The War For The Couch Potato

September 26, 2005

by Edward Jay Epstein

The Hollywood Economist

The numbers behind the industry.

Murdoch vs. Roberts

It's cable vs. satellite

Like the joke in which a suitor for a woman asks his rival, "What are we fighting about if we both want the same thing?" Rupert Murdoch of News Corp. and Brian Roberts of Comcast both want the same thing: Roberts' 23 million cable subscribers.

When Roberts and his family built Comcast, the cable business was a series of local monopolies. Once a cable operator bought a franchise (or, in some cases, the politicians with the power to grant it), he did not have to compete in that area with other cable companies. He merely had to wire up the homes of subscribers who couldn't get good reception of broadcast television or were otherwise willing to pay a monthly charge for the sports, movies, and semiporn that cable providers offered. After all the homes in an area were wired up, the only practical way for entrepreneurs to expand was to acquire other cable operators. AT&T, which bought out cable king John Malone, was the largest operator, with 21.5 million subscribers. In 2002, Roberts bought AT&T's cable operation for $72 billion and then paid another $8.7 billion to divvy up the 3 million subscribers of Adelphia Cable (after its chairman, John Riga, was sent to prison) with Time Warner Cable. These deals made Comcast the world's largest cable operator. Thanks to the ingenuity of Rupert Murdoch, however, Comcast's 23.2 million subscribers, for which Roberts paid in excess of $80 billion, are no longer locked up safely in local monopolies.
Back in the 1980s when cable entrepreneurs in America were wiring up homes, Murdoch was putting an armada of satellites in outer space. They were positioned 22,300 miles above the earth in the Clarke Ring, where they would serve as geosynchronously fixed broadcasting platforms capable of beaming digitized programming into the home. By 2003, he had established satellites over Europe, Asia, Australia, and Latin America—even though the capital costs nearly bankrupted him. That same year, he bought control of DirecTV which, with 12 million subscribers, was by far America's largest provider of satellite television. (The only other satellite service was EchoStar.) Murdoch immediately ordered additional satellites that would expand service to include 500 channels of high-definition programs. His game plan, according to Chase Carey, the charismatic ex-rugby star with a Harvard MBA whom Murdoch put in charge of the operation, is to "double the DirecTV subscription base, making it the number-two distributor of programming after Comcast, and then number one. It's that simple."

Where does Murdoch get the additional 12 million or so subscribers he needs to be No. 1? Carey answers: "Cable users." With his usual brutal candor, Murdoch told BusinessWeek, "We don't want to take over the world. We just want a piece of it."

What concerns Roberts is the size of the "piece" that Murdoch wants to take out of Comcast. Unlike cable franchises, which are limited to local bailiwicks, Murdoch's satellites reach about 90 percent of the American population. Everyone (including Roberts' cable subscribers) in this vast footprint can receive Murdoch's 500 channels with a small 31-inch dish and digital receiver. Murdoch could give away this hardware, as well as free installation, and recover the cost from monthly subscription fees in a year. So, Murdoch is in a position to get—at virtually no cost—many of the subscribers for which Comcast paid more than $3,000 apiece to acquire. To stop Murdoch from luring away millions of Comcast customers, Roberts needs to offer them something that Murdoch cannot. His answer: video on demand. VOD permits customers not only to choose when they watch a program, but, like a DVD player, it lets them pause, rewind, etc. As Roberts explained in a speech at Wharton Business School: "You can't do any of that on satellite." Digital cable both sends and receives signals from cable boxes, whereas satellites broadcast only a one-way signal. Roberts believes that VOD programs and movies will keep viewers so enamored of their cable service that they won't defect to satellite.

For starters, Roberts is now in talks with Disney, which owns, among other things, the ABC network. He is offering Disney a deal to put ABC's hit series on Comcast VOD 24 hours after they air on the network, and he is willing to pay a huge sum. Comcast subscribers could then watch these shows whenever they choose without commercials (though not without the product placement embedded in the programs). For Disney, the deal would provide a short-term windfall and a long-term risk of upsetting network advertisers. Roberts is also seeking VOD content from other quarters of Hollywood, reportedly Viacom and Sony (with whom he partnered on the acquisition of MGM's film library). His ultimate VOD goal is to release new movies at the same time as they are released on DVD. So far, all the studios turned him down because of their concern, according to Roberts, that new films on VOD would "tick off" Wal-Mart.

Murdoch, meanwhile, is not without recourse. While his satellites are not technically able to provide the same VOD service as cable, he can achieve much the same effect by providing his American subscribers with TiVo-like digital video recorders, as he did in Britain in the early 1990s. With digital video recorders, his satellites can download six to eight hours of programs in the middle of the night onto an encoded section of subscribers' hard disks (without their having to do anything or even be aware of it). Then, to rent the program, the subscribers need only click on their remote control (which will charge their account via their telephone line). Even though this system cannot match the huge quantity of programs and movies that cable VOD can provide, it can offer enough to satisfy most viewers. The battle of the titans will be decided by who can offer the most attractive content. Murdoch can draw from his own empire, including the Fox movie studio and library, Fox News, and Fox networks with 19 regional sports channels. To beat him, Roberts needs to buy content, no matter what the price, to protect his $80 billion investment in subscribers. The outcome can only benefit couch potatoes.

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