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News Corp in 2005: Consolidating the Directv Acquisition

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COMPANY PROFILE

| |

News Corporation Limited (NWS) is an international media company engaged in the publication of newspapers, magazines and books; production and distribution of movies and TV series; TV broadcasting; cable and satellite subscriber TV; and owns and develops internet properties. NWS operates primarily in the US, the UK, Australia and Asia. It is the world's second-largest media group as of 2011 in terms of revenue, and the world's third largest in entertainment as of 2009.

The DIRECTV Group, Inc. (DIRECTV) is one of the leading providers of digital television entertainment services in the US and in Latin America. The company is engaged in acquiring, promoting, selling, and distribution of digital entertainment programs. They serve both commercial and residential customers through satellite. DIRECTV is also engaged in producing its own entertainment programs such as Hometown Heroes, Supreme Court of Comedy, Passions, Championship Gaming Series and others.

Company Vision, Mission Statement

News Corp. :

"Creating and distributing top-quality news, sports and entertainment around the world."

DirecTV:

“To provide customers with the best video experience in the United States and Latin America both inside and outside of the home by offering subscribers unique, differentiated and compelling programming through leadership in content, technology and customer service.”

Company History

|June, 1994 – DirecTV launches services in the United States. |
|October, 1994 – DirecTV attains nationwide availability. |
|November, 1995 – The one millionth customer signs with DirecTV. |
|April, 1999 – DirecTV acquires the satellite broadcasting company, PrimeStar. |
|May, 1999 – DTV acquires satellite television company United States Satellite Broadcasting (USSB). |
|July, 2001 – The ten millionth customer signs with DirecTV. |
|December, 2003 – News Corp. acquires a 34% interest in DirecTV. |
|October, 2005 – The 15 millionth customer signs with DirecTV. |
|January, 2006 – DirecTV acquires 100% ownership of DirecTV Latin America. |
| |
|Recent Company News |
| |
|February, 2008 – Liberty Media acquires 41% of DirecTV. |
|February, 2008 – DirecTV Latin America reaches 5 million customers. |
|February 4th, 2009 – Congress voted to delay the digital switchover until June 12th. Congress believed that Americans failed to prepare |
|themselves for the original deadline. On June 12th, Americans will need either a satellite television subscription or digital converter box. |
|February 4th, 2009 – DirecTV announced a $50 bill credit for every referred customer. |
|February 2nd, 2009 – DirecTV and AT&T announced a deal to give customers satellite TV service through DirecTV along with internet and phone |
|services. The deal went in effect January 31, 2009, the expiration date of the AT&T and Dish networks integration deal. |

Source:http://.trinity.edu%2Fsmf%2Finc%2Freports%2FDirecTV%2520Buy%2520Report.docx&h=hAQHj57ND

STATEMENT OF THE PROBLEM:

Was the acquisition of DirecTV by News Corp. the right decision to lead the company to its growth and sustainability?

OBJECTIVES:

General Objective

• To be the dominant player in the media industry.

Specific Objective

• To provide customers with the best video experience in the United States and Latin America both inside and outside of the home by offering subscribers unique, differentiated and compelling programming through leadership in content, technology and customer service;[1] • To gain more subscribers or customers • To have a sustainable and aggressive growth • To improve and widen customer reach • To expand broadcast channel offering

INDUSTRY ANALYSIS:

The Media industry is primarily involved in the production, dissemination and consumption of information and content.[2] It captures a wide variety of companies that serve to provide products and services that keep the everyday consumer engaged. There are a number of segments within this industry, each of which provides a different form of entertainment to consumers around the world. These segments include traditional print media, television, radio broadcasting, film entertainment, video games, advertising and perhaps most importantly, the manufacturers of the technology that the above segments rely on. The significance of these manufacturers cannot be overlooked when considering the industry as a whole; after all, none of these segments has been around longer than the technology used for its distribution. Due to its dependency on technological developments, new segments of the media industry are constantly coming up. To that end, the most significant technological development for the evolution of the media industry has been the rise of the internet. This technology alone has changed how media is consumed and furthermore has created entirely new sectors and platforms for mainstream entertainment that are still in the early stages of their development.[3]

TV broadcasting has emerged as the most important tool of socializing in the past couple of years as it helps in the quick transmission of news and other important items. The technology has made the communication process much easier and moreover has led to so many developments in the broadcast industry. One of the perfect examples of the revolutions and developments in the communications sector is satellite broadcasting services. It is basically a form of regional telecommunication and broadcasting method that permits the access to satellites and other far distant communication or media hubs. A teleport comprises numerous facilities for the broadcast and functions through a satellite connection.[4]

Satellite Broadcasting Service is rapidly expanding globally and makes use of the advantages of satellite communications to the fullest. It was primarily developed to deliver video to users. However, because of its ability to integrate interactive data access and video broadcasts, it has created a new channel for communication with television. As far as a customer is concerned, satellite broadcasting is very similar to cable, except that the signal comes from the sky, rather than a cable system, which is privately owned.[5]

Illustrated below is the Porter’s Matrix of Satellite Industry:

|PORTER’S FIVE FORCE MODEL |ANALYSIS |
|Threat of New Entrants (LOW) |Extremely high fixed costs exist to enter the market. |
| |Satellite broadcasting competitors must either purchase or lease satellites |
| |Ground-based cable TV competitors need lines in populated areas |
|Bargaining Power of Buyers (LOW) |Service pricing is fixed and not negotiable by consumers. |
| |Small businesses also have limited price negotiation power as there are fixed prices for |
| |business service packages |
| |Large customers, such as airlines, have the ability to influence prices for services, but |
| |these services represent a small share of DTV’s overall revenue |
|Bargaining Power of Suppliers (MEDIUM) |In some occasions content producers have the ability to set prices. |
| |Impact on providers varies depending on the nature of the content and the pricing terms. |
| |DirecTV’s largest capital expenditure, satellites, are owned by the company rather than |
| |leased, minimizing supplier power |
| |The content is mainly provided by the major networks and their local affiliates (ABC, NBC, |
| |FOX, CBS), and premium movie channels (HBO, Cinemax, STARZ). |
|Competitive Rivalry in the Industry (HIGH) |The presence of Comcast and Time Warner Cable and other cable and satellite operators |
| |All companies in the industry have one nearly identical product, cable television, which |
| |they offer their customers |
| |A price war is not on the horizon, with companies instead opting to use sign-up specials and|
| |discounts. |
|Threat of Substitutes (MEDIUM-HIGH) |Live streaming in the Internet |
| |Cable operators and other satellite operators |
| |Pirated contents |
| |Other kinds of leisure and recreational activities |

While the market for TV subscription service is competitive in the United States, DirecTV has a strong market share.[6] The industry itself is quite innovative in implementing new technologies and finding ways to derive revenue streams from excess capacity. The biggest threat to the industry is the risk of losing subscribers due to substitutes available on the internet. However, this is countered by offering subscriptions with emphasis on live content. DirecTV has an advantage when expanding into new markets over its competitors because they do not have to create additional infrastructure to service new geographic regions.

EXTERNAL ANALYSIS:

|EXTERNAL ANALYSIS |IMPLICATIONS |
|Latin America expansion |This largely untapped market is a huge opportunity for DTV because traditional cable |
| |providers do not have the capital necessary to bring service to the area. |
| |With Satellite as a highly advanced technology in Latin America and DTV introducing a tiered|
| |packaged system, DTV has long term potential to dominate when emerging markets like Brazil |
| |continue their middle class expansion in the future. |
|Digital switch over |The switchover could provide a new market of customers that used to use analog |
| |transmissions. |
|Emerging digital media |Easy access to downloadable programs could adversely affect the company in the future |
|Technological convergence or “bundling |Major innovations over the past decade have allowed individuals to combine once different |
| |products or services into a combined product or service. Five years ago, different companies|
| |existed for cable, Internet, and phone services. Now, phone companies offer phone/internet |
| |packages and are investing heavily to upgrade their networks to include broadcast cable. |
| |DTV does not own its own telecom unlike some of their competitors like Comcast and AT&T |
| |U-verse. However, they do partner with telecom companies to offer internet services bundles.|
|Cable providers with ability to bundle services |Cable providers with ability to bundle services. DirecTV can bundle services through AT&T, |
| |but cannot reap equivalent economies of scale. |
|Increased production costs |DirecTV and other TV suppliers rely upon content provider by networks, which are facing |
| |increased costs. |
|Competition |DirecTV currently faces an increasingly competitive landscape. It is evident that in a time |
| |of consolidation and bundled package services, DirecTV cannot be successful in offering |
| |satellite television alone to its customers. The company must enter into strategic |
| |partnerships that will allow them to offer bundled services (as their cable counterparts do |
| |already) and possible better services that would differentiate DirecTV from their |
| |competitors. |
|Technological Advancements |Wireless or other unforeseen technologies could develop faster than expected, providing key |
| |elements of DTV’s services such as video and data at lower prices |
|Stolen Satellite Data |Some signals have been stolen in the past. Proliferation of this could damage revenues. |
| |DirecTV must continue to fight against the stealing of its signal, with the most current |
| |attack coming from smart card devices. These devices are computers on a card that have |
| |legitimate uses ranging from your credit/debit cards to access control cards to computer |
| |systems. |
|US Economic Slowdown |Uncertainty of News Corp. that subscribers would continue to patronize them. |
|Online Piracy |Copyright infringement and copycats have been getting stronger and has much more ability to |
| |pirate media information, resources and products. |

Source: http://www.trinity.edu/smf/inc/reports/DirecTV%20Buy%20Report.docx

INTERNAL ANALYSIS:

|INTERNAL ANALYSIS |IMPLICATIONS |
|First-mover in America |Being the first in this market allows DirecTV to make great gains in an untapped market. |
| |DirecTV is the first entertainment service in the United States to provide all digital |
| |quality, multi-channel television programming via an 18-inch satellite DISH and also reach |
| |people across America and other targeted market locations with an alternative to cable |
| |television. |
|Ranked # 1 in customer satisfaction and |A reputation for superior customer service may lure customers away from traditional |
|reliability |suppliers like Comcast and Time Warner Cable. |
| |It has consistently scored the highest in customer satisfaction against the largest national|
| |cable and satellite TV providers. |
|Plenty of cash and strong cash flows |DirecTV has nearly $3 billion in cash and a modest debt load, allowing the company to |
| |capitalize on the current market conditions. |
| |DTV cash position and borrowing capacity with current and expected future cash generation |
| |capability provide DTV with significant financially flexibility to improve shareholder |
| |value. |
|High paying customers |DirecTV’s revenue is equal to nearly $80 per customer, while the average cable customer only|
| |pays $6. |
| |DTV is the largest provider of DTH digital television services. Subscription growth |
| |continues in both the U.S. and Latin America, providing opportunity to obtain programming on|
| |favorable terms and secure unique and exclusive programming. A large base also contributes |
| |to economies of scale. |
|Murdoch’s aggressive marketing tactics |News Corps leader is endowed with agile and proactive marketing strategies and devices that |
| |directs the firm to strategic competitiveness. |
|Consumer discretionary |The economy is weakening and individuals may cut back on spending they deem to be |
| |unnecessary. |
|Lack of Key Strategic Partnerships |DirecTV has partnerships with Microsoft, AOL and TiVo, just to name a few. What these |
| |partnerships lack is the ability to offer broadband and telephone services to their |
| |customers. Cable television companies are offering digital television, high-speed internet |
| |and digital telephone services. DirecTV needs to engage in strategic partnerships so that |
| |they can offer similar packages (or better ones) that cable currently offers. |
|Satellite Launches and operations |There is a risk that satellites could have problems during or after launch, which could add |
| |to costs. |
|No clear successor for CEO |There is a future risk that the company can no longer perform and materialize its goals and |
| |objectives if no clear successor is established. |

Source: http://www.trinity.edu/smf/inc/reports/DirecTV%20Buy%20Report.docx

TOWS ANALYSIS:

| | | |
| |OPPORTUNITIES |THREATS |
| |Latin America expansion |Cable providers with ability to bundle |
|External |Digital switch over |services |
| |Emerging digital media |Increased production costs |
| |Technological convergence or “bundling” |Competition |
| | |Price wars |
| | |Technological Advancements |
| | |Stolen Satellite Data |
| | |US economic slowdown |
|Internal | |Online piracy |
| | | |
|STRENGTHS |S-O Strategies |S-T Strategies |
|First mover in Latin America |Innovation of products and services |Enter into strategic partnerships that will |
|Ranked # 1 in customer satisfaction and |Technological Advancements |allow them to offer bundled services. |
|reliability |Develop long-term strategy of bundling cable |Develop more sophisticated encryption systems |
|Plenty of cash and strong cash flows |and Internet |More marketing in VOD offerings/ pay per view |
|High paying customers |Enter into strategic partnerships that will | |
|Murdoch’s aggressive marketing tactics |allow them to offer bundled services | |
| |Expand its Latin America operations | |
| |Acquisitions and Mergers | |
| | | |
|WEAKNESSES |W-O Strategies |W-T Strategies |
|Consumer discretionary |DirecTV needs to engage in strategic |Enter into strategic partnerships that will |
|Lack of Key Strategic Partnerships |partnerships so that they can offer similar |allow them to offer bundled services |
|Satellite Launches and operation |packages (or better ones) that cable currently|Better alliance with business partners |
|No clear successor for CEO |offers |Business Restructuring |
| |Management Succession Planning | |

Source: http://www.trinity.edu/smf/inc/reports/DirecTV%20Buy%20Report.docx

ALTERNATIVE COURSES OF ACTIONS:

| STRATEGIES |PROS |CONS |
| | | |
|Innovation of products and services |Innovation provides positive benefits to stakeholders and |The outcome would still be determined by |
| |customers by reinvigorating products and services, improving|the acceptance or rejection of the society |
| |processes and promising economies of scale. |to said motivation |
| | | |
| |Technology advances show people a more efficient way to do | |
| |things, and these processes get results. |The more advanced society becomes |
| | |technologically, the more people begin to |
|Technological Advancements | |depend on computers and other forms of |
| | |technology for everyday existence. This |
| | |kind of dependency on technology puts |
| | |people at a distinct disadvantage because |
| | |they become less self-reliant |
| | | |
| | | |
| | | |
| | | |
| | | |
| |It is evident in order to gain market share and improve | |
| |profitability over the short and long term. | |
| | | |
| | | |
| | |Untimed choosing of successor |
| | | |
|DirecTV needs to engage in strategic | | |
|partnerships so that they can offer |Provide the company with ease succession of leadership roles| |
|similar packages (or better ones) that |Sufficient time for training and development of future | |
|cable currently offers |leaders | |
| |Retention of people with relevant skills and knowledge | |
| | | |
|Management Succession Planning | |Too costly and risky |
| |News Corp. will be able to tap customers or subscribers both|Vulnerable to strict rules and regulations |
| |by satellite and cable through acquisitions like DirecTV. | |
| |It will attract more customers | |
| |Improved efficiency and economies of scale | |
| | | |
| | | |
| | | |
|Acquisitions and Mergers |DirecTV must consider strategic partnership in order to |Business partners are jointly and |
| |successfully compete in saturated market. |individually liable for the actions of |
| |Partnerships provide moral support and will allow for more |other partners. |
| |creative brainstorming. |Since decisions are shared, disagreements |
| |It can be cost effective as each partner specializes in |can occur. A partnership is for long term, |
| |certain aspects of their business. |and expectations and situations can change,|
| | |which can lead to dramatic and traumatic |
| | |split ups. |
| | | |
| | | |
|Enter into strategic partnerships that |It is relatively cheaper on a consumer’s point of view. |Customers would still have high |
|will allow them to offer bundled services|Since it is relatively cheaper, it has the tendency to |expectations on the given bundle even |
| |attract more customers, thus, generating more income. |though it is cheaper and thus putting |
| | |pressure on the performance of what they |
| | |offer. |
| | | |
| | |When you expand your business, you often |
| | |spread the risks of doing business and |
| |This largely untapped market is a huge opportunity for DTV |reduce the potential of one product or one |
| |because traditional cable providers do not have the capital |poor decision damaging your business. |
| |necessary to bring service to the area. | |
| |Primary benefit of business expansion is the ability to | |
| |attract and retain new customers. |Encryption that is managed by different |
| | |users can cause problems in a managed |
|Develop long-term strategy of bundling | |network by rendering necessary files |
|cable and Internet |Encrypting a file makes its contents unrecognizable to |inaccessible to the network managers. |
| |applications and to anyone snooping around on your computer.| |
| | |Some campaigns are never successful. |
| | |Users may only be interested in the free |
| | |software and the website or firm being |
| | |promoted. |
| | | |
| |PPV is an affordable strategy to increase traffic. |Resistance to change |
| |Gaining more pay per view will increase the firm’s revenue. |Destroyed organizational culture |
| | | |
|Expand its Latin America operations | | |
| | | |
| | | |
| | | |
| |Lay-off of unnecessary employees | |
| |Flexibility to change | |
| | | |
| | | |
| | | |
| | | |
| | | |
|Develop more sophisticated encryption | | |
|systems | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|More marketing in VOD offerings/ pay per | | |
|view | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
|Business Restructuring | | |
| | | |
| | | |
| | | |
| | | |

RECOMMENDATION:

DirecTV delivers satellite-based television services to U.S. customers in homes and businesses. Their operations include some of the world's most advanced technologies in the delivery of a seamless viewing experience. Taking into consideration the identified threats, opportunities, weaknesses and strengths, we have identified different strategies in order to address different concerns. Based on the pros and cons analysis as shown in previous page, News Corp. had a rightful decision with regard to the acquisition of DirecTV. The said action feeds to its general objective of acquiring market power or dominance in the industry where it belongs. The only major drawbacks of acquisition would be a) it is too risky, 2) it consumes a lot of time and money and 3) there are a lot of strict regulations with regards to the strategic action. Acquisition, on the other hand, is more certain and it somehow incorporates all other alternative courses of actions mentioned in previous pages. Moreover, acquisition gives a lot of benefits to the company. It improves firm’s efficiency and economies of scale hence reducing over-all costs. It would also expand its customer base and reach other markets that help the company in achieving above-average returns.

NEWS CORP. in 2005:
CONSOLIDATING THE DIRECTV ACQUISITION
Case Analysis

STRATEGIC MANAGEMENT
MANAGEMENT 190

Submitted to:
Prof. Viola C. Siozon

Submitted by:
Michelle Grace A. Tonido
-----------------------
[1] http://www.trinity.edu/smf/inc/reports/sp2011/dtv.pdf
[2] http://www.qcommission.com/industry_media_overview.htm
[3] http://www.wikinvest.com/industry/Media_%26_Entertainment
[4] http://www.articlesnatch.com/Article/An-Overview-Of-Satellite-And-Tv-Broadcasting-Services/1233416
[5] http://www.ehow.com/list_5981852_advantages-broadcasting-satellite-service-_bss__.html
[6] http://www.facebook.com/l.php?u=http%3A%2F%2Feconomics-files.pomona.edu%2Fjlikens%2FSeniorSeminars%2Fpandora%2Freports%2Fdirectv.pdf&h=mAQFgUwzu…...

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Mergers and Acquisitions

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