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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