Satellite Merger Signals a Rising Star

A deal in satellite television last week in which Rupert Murdoch’s News Corp. and EchoStar agreed to merge their direct-broadcast satellite operations in the United States has aroused a lot of comment.

The agreement is a signal that direct-broadcast satellite, or DBS, television, although only in its infancy, will become a sizable industry, a competitor to cable and other forms of information distribution.

The deal itself looks relatively unexciting: News Corp. contributes satellite and ground facilities worth an estimated $1 billion to acquire 50% of EchoStar, a small company based in Denver that has extensive satellite capabilities. MCI Telecommunications, a News Corp. partner in satellites, will own 10% of the venture.

But little cash is being invested in the deal, so the venture, to be called Sky, will have to raise considerable financing and overcome regulatory hurdles before it becomes truly operational.

Yet the involvement of Murdoch’s News Corp., the owner of world-leading satellite operations in Britain and Asia, sets the deal apart and offers not only insight into satellites’ potential, but also into the many gains and losses that go into building a global business.

News Corp.’s move reflects Murdoch’s determination to make satellite broadcasting a centerpiece of the $10-billion media company that also owns 20th Century Fox studios, the Fox Television Network and many other properties here and worldwide.

He has announced intentions to sell some of News Corp.’s book-publishing holdings to finance expansion in satellites; further capital has been raised through sale of preferred stock to MCI.

Murdoch is late into the U.S. satellite market and had to hurry. The Sky venture, which will have fewer than 500,000 customers to start, is well behind DirecTV, the U.S. leader with 2.4 million subscribers.

And technology is moving on. DirecTV, a subsidiary of Hughes Electronics, will demonstrate DBS’ ability to facilitate online programming and access to the Internet late this year through a joint venture with Microsoft in which satellites will transmit to personal computers.

The advantage initially is that the PC will be able to take in and record--”download,” in the jargon--far more data and multimedia offerings, even feature films, than is practical now.

Several years from now, through more advanced satellites and receivers that are now being developed, satellites and PCs will move to full interactivity, predicts Eddy Hartenstein, president of DirecTV.

The new Sky venture will also experiment with satellite-to-PC transmission, but its chief competitive feature will be local television service. Thanks to what will be Sky’s eventual operation of up to seven satellites, it will provide 500 channels, including local stations.

Those 500 channels will open the way not merely for endless hours of movies, but for specialized, almost individualized programming--tax advice to small groups, for example; cultural events for small audiences; coverage of specialized sports events.

Such narrow-audience features can be possible--and profitable--because satellite broadcasting is not dependent on advertising, at least not yet. Rather, customers buy the satellite dish for $200 or more--although that may change as competition reduces prices--then pay monthly fees for service as they do with cable.

And competition is heating up because DBS is potentially a very profitable business. Preston Padden, head of worldwide satellite broadcasting for News Corp., says it is “potentially more profitable than any of the company’s businesses.”

Even in the early days of the business, DirecTV, EchoStar and other U.S. companies have already reached the point where income and depreciation are recovering their initial capital outlays, notes Jim Schaeffler of the Carmel Group, a Carmel research firm.

That said, it’s important to understand that satellite broadcasting is just another species in the technological Garden of Eden. DBS has fewer than 5 million subscribers in the United States. Cable television has 64 million subscribers, and the big phone companies are developing wireless technology that could provide another entrant in the communications derby.

“It will take a three- to five- year evolution to determine which form prevails,” says analyst Jeffrey Logsdon of Cruttenden Roth, an Irvine-based investment firm.

The number of DBS customers is larger in Europe, mainly because of the success of News Corp.’s BSkyB operation in Britain. In Asia, the potential market is in the many millions but difficult to organize. News Corp.’s Star TV operations in India, China, Indonesia and other countries lose about $100 million a year. But the company has hopes of building a truly large business because it is moving to broadcasting in Hindi, Mandarin and Cantonese Chinese and other languages.

That language capability is significant because it is a harbinger of the global entertainment industry of the future, says Saul Berman, a managing director of Price Waterhouse’s communications consulting practice. Every country is already signaling its preference for local content in programming, Berman explains. And that trend will continue.

Therefore, News Corp. with its investments in language broadcasting--in localized service--is building a global distribution system of great value.

News Corp. is a complex company that takes risks and often big losses. But because it has vision, lenders and investors support it. And they support the other ventures in satellite broadcasting, DirecTV, EchoStar, etc.

There’s a lesson in this new medium when you think about it: News Corp., DirecTV, MCI and the others are newcomers to television. They will now compete with cable, which came in to compete with the major networks.

But none of the network companies, pioneers who were so dominant in television’s early days, are around as major players as the global business emerges. That’s only one of the lessons to ponder from last week’s deal.