DirecTV Swap with News Corp. Puts Malone in Charge of DBS

A stock swap exchange between Rupert Murdoch's News Corp. and John Malone's Liberty Media, predicted two weeks ago by The New York Times, is on its way to fruition today, as both companies announced their intent to make a stock swap. The deal will give Malone the most sizable stake - 38.4% - in DirecTV, the US' largest satellite service provider, which has lately been giving broadband Internet service a second try.

News Corp. will receive 16.3% of its own stock back, solidifying the Murdoch family's hold on the company and removing what Murdoch has considered an obstacle to progress. To even things out, Malone will receive about $550 million USD in cash, meaning Murdoch is essentially paying Malone over half a billion to take away a property he paid $6.6 billion USD just three years ago. That is, if Malone will also promise to go away and leave him alone.

Ever since the deal emerged from the realm of speculation, analysts have been questioning exactly what it is Malone is planning. Murdoch's bold plans to innovate DirecTV to become the American component of his Sky global satellite system were abruptly stonewalled when cellular service providers actively ran up the price of upstream spectrum in an FCC auction last September, which DirecTV could have used to upgrade its DBS Internet service. T-Mobile ended up paying an enormous sum in a move that successfully blocked Murdoch, who immediately leaked to the press that DirecTV was no longer something he particularly wanted.

Now, Malone - at one time the leader of the nation's largest cable service, the former TCI - finds himself dealing with Murdoch's debacle. The rise in DBS subscribers in this country is tapering off rapidly, partly due, some believe, to Murdoch's having severed many of DirecTV's ties with TiVo, which had been providing the service with recording equipment for subscribers. Another reason is that connections for the upstream signal necessary to make DBS Internet service viable have been slow to roll out, the auction blockade notwithstanding.

While some analysts are speculating that Malone could use the $550 million USD to help bring his stake in DirecTV above 50%, solidifying his permanent stake there, others, including Doug Mitchelson of Deutsche Bank, believe Malone may not be interested in keeping DirecTV anyway. One option, they say, is to sell DirecTV to one of the telcos currently seeking to expand their position in broadband and their competitive stake against entrenched cable companies like Comcast (which currently holds the former TCI's assets.)

But here's the problem: What would a telephone company do with DirecTV? If an FCC ruling earlier this week withstands legislative and judicial scrutiny, telcos would be given more opportunities to build out their own cable TV and broadband Internet services, in regions where CATV providers such as Comcast and Cox Communications have exclusive licenses. Verizon, for instance, would be less encumbered in its negotiations with states and municipalities for building out its FiOS fiberoptic service.

What would Verizon do with DirecTV if it had it? Probably nothing. With one less DBS player providing an alternative, telcos might have an easier time establishing a fiberoptic broadband market for themselves. Analysts also say the telcos could benefit from DirecTV's existing deals with TV program providers - deals the telcos would theoretically acquire.

But that logic falls apart pretty quickly: With a real-world price tag probably still in the billions, it seems fairly unlikely that a telco would pay that much to Malone just to shut DirecTV down. And if telcos truly are willing to pony up $5 billion USD just to be left with a bunch of programming deals, they may as well avoid the end-around and simply buy some cable networks - meaning telcos would be more likely to bid for Malone's stake in QVC and Discovery Communications than for DirecTV.

A more likely scenario, it appears, is for Liberty Media to solve the DirecTV problem in-house. With the auction of the old analog television spectrum coming up shortly, that $550 million USD could come in very handy. But Liberty may need a bidding partner in order to stave off another blockade attempt by cellular carriers and/or telcos, which is why he may want to enlist the help of Echostar, the parent company of Dish Network, rather than merge with it as some analysts have speculated - a move which could draw too much attention from federal regulators.

With both DBS providers dividing the upstream spectrum acquired from this auction, they could conceivably gain what Malone calls a "national footprint" at a time when the telcos are struggling to plead for the rights to provide service, in some areas on a neighborhood-by-neighborhood basis. Indeed, Malone stands more to gain by keeping DirecTV than selling it, but his success still depends on all the stars being in perfect alignment.

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