Testimony of
Rupert Murdoch,
Chairman and CEO, The News Corporation, Ltd.
Before the Committee on the
Judiciary
“Direct Broadcast
Satellite Service in the Multichannel Video
Distribution Market”
Good Morning, Chairman Sensenbrenner, Ranking Member Conyers, and Members of the
Committee. Thank you for the invitation
to testify today regarding News Corporation’s proposed acquisition of a 34%
interest in Hughes Electronics Corporation.
Let me say at the outset that we
believe that this acquisition has the potential to profoundly change the multichannel video marketplace in the
The public interest benefits of
this transaction are manifold, but I would like to briefly touch on three key
areas today:
First, News Corporation’s
outstanding track record of providing innovative new products and services to
consumers, a track record that it is determined to replicate at Hughes and
DIRECTV;
Second, the specific consumer
benefits that will be realized from this transaction, including improvements in
local-into-local service, new and improved interactive services, and the many
new diversity programs News Corporation will bring to Hughes; and
Third, the absence of any
horizontal or vertical merger concerns about this transaction. This transaction
will only increase the already-intense competition in the programming and
distribution markets, and market realities will compel our companies to
continue the open and non-discriminatory practices each company has lived
by. Nonetheless, to eliminate any
possible concerns over the competitive effects of vertical integration, the
parties have agreed as a matter of contract to significant program access
commitments, and have asked the FCC to make those commitments an enforceable
condition of the transfer of Hughes’ DBS license.
News Corporation’s track record of
innovation as a content provider and as a satellite broadcaster is without
parallel. Our company has a history of challenging the established – and often
stagnant – media with new products and services for television viewers around
the world. Perhaps our first and best-known
effort to offer new choices to consumers in the broadcasting arena came with
the establishment of the FOX network in 1986. FOX brought much-needed
competition to the “Big 3” broadcast networks at a time when conventional
wisdom said it couldn’t be done.
Seventeen years later, we have proved unambiguously that it could be
done, with FOX reigning as the number one network so far this calendar year in
the highly valued “adults 18-49” demographic.
Along the way, we redefined the TV genre with shows like The Simpsons, In Living Color, The
X-Files, and America’s Most Wanted, and more recently 24,
The FOX network was launched on the
back of the Fox Television Stations group, an innovator in local news and
informational programming since it was first formed. Today, Fox-owned stations air more than 800
hours of regularly scheduled local news each week – an average of 23 hours per
station. We have increased the amount of
news on these stations by 57 percent, on average, compared to the previous
owners. Viewers demand more local news,
and we provide it. Fox-owned stations
were often the first – and in many markets are still the only – stations to offer
multiple hours of local news and informational programming each weekday
morning. This commitment to local news
extends well beyond the stations we own.
Since 1994, Fox has assisted more than 100 affiliates in launching local
newscasts.
In addition to providing greater
choice and innovation in network entertainment and local news, we have also
redefined the way Americans watch sports.
With viewer-friendly innovations such as the “FOX Box” and the first
“Surround Sound” stereo in NFL broadcasts, the catcher cam in baseball, the
glowing puck in hockey, and the car-tracking graphic in NASCAR, FOX has made
sports more accessible and exciting for the average fan. FOX Sports Net, launched in 1996, has
provided the first and only competitive challenge to the incumbent sports
channel, ESPN. Fox Sports Nets’ 19 regional sports channels, reaching 79
million homes, regularly beat ESPN in several key head-to-head battles. In
2002, Major League Baseball on ESPN averaged a 1.1 rating. On Fox Sports Net, baseball scored an average
3.5 rating in the markets it covers. The NBA on ESPN has averaged a 1.2 rating
during the current season. In Fox Sports Net’s markets, it has rated a 2.2. The
key to Fox Sports Net’s success is its delivery of what sports fans want most passionately: live, local games, whether at the
professional, collegiate, or high school level, coupled with outstanding
national sports events and programming.
Perhaps News Corp.’s most stunning
success against conventional wisdom—and our most innovative disruption of the
status quo-- is the Fox News Channel, launched in 1996. A chorus of doubters
said CNN owned the cable news space and no one could possibly
compete. A scant five years later, Fox
News Channel overtook CNN, and since early 2002 has consistently finished first
among the cable news channels in total day ratings. Growing from 17 million subscribers at launch
to almost 82 million subscribers this month, Fox News Channel boasts some of
the most popular shows on cable and satellite. I think it is fair to say Fox transformed the
cable news business, introducing innovative technology and programming, and
bringing a fresh choice and perspective to American news viewers.
Across the dial on American
television are examples of where our challenges to the status quo have made a
difference for viewers and proven we could be competitive against entrenched
competition. We’ve launched and expanded
FX, a general entertainment channel; we’ve launched the movie channel FXM; and
we’ve re-launched and expanded the Speed Channel, a channel devoted to auto
racing enthusiasts. And in January 2001, we launched National Geographic
Channel with our partner, the National Geographic Society, into nine million
homes. Today, Nat Geo is the
fastest-growing cable network in the nation with 43 million subscribers and is
making steady progress in the ratings against the established industry leader,
The Discovery Channel.
News Corp.’s track record of
innovation is not limited to the
Upon completion of this
transaction, News Corp. will bring the same spirit of innovation to the DBS
business in the U.S, in the process redefining the choices Americans have when
they watch television. This spirit of
never-say-die competition and News Corp.’s demonstrated determination to
provide ever-expanding services to the public have the potential to re-energize
the entire American multichannel video marketplace.
To my second point about this
transaction: its benefits to consumers. Apart from a history of bringing new
competition and innovation to the television industry, News Corp. has been
tremendously successful in bringing tangible benefits to consumers over nearly
two decades of operating both here in the
One of the first enhancements to DIRECTV’s service that News Corp.’s investment in Hughes
will bring will be more local television stations for subscribers, offering
consumers a more compelling alternative to cable. News Corp., as a leading
With that in mind, News Corp. is
committed to dramatically increasing DIRECTV’s
present local-into-local commitment of 100 DMAs by
providing local-into-local service in as many of the 210 DMAs
as possible, and to do so as soon as economically and technologically
feasible. To that end, we are already
actively considering a number of alternative technologies, including using some
of the Ka-band satellite capacity on Hughes Network Systems’ SPACEWAY system;
seamlessly incorporating digital signals from local DTV stations into DIRECTV
set-top boxes equipped with DTV tuners; and by exploring and developing other
emerging technologies that could be used to deliver local signals, either alone
or in combination with one of the above alternatives.
In addition, News Corp. is
exploring new technologies that promise to improve spectrum efficiency or
otherwise increase available capacity so that DIRECTV can expand the amount of
HDTV content. Options include use of
Ka-band capacity, higher order modulation schemes, such as the 8PSK technology
FOX uses for its broadcast distribution to affiliated stations, and further
improvements in compression technology.
News Corp. will urge DIRECTV to carry many more than the four HDTV
channels it currently carries and the five channels that some cable operators
carry. In this way, we hope to help drive the transition to digital television
by providing compelling programming in a format that will encourage consumers
to invest in digital television sets.
As to broadband, News Corp. will
work aggressively to build on the services already provided by Hughes to make
broadband available throughout the
The public will also benefit from
the efficiencies and economies of scope and scale that News Corporation will
bring to DIRECTV. We believe by sharing
“best practices,” and by using management and expertise from our worldwide
satellite operations, we will be able to substantially reduce DIRECTV’s annual expenses by $65 to $135 million
annually. Other efficiencies include
sharing facilities of the various subsidiaries of News Corp. and Hughes in the
News Corp. also plans to bring to
DIRECTV the “best practices” it has developed at its satellite operations in
other countries. DIRECTV’s
“churn rate” – that is, the rate at which customers discontinue use of the
service – is around 18 percent, whereas BSkyB’s
annual churn rate is currently 9.4 percent.
By using BSkyB’s “best practices” and
accelerating the pace of innovation, we predict that DIRECTV should experience
a 2 to 3 percent decline in its annual churn rate. We calculate that every percentage point
reduction in churn will add approximately $33 million to Hughes’ earnings. With these additional financial resources,
DIRECTV will be able to finance additional initiatives in research, development
and marketing.
Another important element that News
Corp. will bring to Hughes and DIRECTV is its deep and proven commitment to
equal opportunity and diversity.
Specifically, the diversity initiatives we will implement include:
- A commitment to carry more programming on DIRECTV
targeted at culturally, ethnically and linguistically diverse audiences;
- An extensive training program for minority
entrepreneurs seeking to develop program channels for carriage by multichannel video systems;
- A program for actively hiring and promoting
minorities for management positions;
- An extensive internship programming for high school
and college students;
- Improved procurement practices that ensure outreach
and opportunities for minority vendors; and
- Upgraded internal and external communications,
including the Hughes web site, to assist implementation of the above
initiatives.
Finally, to my third point: there
are no horizontal or vertical merger concerns arising from this transaction.
Because this transaction involves an investment in DIRECTV, a multichannel video programming distributor with no
programming interests, by News Corp., a programmer with no multichannel
distribution interests, no “horizontal” competition issues arise. There will be
no decrease in the number of
The transaction does result in a
“vertical” integration of assets because of the association of DIRECTV’s distribution platform and News Corp.’s
programming assets. But this “vertical”
integration is not anti-competitive for two reasons. First, neither News Corp. nor DIRECTV has
sufficient power in its relevant market to be able to act in an
anti-competitive manner. DIRECTV has a
modest 12 percent of the national multichannel market,
compared to as much as 29 percent of the market held by the largest cable
operator. News Corp. has a modest 3.9 percent of the national programming
channels, compared to the largest cable programmer at 15.2 percent of the
channels.
Second, rational business behavior
will prevent News Corp. and DIRECTV from engaging in anti-competitive
behavior. As a programmer, News Corp.’s
business model is predicated on achieving the widest possible distribution for
our programming in order to maximize advertising revenue and subscriber
fees. Any diminution in distribution
reduces our ability to maximize profit from that programming. Even if we were voluntarily willing to lower
our earnings potential by withholding our programming from competing
distributors, we would be precluded from doing so by the FCC’s program access
rules. Similarly, DIRECTV has every economic incentive to draw from the widest
spectrum of attractive programming, regardless of source, in order to maximize
subscriber revenue. In short, it makes no
business sense for either party to do anything to limit our potential customer
base or our programming possibilities.
Notwithstanding these strong
economic and business incentives, News Corp. and Hughes have agreed – as a
matter of contract – to a series of program access undertakings to eliminate
any concerns over the competitive effects of the proposed transaction. We have asked the FCC to adopt these program
access commitments, which are attached to my written testimony, as a condition
of the approval of our Application for Transfer of Control that was filed at
the FCC on May 2. These program access
commitments are largely the same as those required of cable operators, but in
some respects go further. These
commitments will:
- Prevent DIRECTV from discriminating against
unaffiliated programmers;
- Prevent DIRECTV from entering into an exclusive
arrangement with any affiliated programmer, including News Corp.; and
- Prevent News Corp. from offering any national or
regional cable programming channels it controls on an exclusive basis to any
distributor and from discriminating among distributors in price, terms
or conditions.
These extensive commitments apply
for as long as the FCC’s program access rules remain in effect and News Corp.
owns an interest in DIRECTV. They make
it clear that News Corp. and Hughes are committed to fair, open and
non-discriminatory program access practices that go well beyond what the law
requires of DBS operators, cable programmers, and even cable operators.
In any event, neither News Corp.
nor Hughes is among the top five media companies, by expenditure, in the
In closing, I believe this
transaction represents an exciting association between two companies with the
assets, experience and history of innovation that will ensure DIRECTV can
become an even more effective competitor in the multichannel
market. There will be significant public
interest benefits for consumers as a result of this transaction, including
bringing more local channels to more markets, innovations such as set-top boxes
with next generation interactive television and digital video recorder
capabilities, and a diversity program that will set the standard for the rest
of the entertainment industry.
Thank you for your attention, and I look forward to your questions.
