Howard Hughes must be laughing in his grave over the game of high-stakes poker being played with what’s left of his empire, the satellite business of GM Hughes.
It’s hard to find a sympathetic player in this saga. And it may be all for nothing, as Direct Broadcast Satellite (DBS) could soon be as obsolete as the Spruce Goose.
In 1985, the Howard Hughes Medical Institute sold Hughes Aircraft Co., by then a defense-electronics and satellite company, to GM, which figured it was a hedge against a declining auto business, then besieged by the Japanese. GM was right, and has been milking the business ever since. It raised money in 1988 in a classic Wall Street smoke-and-mirror move. The public was sold a piece of paper named GMH that represented no assets of Hughes, just the promise that the board of GM, if they felt like it, would pay them dividends that might or might not track Hughes’s profits.
GM spun off the defense business to Raytheon in 1997, leaving a satellite business. And here’s where it gets interesting. Michael Smith, brother of GM Chairman John Smith, invoking the Smith family full employment act, was promoted from CFO of GMH to chairman and CEO.
The DBS business was booming. Fed up with cable companies’ shoddy service, consumers increasingly bought 18-inch satellite dishes and subscribed to Hughes-owned DirecTV. The other choice was a once-fleabag company in Colorado named EchoStar, which peddled a service with the memorable name of the DISH. Both of these guys sold under a lofty cable-rate price umbrella, but didn’t have to lay cable, just leverage their geo-synchronous birds 22,241 miles up. Their only costs were marketing and subsidizing the receivers.
The Federal Communications Commission, fresh from a 1996 Telecommunications Act that pretended to deregulate all sorts of things, was accommodative to DBS. It gave these companies a “satellite exemption,” meaning there were no limits on how many homes they could sell to, while TV broadcasters and cable were limited. The FCC figured DBS was a true competitor to cable and prices would drop. Not a chance.
The charade of the tracking stock continued, and all was smooth for the Smith brothers, until GM hit the wall and realized it was going to need lots of cash. Not only is the auto industry in a nasty downturn, but also, for the first time, GM appears to be losing market share in high-margin sport utility vehicles and trucks. There seems to be a sense of urgency for GM to get cash in the door, now. Maybe to cushion a downturn, maybe to buy Daewoo Motor, but one way to do it is liquefy Hughes. The “for sale” shingle went up last year.
Many kicked the tires, but Hughes only got one bid, and from Rupert Murdoch of all takers. Rudolph Giuliani had helped Mr. Murdoch in a nasty scrape with TimeWarner cable in New York, which had refused to run his Fox News Channel. But Mr. Murdoch was tired of begging for carriage of his Fox TV programming and Fox studio movie output, so he was assembling his own distribution. He had built the Fox TV network in the U.S., but it was based on antennas on tall buildings, and he wanted the bird in the sky blasting Fox stuff to all takers. If he owned the distribution, he figured, he would have those clowns at TimeWarner begging him for carriage.
Sky Global, which is the BSkyB satellite network in Europe, and StarTV in Asia, were created to blast the Simpsons into Italian villages and every tiny Chinese hamlet. In 1997, Mr. Murdoch tried and failed to get a U.S. footprint by buying EchoStar and then Primestar.
So now his long-awaited prize, Hughes. His offer was to combine Hughes and Sky Global with a 65%-35% split. Brothers Smith balked, so he sweetened it to a 70%-30% split — and $5 billion in cash. Mr. Murdoch, a little short of loose change these days, apparently has commitments from both Microsoft and John Malone of Liberty Media, which owns lots of programming and would rather sit on the same side of the conflict-of-interest (i.e. content-and-distribution) table as Mr. Murdoch. Mr. Malone is not used to begging for carriage, but he was out of the distribution business after he suckered AT&T to overpay for his cable systems. These new partners would create a new system with a global footprint, get GM liquidity, and rescue Mr. Murdoch from his mounting debt problems.
Everyone figured this thing was a done deal — everyone except Michael Smith, because Rupert wanted to run the global footprint and Michael was to be out of a job. In April, he visited institutional owners of GMH shares and told them that he was in charge and that GM had told him to get the best deal he could. Apparently that meant for him, even though he was the chairman of a company with no assets and a promise of a dividend stream only if his brother felt like it. For his intransigence, Michael was shown the door the other week, no doubt wearing a golden parachute to gently descend from geo-synchronous orbit.
Every dealmaker on Wall Street knows that the best way to resolve an impasse to closing a deal is to bring in another buyer. The other guy is EchoStar. EchoStar is reported to have some deep-pocket partners with loads of conflicts on its side as well. AOL invested $1.5 billion in Hughes before it thought of combining with TimeWarner. Hooking up with EchoStar in a bid for Hughes helps Steve Case keep DBS from devastating his debt-laden cable franchise, but also gives him the same clout Mr. Murdoch covets in pumping his programming to every human being in the Western Hemisphere.
GE is also reportedly interested in kicking in some money. This gives one last fling to Jack Welch, but also protects his naked NBC network, which could use some leverage to expand programming, as ABC has the Disney system, CBS has Viacom, and Fox has, well, the Murdoch programming machine. And now phone companies like SBC, with cash they refuse to invest upgrading the last mile to homes, are interested in helping EchoStar. Phone companies already know how to be and stay regulated, plus they can cut DBS prices and kill off their enemies, those nasty cable companies, and build out broadband Internet access at their own lethargic pace.
The trouble with all this, at least as far as consumers are concerned, is that there are only a few satellite slots available over the U.S. What was once four players vying for a real business is down to two, and if EchoStar wins only one. But because of the satellite exemption, it’s all quite legal.
Then again, in the not-too-long term, it may not matter very much. Over the next five years, a host of new digital delivery systems, from broadband fiber to wireless Wi-Fi that will allow for infinite channels, could blow the content-delivery business wide open — the dreaded fear of content-distribution players like Mr. Murdoch. A one-way footprint may become a liability. So whoever ends up with Hughes wins the battle near-term, but may get the booby prize of winning the last poker game on the Titanic.
Comments