provide meaningful competition to the cable industry.

But Murdoch--a naturalized U.S. citizen who two years ago won a high-stakes battle with FCC officials who alleged his ownership of a group of Fox television stations violated U.S. foreign ownership rules--faces that issue again in trying to complete the Echostar deal.

Experts say News Corp. could circumvent the law--which limits foreign investment in U.S. communications companies to between 20% and 25%--by not being the licensee of record. MCI holds the license. Although the company is being acquired by British Telecommunications, one source at the FCC said the parties had tried in the deal to overcome any objections to foreign ownership by limiting MCI’s stake in Echostar to 10%. News Corp. would effectively own 40%.

Murdoch and Echostar could form a U.S. subsidiary to hold and own the satellite licenses. In any event, the FCC has indicated that satellite subscription video services, as distinguished from broadcast licenses, may not be subject to the foreign ownership restrictions.

But if regulators appear ready to show more flexibility in dealing with Murdoch, several cable operators and broadcasters are preparing for a fight.

In particular, Murdoch’s proposal to include local broadcast stations--which aren’t generally available through satellite services--could bring him massive legal and logistic headaches.

A 1988 federal copyright law allows satellite operators to offer out-of-market broadcasts only to areas that cannot receive over-the-air signals from local TV stations. Although Murdoch is proposing to deliver TV signals only to their current local markets, pinpointing coverage from a satellite stationed 25,700 miles above the Earth to densely populated areas presents huge technical and administrative challenges.

Television broadcasters have already filed scores of lawsuits against satellite operators for allegedly violating copyright law by selling TV programming from out-of-town stations.

What’s more, cable operators--who are prohibited by federal cross-ownership laws from owning a cable system and a TV station in the same market--grumble that Murdoch already owns broadcast stations in many markets.

“Right now cable operators have an obligation to retransmit [all] local broadcast stations,” said one cable industry lawyer who requested anonymity. “Satellite operators have no such obligation; they can cherry pick who they want. We don’t think that’s fair,” said the lawyer, who added that several cable operators have approached him about challenging the Murdoch venture on those grounds.

Indeed, the cable industry is expected to lobby to force satellite operators to carry all local broadcast channels--just as cable systems are required to do so under so-called must-carry rules. Were that law extended to satellite operators, Sky and most other satellite ventures would have difficulty carrying the nation’s more than 2,000 local stations.

However, if the experts are right, satellite operators may never have to wrestle with the problem. The U.S. Supreme Court is expected to rule soon on whether the must-carry rule is constitutional. Many experts believe the court will overturn the rule as an abridgment of cable operators’ free-speech rights.