Case Study - News Corp. and DirecTV

1. Consolidating The Direct TV Acquisition
PRESENTED BY-
GROUP 8

3. TIMELINE FOR
DIRECT TV AND
NEWS CORP

4. CASE FACTS FOR DIRECTV
 BEFORE 1990’S
• 1932- Huges aircraft by Howard Huges
• 1963- 1st communication satellite by Howard Huges Medical
Institute
• 1985- institute sold Huges Aircraft to GM- GMHE
1990- 1995

• 1995- GMHE became Huges electronics and launched DIRECT
TV

5. CASE FACTS FOR DIRECTV
1996- 2000
• 1996- Huges brought major stake in satellite communication
PanAmSat
• 1998- boosted stake in PanAmSat to 81%
• 1998- drop in profits
• 1999- huges bought United States Satellite Broadcasting and
folded into Direct TV
 2000-2005
• 2000- Huges sold its Satellite Manufacturing business
• 2000- 9.5 million subscribers(largest satellite based television
content provider)
• 2001- Huges bought Telocity- $177 million
• 2001- negotiations with Rupert Murdoch’s newscorp
• 2004 HE changed name to Direct TV

6. CASE FACTS FOR NEWSCORP
 BEFORE 1990
• Mid 1980s- Sky television (Sky) £ 10 million
1990-1995

• 1990- BSB, a television channel, merged with Sky
• 1992-losses due to combined entity but better programs
and soccer matches increased revenue to £385 million
• 1993- BSkyB reached financial stability

7. CASE FACTS FOR NEWSCORP
 1995-2000
• 1997- 25% british homes were subscribers
 2000- 2005
• 2001- 5 million subscribers
• 2002 revenues 20% increase in revenue with 6.1 million
subscribers
• 2003- 34% stake in HE

8. PORTER’S 5 FORCES

9. MICHAEL PORTER’S 5 FORCE MODEL
Threat of Competitors Buyers Suppliers Substitutes
new • Time Warner • TV Channels • Content • Cable
entrants • Comcast like Fox Providers like
• EchoStar News, NFL Football
National games,
Geographic, soccer
Speed matches
Channel
• TV viewers

10. COMPETITOR COMCAST
 No.1 cable system in US
 Acquired AT&T Broadband(owned regional sports rights,
telephony and 2 way internet interactivity over cable lines)
 Deal with Viacom’s MTV & Nickelodeon
 Sold movies on cable even before video stores could get them
 Partnered with Radio One to launch a channel that targeted
African Americans
 Struck a deal with Chicago’s major sports teams- Chicago Bulls,
Cubs, White Sox, Blackhawks to create a new sports channel
• Acquired TechTV to cater to video gamers

11. ECHOSTAR
 Constant bids to acquire DirecTV
 EchoStar & DirecTV together controlled 92%
of the U.S. satellite pay- TV market

12. BUYERS’ BARGAINING POWER
 Fixed fees from pricey cable channels
 Prices of DVR reduced
 Free DirecTV set top box
 DirecTV spent $670 (2002), $758(2003),
$894(2004) to acquire and keep a new
subscriber

13. SUPPLIERS’ BARGAINING POWER
 Hollywood was made to supply movies first
to Comcast for broadcasting and then to
video stores
 News Corp finalized a $3.5 billion with NFL
Football games for broadcasting rights for 5
years.

14. SUBSTITUTES
 Cable offered high speed, two way internet access
including phone capability
 Cable needed a very heavy investment for
upgradation to digital technology
 Upgradation needed for Digital video recorder, high-
definition TV
 Weather conditions cannot affect the quality as in
case of satellite signals

15. EVALUATION
Parameters Evaluation Attractiveness
Threat of new entrants Low High
Industry Competitors High Low
Buyer’s Bargaining Medium Medium
Power
Suppliers’ Bargaining High Low
Power
Substitutes High Low

16. ANALYSIS OF NEWSCORP

17. NEWS CORP TANGIBLE RESOURCES
Financial Physical Technological
resources resources resources
• Subscription & • Geographic spread: • Worldwide network
advertising revenues 4 continents & 26 of satellite
million subscribers distribution (BSkyB,
Star TV, FoxTel,
• High number of SkyTel, Stream)
distributors

18. INTANGIBLE RESOURCES
Human Innovation Reputational
Resources Resources Resources
•Experience & •Innovative •Brand Image
Planning of Murdoch programming and
attractive sports •Content: high quality,
content new/ fresh, innovative
•Attractive sports,
aggressive mktg

19. CAPABILITIES
Distribution Effective use of Content and satellite
distribution. Worldwide network of satellite
distribution
Human resources Murdoch’s negotiation skills
Marketing Aggressive marketing tactics
Free installations
Management Ability to envision the future of Television
viewing experience
Manufacturing High content quality
Research & Quest of Innovative technology
development Could cater to DVRs, HD-Tvs control of fox

20. VALUE CHAIN
TECHNOLOGY PRODUCT MANUFACTURING MARKETING DISTRIBUTION SERVICE

21. CORE COMPETENCE
 Innovative Content and Worldworld satellite
distribution network are news corp’s core
competences

22. ANALYSIS OF DIRECTV

23. DIRECT TV TANGIBLE RESOURCES
Financial Physical Technological
resources resources resources
• Revenue: $7.7 • Geographic spread • Digital technology:
billion (19% (72% of US) Broadcasting,
increase) Broadband/ Internet
Profit: $970 million
(59%)
• High number of •25 satellites capable
•12.2 million distributors of covering 98%
customers (revenue world populations
per customer =
$63.9)

24. INTANGIBLE RESOURCES
Human Innovation Reputational
Resources Resources Resources
•Efficient & • Ideas like NFL • Perception of
experienced Sunday Ticket delivering good
leadership of Hughes Package Content
•Efficient distribution •Ranked no. 1 in
system • Scientific innovation customer satisfaction
like Spaceway
•Brand Image

25. CAPABILITIES
 Distribution Effective use of satellites & digital techniques
 Marketing Effective promotion of brand-name products
Effective customer service
Innovative offers
 Management Ability to envision the future of satellite
technology
R &D Innovative technology
Rapid transformation of technology
Digital technology

26. VALUE CHAIN
TECHNOLOGY| PRODUCT MANUFACTURING MARKETING DISTRIBUTION SERVICE

27. CORE COMPETENCE
 Content Distribution in the U.S. using the
Satellite technology

28. DIVERSIFICATION
 Level of Diversification: Dominant Business
 Reason for Diversification:
a) Economies of scale
b) Market power

29. DIVERSIFICATION STRATEGY
 Acquisition
 REASON BEHIND MURDOCH’S DECISION
TO ACQUIRE DIRECTV

30. COMPETITORS OF NEWSCORP

31. Competition Faced:
Satellite distribution,
Cable distribution, via
Product Level
bluetooth, infra red or Physical
Diskettes and HDD
Internet(1 way or 2 way)
Broadband connection,
Form Level
Sound(Frequency) -
telephony, Light - Morse code
Distribution through any means
Generic Level
or No distribution at all
Comcast: Cable TV,
Times Warner Cable: Cable TV
Enterprise Level
ECHO star: Satellite TV

32. WHAT WAS THE COMPETITION BETWEEN NEWS
CORP AND HOW DID NEWSCORP FEND OFF
RIVALS?

33. 2001 DEAL
 Acquisition of the DirecTV from Hughes –
 Echo Star – unsolicited bid: $30.4 bil & $1.9 bil in dent
 Murdoch’s - $ 177 Mil (confident)
 The deal was abruptly called off
 Hughes and Echo Star consisted 92 percent of the US
Satellite pay –TV market
 The Justice Dept. was involved to stop the merger as
Murdoch was under confidence since 2001

34. 2003
 News Corp. acquired GM’s 19.9 percent
stake + 14.1 percent from public share and
GM’s pension and funds
 Major stake holder, R. Murdoch NOW had a wide
entry into USA satellite pay-TV market
 Rupert Murdoch – Chairman of Hughes

35.  Cost leadership by NewsCorp:
 Low rates of set top boxes: Attract subscribers
 Low priced Content distribution: Sports and
entertainment
 Acquired content and distributed it cheaply
 Focus Differentiation by NewsCorp:
 Strong distribution Channels – Comcast had
trouble with it’s reach
 Digital Video Recorder technology – DVR
 High Definition TV

36. FACTORS THAT INHIBIT NEWS CORP FROM
DELIVERING ITS FULL POTENTIAL

38. In 2004 and 2005 DirecTV made the highest
NSA beating its immediate competitor
Echostar

39. A low churn rate means high customer retention, which in turn allows for
savings in advertising costs.
Churn rates below 2.5%, are better than average DBS providers.
DirecTV Echostar
2004 1.59% 1.70%
2005 1.70% 1.85%

40. TECHNOLOGICAL LIMITATIONS
 High switching cost from cable to a direct broadcast satellite.
 Cable companies like Comcast have the ability to bundle cable and Internet
over their networks. DirecTV did not have the ability to bundle cable, Internet,
and phone services, putting them at a pronounced disadvantage.
 To overcome this problem DirecTV entered into agreements with Verizon and
BellSouth phone companies in 2005 which solved the problem in the short run.

41. Cost to acquire and retain a new customer
1000
900
800
700
Cost (US $)
600
500
400
300
200
100
0
2002 2003 2004
Cost (US$) 670 758 894
virtually everyone who is going to buy cable or DBS has already done
so, DirecTV has to spend heavily on persuading customers to switch and to
retain them

42. DirecTV had very little interest and tax cost
Incurred massive sales and administrative cost by adopting aggressive
advertising campaign to attract new customers, or steal existing cable
customers.

43. LIMITATIONS WITHIN MARKET
 DirecTV had to spend millions in upgrading users' TiVo digital
video recorders (DVRs) as technology improves.
 DirecTV spends a much greater amount on SGBA compared to
its competitors. Echostar had almost no sales and administrative
costs in 2005, but still was able to gain almost 1 million new
customers.
 DirecTV incurred sales and marketing costs for US
market, limiting its focus on expanding its Latin American
operations as the market is not saturated and it was much
cheaper to acquire new customers
 DirecTV had a subscriber base of 15 million households as in
15% of homes in USA, in contrast there were 167 million homes
in Latin America of which DirecTV was serving only 1% (1.5
million homes)

44. THANK YOU