Satellite Broadcasting Showdown

No matter which company wins the bidding war for DirecTV, the outcome will produce a powerful new player in interactive global communications.

No matter which company wins the bidding war for DirecTV, the outcome will produce a powerful new player in interactive global communications.

In the hands of media baron Rupert Murdochs Sky Global Networks, DirecTV would complete a true global satellite broadcasting system, stretching from Europe to Asia and Latin America. Already in control of content-rich studios and Internet services, Murdoch would gain the upper hand in a lucrative North American satellite market that has eluded him for years. Beyond the traditional entertainment arena, Murdoch sees Sky Global as a major platform for interactive services and commerce.

The man who stymied Murdochs North American satellite ambitions four years ago is threatening to do so again, however. Should he succeed in lining up deep-pockets financing from regional Bells, Charlie Ergen would have a chance to become North Americas largest satellite broadcaster, combining his EchoStar Communications with DirecTV.

In Ergens constellation, DirecTV could become not only a powerful rival to digital cable, but a significant force in the developing field of broadband Internet service via satellite. Ergen aims to boost revenue per customer, making direct satellite broadcasting a business rich in cash flow.

Analyst Matthew Harrigan at Janco Partners said that EchoStar, with 5.7 million subscribers, continues to grow faster than the larger DirecTV. With 9 million subscribers, DirecTV ranks third among multichannel purveyors, behind AT&T Broadband and Time Warner Cable.

Extracting DirecTV from its parent Hughes Electronics and Hughes parent General Motors is proving extraordinarily difficult for Murdoch, who has been working on the deal for months. For its part, GM is concerned about tax implications, while seeking a sizable chunk of cash from the deal.

While the early retirement of Hughes Chairman and Murdoch critic Michael Smith was seen as a blow to EchoStar, Ergens bid continues to put pressure on Murdoch.

By pitching his package to carriers BellSouth, SBC Communications and Verizon Communications, Ergen raises the specter of regional Bells armed with satellite technology — and a satellite broadcaster empowered by DSL service. While SBC and Verizon already peddle Hughes DirecTV service to local phone customers, BellSouth aborted its satellite TV business in December.

A wild card in the negotiations could be antitrust issues. If the Federal Communications Commission looks at satellite broadcasting as a single market, the EchoStar-DirecTV combination would clearly constitute a U.S. monopoly. But if the market is seen as pay TV, the combined company would provide a counterbalance to the largest cable operators.

One possible argument for combining DirecTV and EchoStar would be the ability to offer broadband Internet service to more than 50 million U.S. households that lack access. Although currently slower than broadband Internet access over cable and DSL, satellite broadband could become much more attractive with a new generation of satellites.