NYT: Malone to Take Control of DirecTV from Murdoch

The New York Times reports this morning that a deal is imminent between Liberty Media chairman John Malone and News Corp. chairman and CEO Rupert Murdoch, in which Malone will acquire one of Murdoch's prize assets -- satellite service provider DirecTV -- in exchange for Malone's 19% voting stake, plus 15% non-voting stake, in News Corp.

The move confirms rumors reported last September that Murdoch had fouled the nest of his satellite holdings, semantically speaking, in enticing Malone with the prospect of taking the foul-smelling property off his hands in exchange for refraining from mounting a shareholder-led takeover bid for all of News Corp.

To sweeten the deal - and to help avoid taxes - Malone will also receive controlling interest in News Corp.'s Fox Sports Net, which he would add to his leadership stake in QVC and Discovery Communications, and 25% stake in Barry Diller's USA Interactive.

If the deal is consummated in two weeks' time, as the Times' Richard Siklos reports, Malone would wrest control of one of the prize jewels in Murdoch's media empire, though it was only acquired from General Motors' Hughes unit three years ago. DirecTV might have already been renamed "Sky USA," and joined News Corp.'s colossal worldwide Sky network of direct broadcast satellite providers, had the DirecTV brand not already become so powerful here.

Murdoch saw DirecTV's potential as essentially a DBS television service, as his testimony before Congress in 2003 (PDF available here) indicated. There, he mentioned broadband service only parenthetically, by way of a combination promise/plea to Congress that DBS Internet service should be competitive with cable and phone service-provided DSL.

"News Corp. believes it is critical that consumers have vibrant broadband choices that compete with cable's video and broadband services on capability, quality and price," Murdoch told the House Judiciary Committee.

DirecTV actually abandoned the DSL provider market back in 2003, in an exit compared to the one the US made from Saigon. Yet with trepidation, the company has been re-entering the broadband service arena in fits and starts since last January. At that time, a Sanford Bernstein analyst wrote, "We view DirecTV's desire to enter the broadband market as a purely defensive - and ill-timed - measure."

On the other side of the bargaining table, the notoriously tech-savvy Malone was once considered the holder of the keys to the very concept of broadband Internet service in North America, back before he allowed his cable provider, TCI, to be acquired in 1999 by AT&T Corp. AT&T was never able to make anything of that deal, ending up merging it briefly with Comcast in 2002, and then spinning it off altogether as part of that company's second divestiture.

Malone's acquisition of DirecTV, assuming it all works out, puts him right back in the ballgame, as he doubtlessly places more value on its power as a broadband service provider than did Murdoch.

But why would Murdoch have been so dead-set on making DirecTV his own in 2002, and so willing to compare it to excremental foul today?

As it turned out, the person considered one of the world's most notable media moguls may have ended up on the losing end of a net neutrality fracas. Last August, the FCC held the largest auction of wireless broadband service spectrum to date, which was concluded last September. DBS Internet service requires wireless spectrum for the upstream part of the link, where data is uploaded to the earth station, as satellite receivers are by definition passive.

To help ensure they received the spectrum they needed to upgrade their satellite/DSL service offerings, DirecTV made a pact with one-time prospective merger partner EchoStar Communications, to pool their resources and place a joint bid.

Together they managed to put up an astounding $972.5 million. But that wasn't enough, as it turned out, as cellular carriers hurriedly ran up the price of spectrum well into the multiple-billion-dollar range. The T-Mobile division of Deutsche Telekom managed to win the biggest chunk.

Net neutrality proponents claimed the lockout was an intentional effort to cripple DBS, though initially they claimed that cable providers were behind the lockout, and as it turn out, cellular carriers walked out with most of the marbles.

From Murdoch's point of view, however, regardless of who was responsible, their fiendish plan apparently worked. Almost immediately after the auction was closed, he made the foul-smelling-bird comment, and negotiations with Malone were on.

What could Malone gain from Murdoch's rotten wildfowl? Earlier this year, Congress set the date for the transition from analog to digital television to February 17, 2009. At that time, a huge chunk of spectrum in the 700 MHz band that has been part of the North American television landscape since after World War II, goes on the auction block, with senators promising that some of the money raised could perhaps pay off more than a minute fraction of the national debt.

If anyone could muster the effort to pull off a sweeping auction bid, it's John Malone, especially with Democrats -- among them, net neutrality proponents -- taking control of Congress next year, and perhaps changing the terms of the auction to force anonymous bidding.

Such a change would prevent wireless or cable companies from outbidding one another just to drive the price up, and lock DBS bidders out. Thus Malone could wind up with a better deal than Murdoch had gotten.

The history of mass media in the past decade may be more about losses than wins, but somehow, the same personalities always wind up floating to the top. Shares of News Corp. traded higher by about 3.5% on the New York Stock Exchange in late morning trading, while Liberty Media shares were up about 2% and DirecTV shares traded flat.