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Star Wars Redux?
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 arms.

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.

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