by Jim Surowiecki
NEW YORK, NY (May 16, 1997) /FOOLWIRE/ -- Three months ago ECHOSTAR
COMMUNICATIONS (Nasdaq: DISH) and Rupert Murdoch's NEWS CORP proposed
a joint satellite-TV venture tentatively called "Sky." Anxious cable operators
dubbed the deal "the Death Star" because they feared that their franchises
would vanish in the face of a service that would provide 500 digital television
channels. But the Death Star has turned out to unstable as the two partners
in the deal have ended up at each other's throats instead of in each other's
Last Friday, EchoStar filed a massive breach-of-contract suit against News
Corp. EchoStar claims that as a result of News Corp.'s failure to live up
its obligations, it no longer has "adequate capital to fulfill its contemplated
business plan." Even if nothing comes of this lawsuit, at the very least
Sky is dead. The sudden collapse of an arrangement on which News Corp. had
been counting to bring it strongly into the U.S. satellite-TV market raises
certain questions about Murdoch's judgment and his ceaselessly expansive
ambitions. While EchoStar's woes are more immediate -- without a new investor
or partner the company's future looks bleak -- how News Corp. reacts to the
deal's demise will have a major impact on the company's future.
Murdoch wanted in to the U.S. direct-broadcast-satellite (DBS) market because
it represented the final piece in the global puzzle he was assembling (if
only in his head). News Corp. owns 40% of BSkyB in Britain, it controls Star
TV in Asia, and it has invested in a number of start-up companies in Central
and South America. In 1996, News Corp. did start up its own DBS service in
the United States, calling it ASkyB. The new Sky venture represented an
opportunity for News Corp. to ally itself with an established player in the
American DBS market. Murdoch apparently assumed that he would be able to
use EchoStar as a launching pad for the kind of dominance that News Corp.
has been able to exercise in other countries.
EchoStar, though, was only one player in a crowded field. In fact, it had
three larger competitors: DirectTV (owned by HUGHES ELECTRONICS (NYSE: GMH)), with 2.4 million subscribers; Primestar (owned by various cable
companies), with 1.8 million subscribers; and U.S. Satellite Broadcasting,
with 1.5 million subscribers. EchoStar's subscriber base was just a third
of U.S. Satellite Broadcasting's. Murdoch did try to swing a deal with one
of the larger players, but when those deals did not pan out, he proved willing
to gamble on the underdog. Murdoch's consistent willingness to rely on his
instincts rather than a sober appraisal of the market is one of those things
that makes News Corp. investors anxious.
The Sky deal, which was signed in February, called for News Corp. to exchange
$1 billion in cash and assets and hundreds of millions in satellite licenses
-- owned by MCI COMMUNICATIONS (Nasdaq: MCIC) -- for 50% of EchoStar.
Murdoch was named chairman of Sky, while EchoStar's Charlie Ergen -- the
man who had founded EchoStar and had taken it public in 1995 -- was chief
executive officer. This joint management appears to be what caused the collapse
of the EchoStar deal as Murdoch and Ergen had differences over management
issues seemingly connected to their unwillingness to compromise on some
substantive strategic issues. EchoStar's Ergen now believes that EchoStar
may have been "a pawn in a much larger game."
Some believe the deal's collapse was not just the product of two combative
personalities, but rather Murdoch's misreading of the American DBS market
-- in particular his failure to understand how powerful the cable industry
is in the United States. Part of the impetus behind Murdoch's decision to
move strongly into the DBS market was the desire to ensure that his television
stations would have an outlet in the future. Murdoch's battle last year with
TIME WARNER (NYSE: TWX) over its refusal to carry the new 24-hour
Fox News channel angered him and left him concerned that other cable systems
would do the same. Murdoch wanted a DBS service because he understood the
power cable exercised in local markets.
Murdoch appears to have failed to anticipate the influence the cable industry
continues to exercise both in Washington and over consumers. Cable lobbyists
were able to put roadblocks in the way of News Corp.'s attempts to rewrite
a law requiring DBS services to pay local broadcasters for the retransmission
of their signals. Additionally, a March decision by the Supreme Court requiring
cable systems to carry all local stations created potentially massive problems
for Sky. If the same rule were applied to DBS, a satellite service would
have to carry more than 1600 local stations, more than any service could.
More importantly, the cable industry's installed base of 65 million subscribers
may not actually represent a group of consumers ripe for the picking, but
rather a loyal customer base accustomed to the convenience and ease of cable.
One might expect that the collapse of the Sky venture would have left Murdoch
somewhat chastened. Certainly News Corp. investors who, at the time the original
EchoStar deal was announced, expressed concerns about Murdoch's penchant
for overreaching himself would hope that was the case. But all indications
are that Murdoch is intent upon pursuing his DBS dream at all costs. He has
started talking with Direct TV, and is simultaneously trying to construct
some kind of arrangement with PrimeStar, although Time Warner, which owns
a stake in PrimeStar, is opposed to any deal with News Corp. Even more
strikingly, Murdoch continues to try to expand his empire in other directions.
News Corp. has offered $350 million for the Los Angeles Dodgers franchise
and appears to be closing on a $1 billion deal for the Family Channel. In
times of trouble, Murdoch's philosophy appears to be, the best thing to do
is make another deal.
This might not be so troubling to News Corp. investors were it not for the
fact that less than a decade ago News Corp. came very close to bankruptcy,
due in no small part to precisely this kind of indiscriminate empire-building.
It's not clear that News Corp. is able to pay the kind of attention to its
various parts of that empire that is required. HarperCollins, for instance,
has struggled since its acquisition by News Corp., and yesterday announced
that it was folding one of its most distinguished imprints, Basic Books.
Reports suggest that Murdoch is looking to unload the company, but that will
be difficult to do at a time of considerable unrest in the publishing industry.
Indeed, Murdoch's insatiable appetite for deal making has not helped News
Corp. with Wall Street, which has instead punished the company for its inability
to convert acquisitions into profitability. As a spectacle, News Corp. may
be fascinating to watch. As an investment it seems to have little to recommend
it. At a time when most companies are trying to do one thing well, News Corp.
prefers to do many things, well or not. It's a curious recipe for success.