Murdoch Outfoxing Himself With New Satellite Venture?
Earlier this month, sales executives from the fX cable channel, which is owned by News Corp., had appointments with one of their top clients, Marcus Cable in Dallas. They hoped to persuade Marcus, the nation’s ninth-largest cable operator, to carry fX on more of its systems.
Their timing was unfortunate. Days before, News Corp. Chairman Rupert Murdoch had vowed to “take over North America” with an elaborate satellite broadcasting service that one of his top lieutenants predicted would send cable competitors crawling to Dr. Kevorkian.
As cable stocks tumbled on Wall Street with the news, Marcus slammed the door shut, refusing to meet with fX or News Corp.'s fledgling Fox News Channel.
“If someone is threatening to burn your house down, you don’t invite them in for lunch first,” said Jeff Marcus, chairman of Marcus Cable, which serves 1.2 million customers in 18 states. “We are not going to give them money so they can build a competing satellite business.”
Such is the complicated world of media today, as conglomerates expand into every facet of entertainment and increasingly do business with companies that are also their rivals. News Corp.'s agreement last month to purchase half of struggling satellite TV provider EchoStar Communications Corp. underscores what some sources call a schizophrenic strategy that puts Murdoch in direct competition with the cable operators that helped him build channels today worth nearly $2 billion. Some sources say the dizzying array of 500 channels that the Sky satellite service could offer next year could even quicken the erosion of broadcasters’ viewership, hurting News Corp.'s own Fox TV network.
With several cable operators threatening to retaliate against News Corp., the situation is also the latest evidence of the distrust building against Murdoch. No media giant, not even the much larger Time Warner Inc. or Walt Disney Co., stirs as much dread among its rivals as News Corp., in part because of Murdoch’s history of strong-arm tactics, of riding roughshod over regulations and of using his various newspapers to do his bidding.
Cable operators were particularly troubled recently about Murdoch’s bully tactics when News Corp. filed antitrust lawsuits against Time Warner and Disney for allegedly trying to block the growth of his channels.
News Corp. would not comment about the conflicts. But Chase Carey, chairman of the Fox Television group and in charge of the cable channels, said the company’s mission is to exploit a multitude of avenues into consumers’ homes, whether by cable or phone lines, broadcast signals or satellites.
“Companies today compete on some levels and do business on others,” he said. “If we continue to put on good programming, we will succeed at getting them distributed, despite the rhetoric and gossip. I’m sure there are cable operators that wish competition didn’t exist, but as time goes on, consumers will ultimately drive the market.”
It is unclear what cable operators can do, since many of them are bound by contracts with News Corp. and could face heat from customers if they don’t carry popular services, such as sports channels, that Fox controls. But the industry will take a leading role in opposing the $1-billion merger with EchoStar in Washington, where the Federal Communications Commission sees Sky as a means to break the long-standing cable monopoly.
Among the rules the industry will challenge are those that prevent TV station owners from controlling cable systems in the same markets but not satellite services that reach those local viewers. News Corp. owns TV stations that reach 35% of the nation’s households, whereas the Sky service will be able to beam across the entire U.S.
Cable operators say Murdoch’s satellite plans could drastically slow his cable expansion in the U.S. Marcus said cable operators would bid on regional sports rights to keep them out of the hands of Fox Sports, which is trying to build a challenger to ESPN by linking together regional networks. Marcus worries that Murdoch could eventually take his eight regional channels off cable systems to use them exclusively on Sky to drive subscriptions.
Many cable operators say they may also refuse to raise rates and expand existing services or carry new channels like Fox News and a proposed children’s network. That could widen the lead in the cable news wars of upstart MSNBC, the partnership between Microsoft and NBC that has about 28 million subscribers to Fox News’ 20 million, despite Fox’s unprecedented payments to operators of $10 a subscriber for carriage.
“You never make statements about destroying your customer,” said Ajit Dalvi, senior vice president of programming and strategy for Cox Communications Inc., a leading cable operator. Dalvi said his systems are carrying MSNBC and had considered testing Fox News. “I’m less inclined to do so now.”
Several News Corp. sources say Roger Ailes, the head of Fox News, is complaining that his job is suddenly tougher. Ailes would not comment.
Particularly worrisome to some at Fox is the relationship with leading cable company TCI, which owns half of fX and Fox Sports through its affiliate Liberty Media Corp. and carries Fox News in 12 million homes, with an option to buy 20%.
“We are getting more and more concerned about News Corp.'s business practices in the cable business and their impact on our customers,” said Robert Thomson, senior vice president of communications and policy planning at TCI. “We’ll be watching them closely.”
News Corp. has become a global powerhouse by broadening consumers’ TV options via satellite services. Its BSkyB service hobbled the emerging cable industry in Britain to become the dominant pay TV provider there, and it aims to duplicate that success in Asia, Japan and Latin America, where it is paired up with TCI.
But the U.S. may be tougher to crack because cable is well-entrenched with 60% of the nation’s 100 million TV households, and the DirecTV satellite service has more than a two-year head start.
News Corp. predicts that Sky will expand the total satellite market in the U.S. to 30 million subscribers by 2001, up from 4.3 million today, by providing the local broadcast signals that satellite services lack and cutting in half upfront consumer costs of roughly $700. News Corp. says it would control 18 million subscribers.
Cable operators say tensions with Murdoch were building even before the Sky announcement. Many resent the high prices they pay for Fox’s first channel, fX. Part of their anger is directed at John Malone, the head of TCI, who set a precedent by agreeing to pay monthly fees of 25 cents per subscriber for fX in 1993 in exchange for the right to retransmit the local Fox signals to cable customers. (By contrast, NBC charged less than 10 cents for America’s Talking as part of its retransmission consent.)
“Everyone was suspicious that Malone had a side deal with Murdoch, and sure enough, two years later Murdoch merged his sports interests with TCI’s and threw fX and $350 million into the deal,” said one cable executive. “All those subscriber fees came back to Malone in the form of a 50% interest in fX.”
Other cable operators begrudgingly agreed to carry fX in a fraction of their systems because they needed the Fox signal. But Cox’s Dalvi calls fX, which runs mostly reruns, “one of the worst values in cable.” He said he would dump it were he not bound by the contract.
Fox says the network’s value will improve when major league baseball is added next month and reruns of popular network shows like “NYPD Blue” and “The X-Files” air in August. But Dalvi said turning to sports programming is the “ultimate cop-out and indictment of them as a programmer.”
“They can play the money game, which is what sports is, and the demolition game, but they lack creativity.”
Many cable operators also distrust Murdoch because of his guerrilla retaliatory tactics. After Time Warner put MSNBC rather than Fox News on its New York system last year, News Corp. sued, claiming the cable operator reneged on an agreement to carry Fox News. The disagreement erupted into a public and personal feud between Murdoch and Ted Turner, the vice chairman of Time Warner, who likened Murdoch to Hitler. The mayor of New York threw in on Murdoch’s side.
Richard Aurelio, senior advisor to Time Warner and former president of its New York cable system, said: “Most programmers nurture relations with operators methodically. Murdoch has accused cable of being a bottleneck and relied on browbeating, political pressure and dangling money to buy his way into the business.”
But what rankled cable operators most recently was a situation that developed in January in Los Angeles with its Fox Sports West channel. When the local sports network moved Ducks and Clippers games to a new channel, leaving Kings, Angels and Lakers games on Fox Sports West, cable operators boycotted. They refused to carry Fox Sports West 2 at a monthly fee of 75 cents per subscriber on top of the $1 they pay for the established channel, irked that only one team, the Dodgers, was being added to the mix.
Fox says the new network helps avoid scheduling conflicts, allowing Clippers and Lakers games to air on the same night. In response to the boycott, News Corp. sued Disney, accusing the company of organizing cable operators in an effort to kill Fox Sports West 2 to start its own channel airing the Ducks and Angels, which Disney owns.
Cable operators say Disney did not motivate their boycott and they instead accuse programmers like Murdoch of paying irresponsibly high prices for sports rights--in this case Dodger games--knowing they can pass along the costs to cable customers whose complaints about higher rates they never hear.
Cable operators would like to sell sports services a la carte since only a fraction of their customers watch sports. But programmers have resisted because viewership would fall, driving down advertising rates.
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Since launching fX in 1994, News Corp. has expanded the value of its cable family to nearly $2 billion. But cable operators could stunt further growth at a time when News Corp. is trying to launch a children’s channel. They are also threatening to block the expansion of both fX and Fox News.
Subscribers Value Channel Programming (millions) (millions) Launched fX General 31 $400 1994 entertainment Fox News News 20 200** 1996 fXM: Movies From Fox Movies 5 50 1994 Fox Sports* Regional sports 42 1,300 1995
* Eight networks owned in a 50-50 joint venture with Liberty Media Corp. formed in 1995.
** Number is based on investment since the network has no cash flow. All other values based on cash flow.
Sources: Fox Inc, Paul Kagan & Associates