Filed On 5/2/03 9:25pm ET ˇ SEC File 0-26035 ˇ Accession Number 1021408-3-6972
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
5/05/03 General Motors Corp 425 5/02/03 1:93 Directv Group Inc Donnell..Financial/NY/FA
Hughes Electronics Corporation
Business-Combination Transaction Communication ˇ Rule 425
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 425 Business-Combination Transaction Communication 93 262K
Filed by General Motors Corporation
Pursuant to Rule 425 under the Securities Act of 1933 and
Deemed Filed Pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Subject Companies: General Motors Corporation
Commission File No. 001-00143
Hughes Electronics Corporation
Commission File No. 000-26035
Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554
__________________________________________
)
Application of )
)
General Motors Corporation and )
Hughes Electronics Corporation, )
)
Transferors, ) MB Docket No 03-___
)
and )
)
The News Corporation Limited, )
)
Transferee, )
)
For Authority to Transfer Control )
__________________________________________)
CONSOLIDATED APPLICATION FOR
AUTHORITY TO TRANSFER CONTROL
Richard E. Wiley William M. Wiltshire
Lawrence W. Secrest III Scott Blake Harris
Todd M. Stansbury Harris, Wiltshire & Grannis LLP
Wiley Rein & Fielding 1200 Eighteenth Street, N.W.
1776 K Street, N.W. Washington, DC 20036
Washington, DC 20006 202-730-1300
202-719-7000 Counsel for The News Corporation
Limited
Gary M. Epstein
James H. Barker
John P. Janka
Latham & Watkins LLP
555 11/th/ Street, N.W.
Suite 1000
Washington, DC 20004
202-637-2200
Counsel for General Motors Corporation and
Hughes Electronics Corporation
Summary
For over two decades, Hughes Electronics Corporation ("Hughes") and its
subsidiaries have been at the forefront in developing, introducing and deploying
innovative satellite services for both businesses and consumers in the United
States. For example, Hughes was the first to launch a high-power Direct
Broadcast Satellite ("DBS") service, the first to launch a high-speed satellite
Internet access service, and the first to launch a DBS spot beam satellite. Such
innovations have spurred other satellite and terrestrial service providers to
upgrade their systems and improve their services, all to the benefit of American
consumers.
But now, as the satellite services industry moves into a more mature stage,
Hughes and its parent, General Motors Corporation ("GM"), find themselves at a
crossroads. DIRECTV faces intense competition from other multichannel video
programming distribution ("MVPD") systems. In fact, its DBS rival, EchoStar, is
growing faster than DIRECTV, while the number of digital cable subscribers
recently has been forecast to surpass the total number of DBS subscribers for
the first time. Hughes is also planning to roll out an advanced broadband
satellite system targeted to enterprise customers - a bold initiative that
presents enormous challenges. Thus, this is a critical juncture for Hughes if it
is to realize its full potential as a robust competitor that will offer
Americans a true alternative to established and well-financed incumbents.
For GM, the economic imperatives are very different. GM is world renowned
as a leader in the automotive industry, and seeks to focus its management and
capital resources on this core area of its operations, and the need to provide
funding for GM's U.S. pension plans and retiree health care benefits for the
employees who have supported
GM's core automotive operations. Separation of Hughes from GM will end the era
of Hughes competing for capital against the core automotive operations of GM. GM
has no special expertise in the businesses in which Hughes operates and GM's
continued ownership will not enhance Hughes' position as a dynamic force. Thus,
for several years, GM has been searching for an investor with a core competency
more aligned with Hughes' businesses and a willingness to permit Hughes to
undertake strategic initiatives that may require additional capital and other
resources.
The News Corporation Limited ("News Corp.") has a strategic vision,
expertise and resources that will enable Hughes to reach its full potential as a
leader in MVPD services. Accordingly, through a series of related transactions
described in more detail below, GM will split off Hughes as an independent,
publicly traded company, and News Corp. will acquire a 34% interest in Hughes
which News Corp. will hold through Fox Entertainment Group, Inc. ("FEG"), in
which News Corp. currently holds an 80.6% equity interest and exercises 97% of
the vote.
News Corp. brings an impressive array of capabilities to the transaction.
It holds interests in a number of satellite direct-to-home ("DTH") television
platforms outside the United States, which will allow it both to share with
Hughes the benefits of its experience with diverse service offerings and
business practices and to achieve economies of scope and scale in research and
development and equipment production. News Corp. also has a proven track record
of innovation, a demonstrated ability to challenge established incumbents
successfully, and a tradition of changing the dynamic in markets it chooses to
enter. For example, in launching the FOX network, Fox News Channel, Fox Sports
Net, and National Geographic Channel, and investing heavily in establishing
local news
ii
services in its owned television stations where none previously existed, News
Corp. not only aggressively entered areas dominated by formidable incumbents,
but also demonstrated a long-term commitment to compete in those areas - and
ultimately its ability to do so successfully. In addition, News Corp. has
demonstrated its willingness to invest in breakthrough technologies to offer
subscribers better services, as it did in converting the British Sky
Broadcasting ("BSkyB") platform from analog to digital technology and in
bringing a wide range of interactive television services to BSkyB subscribers.
News Corp. will bring this same level of strategic vision, energy, expertise and
innovation to Hughes. And because Hughes' satellite platforms serve the entire
country, the benefits of these enhanced services will flow to all Americans,
including those in rural and other areas currently underserved or unserved by
terrestrial alternatives.
News Corp. is committed to dramatically increasing DIRECTV's
local-into-local commitment by providing local-into-local service in as many of
the 210 Designated Market Areas nationwide as possible, and to doing so as soon
as economically and technologically feasible. Among the possibilities being
studied are the use of capacity on HNS' recently expanded North American Ka-band
SPACEWAY system, further incorporating digital terrestrial tuners into set-top
boxes so that subscribers can seamlessly integrate digital over-the-air signals,
and other emerging technologies. News Corp. also intends to investigate new
technologies that promise to improve spectrum efficiency, some of which are
already being used by News Corp. subsidiaries. Such initiatives not only will
improve DIRECTV's competitive position in a number of markets, but also will
help DIRECTV carry a greater array of high definition television
iii
("HDTV") programming, thereby helping to drive the digital television transition
process.
By bringing together News Corp.'s DTH experience, spirit of innovation and
programming expertise, with DIRECTV's video distribution capabilities and Hughes
Network Systems' technological capabilities, News Corp. currently expects that,
within three years, the transaction will create synergies and efficiencies of
between $610 million and $765 million annually. These savings will, in turn,
enhance Hughes' ability to undertake the significant risks and costs of
developing and deploying new services and technologies to provide its customers
with consistently more compelling products and services.
Moreover, because the assets and operations of News Corp. and Hughes are
almost entirely complementary, the transaction will not decrease competition in
any relevant market affecting the United States. Indeed, competition will be
intensified and consumers will have more choice.
While the Commission has in the past recognized the pro-competitive
benefits of vertical integration of programming and distribution assets, it has
also assessed the potential for abuse. There is no opportunity for abuse as a
result of the proposed transaction. News Corp. has no market power in the
programming market and DIRECTV has no market power in the MVPD market that
either could leverage for anti-competitive purposes. Moreover, as a programmer,
News Corp. is dedicated to achieving the widest possible distribution for its
programming in order to maximize revenue from advertising and subscriber fees,
and it has no interest in denying access to or discriminating against any MVPD
platform. As a provider of subscription programming
iv
services to the public, DIRECTV is dedicated to securing the most compelling
programming available, regardless of the source.
Nonetheless, in order to allay any program-related concerns whatsoever,
News Corp. and Hughes have agreed as a provision of their transactional
documents that they will consent to the imposition of a series of program access
undertakings as a condition of approval of this Application.
. First, News Corp. and Hughes will agree to operate under the same
program access rules that Congress and the Commission have placed
on programmers that are affiliated with cable operators, even
though in this case there is neither a history of
anti-competitive conduct nor the dominant market share that
engendered the program access requirements in the first place.
This commitment will remain in place whether or not News Corp. is
otherwise legally subject to the Commission's program access
rules. Accordingly, News Corp. will continue to make its
programming available to all MVPDs on non-discriminatory prices,
terms and conditions.
. Second, News Corp. and Hughes will agree to a number of other
restrictions that go beyond those applicable to cable-affiliated
programmers and DBS operators. These restrictions would, for
example, (1) preclude News Corp. from offering any of its
existing or future national or regional programming services on
an exclusive basis to any MVPD, (2) preclude News Corp. and
DIRECTV from discriminating against unaffiliated programming
services in the selection, price, terms, or conditions of
carriage, and (3) preclude News Corp. and DIRECTV from entering
into exclusive arrangements with or unduly or improperly
influencing affiliated programming entities, including Liberty
Media Corporation. (A complete list of these undertakings is
attached to this Application as Attachment G.)
These undertakings would remain in place for so long as the Commission's program
access rules remain in effect and News Corp. holds an attributable interest in
DIRECTV. The parties encourage the Commission to adopt these undertakings as a
condition of the approval of this Application. With these prophylactic measures
in place (and indeed even
v
without them), the proposed transaction does not present even the potential for
public interest harms that could offset the inherent and undeniable public
interest benefits.
Accordingly, the Commission should grant this Application expeditiously so
that the parties can begin as quickly as possible the process that will enhance
Hughes' capabilities and bring the benefits of more robust competition to
consumers throughout the United States.
vi
TABLE OF CONTENTS
[Enlarge/Download Table]
Page
----
Summary ........................................................................... i
I. Introduction ................................................................. 2
A. Description of the Parties .............................................. 4
1. The GM/Hughes Parties ............................................... 4
2. The News Corporation Limited ........................................ 7
3. Description of the Proposed Transaction ............................. 10
II. Standards for Review ......................................................... 14
III. The Proposed Transaction Complies With the Requirements of the
Communications Act, All Other Applicable Statutes,
and the Commission's Rules ................................................... 16
IV. The Proposed Transaction Will Yield Significant Public
Interest Benefits ............................................................ 16
A. News Corp.'s Proven Track Record ........................................ 20
1. A Tradition of Innovation in Programming ............................ 21
2. A Tradition of Innovation in Technology ............................. 23
B. Local-Into-Local, HDTV and Broadband .................................... 27
C. Increased Operating Efficiencies ........................................ 31
D. Economies of Scope and Scale ............................................ 33
E. Improved Customer Satisfaction .......................................... 36
F. Improved Capital Structure .............................................. 38
G. Commitment To Diversity ................................................. 39
H. Additional News Corp./Hughes Synergies .................................. 43
V. The Proposed Transaction Will Result in No Public Interest Harms ............. 44
A. Relevant Market Definition .............................................. 44
B. Potential Horizontal Issues ............................................. 45
C. Potential Vertical Integration Issues ................................... 46
1. Programming Market: Discrimination Against
Rival Programming Services .......................................... 48
2. Distribution Market: Discrimination Against
Rival MVPDs ......................................................... 54
3. Broadcast Programming ............................................... 63
4. Electronic Program Guides ........................................... 65
D. Other Issues ............................................................ 67
[Download Table]
VI. Request for Waiver of the Application Cut-Off Rules .................. 68
VII. Conclusion ........................................................... 70
2
ATTACHMENT INDEX
VOLUME I
A. List of FCC Licenses and Authorizations Controlled by Hughes
Electronics Corporation
B. GM/Hughes Simplified Ownership Structure of FCC Licensees
(Pre-Transaction)
C. The News Corporation Limited Simplified Ownership Structure
(Pre-Transaction), Principal Ownership List, Officers and Board of
Directors
D. Hughes Simplified Ownership Structure of FCC Licensees
(Post-Transaction), Principle Ownership List, Officers and Board of
Directors
E. Declaration of Peter Giacalone
F. The News Corporation Limited National and Regional Programming
Interests
G. Program Access Commitments
H. List of Pending Hughes FCC Applications
VOLUME II
Separation Agreement by and between General Motors Corporation and Hughes
Electronics Corporation (April 9, 2003)
Agreement and Plan of Merger by and between Hughes Electronics Corporation, The
News Corporation Limited, and GMH Merger Sub, Inc. (April 9, 2003)
Stock Purchase Agreement among The News Corporation Limited, Hughes Electronics
Corporation, and General Motors Corporation (April 9, 2003)
VOLUME III
Transfer of Control Applications for Licenses Controlled by Hughes Electronics
Corporation
Before the
FEDERAL COMMUNICATIONS COMMISSION
Washington, D.C. 20554
____________________________________________
)
Application of )
)
General Motors Corporation and )
Hughes Electronics Corporation, )
)
Transferors, ) MB Docket No. 03-____
)
and )
)
The News Corporation Limited, )
)
Transferee, )
)
For Authority to Transfer Control )
____________________________________________)
CONSOLIDATED APPLICATION FOR
AUTHORITY TO TRANSFER CONTROL
General Motors Corporation ("GM"), Hughes Electronics Corporation
("Hughes"), and The News Corporation Limited ("News Corp.") respectfully submit
this joint application for Commission approval of the transfer of control over
various space station, earth station, and terrestrial wireless authorizations
held through GM's Hughes subsidiary./1/ Through a series of related transactions
that will occur essentially simultaneously, General Motors will split off Hughes
and divest its interest in Hughes, and News Corp. will acquire an indirect 34%
interest in the newly-independent Hughes./2/
-----------------
/1/ Attachment A hereto provides a consolidated list of authorizations over
which control is to be transferred and the entities that currently hold
them. Attachment H similarly provides a consolidated list of pending
applications filed by these entities.
/2/ News Corp. has designated News Publishing Australia Limited, a Delaware
corporation and a wholly owned subsidiary of News Corp., as the initial
purchaser of all shares of Hughes being
I. Introduction
Once the proposed transaction has been consummated, Hughes will become an
independent public company that, through its affiliation with News Corp., will
have the strategic vision, scope, scale, expertise and access to capital
necessary to compete more effectively against established and well-funded
incumbents. DIRECTV will be able to provide American consumers with a broader
selection of innovative programming and more cutting-edge technology. DIRECTV
will be able to accelerate the penetration of next-generation systems and
services such as interactive television ("ITV") and digital video recorders
("DVRs"), and to better compete with the offerings of the incumbent cable
operators, which the Commission has concluded are dominant in virtually all
local and regional multichannel video programming distribution ("MVPD") markets.
As the Commission has recognized, "the strong overbuild competition from
local exchange carriers and others that Congress anticipated as a result of the
1996 amendments to the Communications Act has, as yet, failed to develop."/3/
Thus, the ability of Direct Broadcast Satellite ("DBS") operators to compete
successfully in the MVPD market is more important than ever. News Corp.'s
acquisition of a 34% interest in Hughes will promote competition in the MVPD
market, to the benefit of all American consumers.
The proposed transaction combines U.S. assets that are almost entirely
complementary rather than duplicative. News Corp. holds interests in a number of
acquired in the transaction. As hereinafter described, the shares of Hughes
will be transferred to a subsidiary of Fox Entertainment Group, Inc. For
purposes of this Application, we shall refer to the purchaser as News Corp.
for the sake of simplicity.
/3/ See Implementation of the Cable Television Consumer Protection and
Competition Act of 1992 - Sunset of Exclusive Contract Prohibition, 17 FCC
Rcd. 12124, 12144-45 (2002) ("Exclusivity Sunset Order").
2
satellite programming distribution platforms and many related technology
businesses worldwide. However, it has no multichannel distribution or broadband
capabilities in the United States. Hughes' DIRECTV satellite television service
would complement the MVPD services operating in other countries in which News
Corp. holds an interest (such as British Sky Broadcasting Group plc ("BSkyB")).
Conversely, Hughes has virtually no interest in programming services,/4/ while
News Corp. holds interests in a broadcast network and a number of cable
programming channels. Thus, while News Corp. and Hughes each provide a broad
array of services, they are almost entirely in non-overlapping lines of
business. This strategic relationship will enable the parties to improve Hughes'
competitive capabilities by drawing on resources available from and experience
gained in markets around the world, without eliminating any existing competitor
serving the United States in the MVPD, programming or broadband markets.
Not only is the proposed transaction consistent with all Commission rules
and policies, but it also will result in many affirmative public interest
benefits - benefits that cannot be realized until the transaction is
consummated. Accordingly, the parties respectfully request that this Application
be granted as expeditiously as possible. Because this proceeding involves broad
public policy issues implicating competition in the programming and distribution
markets in the United States, the parties also request that the Commission
designate this application as a permit-but-disclose proceeding covered by
Section 1.1206 of the Commission's rules.
This consolidated Application consists of a narrative description of the
parties and the proposed transaction, including the attendant public interest
benefits, along with
---------------------
/4/ Hughes' sole programming interest is a 5% passive equity interest in the
Hallmark Channel.
3
several attachments containing the transaction documents, completed FCC transfer
application forms, and other materials. Each FCC form application and its
associated exhibits and filing fee have been filed separately in accordance with
the Commission's rules. Following the closing of the transaction, the relevant
Applicants will supplement all pending applications as required under the
Commission's rules, 47 C.F.R. (S) 1.65, to reflect the new ownership structure
of Hughes. To the extent that any pending applications, or any other
applications for new facilities or for renewal or modification of existing
facilities, are granted prior to the closing of the proposed transaction, the
parties request a determination by the Commission that the grant of this
Application includes consent to transfer control with respect to all such
subsequently granted authorizations.
A. Description of the Parties
1. The GM/Hughes Parties
Hughes, a Delaware corporation, is a wholly owned subsidiary of GM, which
is also a Delaware corporation./5/ Hughes is the corporate parent of several
other companies that provide specialized communications services to a wide range
of end users. Hughes indirectly owns all of the issued and outstanding interests
of DIRECTV Enterprises, LLC ("DIRECTV"), a Commission licensee. In addition,
Hughes controls various Commission licenses and authorizations through various
other subsidiaries that are directly or indirectly wholly owned./6/ Hughes also
indirectly holds an approximately 81%
----------------------
/5/ As discussed below, GM has issued a publicly traded tracking common stock
(GM Class H common stock) designed to provide shareholders with financial
returns based on the economic performance of the businesses and assets of
GM's wholly owned Hughes subsidiary.
/6/ A list of the Commission licensees in which Hughes holds a controlling
interest is included in Attachment A. Hughes also holds a non-controlling
15.5% equity/7.4% voting interest in XM Satellite Radio Holdings, Inc., the
corporate parent of a Commission licensee in the satellite Digital Audio
Radio Service, which is not part of this Application.
4
economic and voting interest in PanAmSat Corporation ("PanAmSat"), a publicly
traded Delaware corporation and the corporate parent of PanAmSat Licensee Corp.,
a Commission licensee./7/ Attachment B includes a chart summarizing the relevant
GM/Hughes ownership structure prior to the proposed transaction.
DIRECTV is one of the world's leading digital DBS operators. DIRECTV
launched the United States' first DBS satellite in December 1993 and a second
DBS satellite in August 1994./8/ In June 1995, DIRECTV launched a third
high-power DBS satellite. In April and May 1999, the Commission authorized the
transfer to DIRECTV of DBS assets and related authorizations held by United
States Satellite Broadcasting Company, Inc. ("USSB")/9/ and Tempo Satellite,
Inc.,/10/ respectively. Over the last two years, DIRECTV has launched two more
satellites, including the first DBS satellite with spot beam technology that
enables it to re-use its spectrum a number of times across the United States to
provide more efficiently the signals of local broadcast stations into their
local market areas. Thus, DIRECTV currently provides service to U.S. consumers
from seven DBS satellites using 32 channels at 101(Degree) W.L., 3 channels at
110(Degrees) W.L., and 11
------------------
/7/ See Hughes Communications, Inc., 12 FCC Rcd. 7534 (1997). With the
exception of six satellite earth stations licenses held by PanAmSat, none
of the licenses controlled by Hughes is a common carrier or broadcast radio
license. PanAmSat has filed applications to remove the common carrier
designation from these earth station licenses, and has also recently
notified the Commission of discontinuance of service under its inactive
Section 214 authorizations.
/8/ United States Satellite Broadcasting Co., 7 FCC Rcd. 7247 (1992). At the
time, the license was held by DIRECTV's predecessor-in-interest, Hughes
Communications Galaxy, Inc. ("HCG"). In June 1995, the Commission consented
to the pro forma assignment of all licenses and facilities necessary to
operate DIRECTV's DBS system from HCG to DIRECTV. See Public Notice, Rep.
No. SPB-10 (rel. June 7, 1995) (pro forma assignment granted on June 5,
1995). On April 7, 1995, the Commission also approved the assignment of the
earth station authorization for DIRECTV's uplink facilities at Castle Rock,
Colorado, from Hughes Communication Satellite Services, Inc. to DIRECTV.
/9/ United States Satellite Broadcasting Co., 14 FCC Rcd. 4585 (Int'l Bur.
1999).
/10/ Tempo Satellite, Inc., 14 FCC Rcd. 7946 (Int'l Bur. 1999).
5
channels at 119(Degrees) W.L./11/ DIRECTV, together with certain independent
distributors, now have approximately 11.4 million subscribers in the United
States./12/
Hughes Network Systems, Inc. ("HNS"), another Hughes subsidiary, provides
broadband satellite network solutions for businesses and consumers around the
world. HNS' high-speed, satellite-based broadband services are marketed globally
under the DIRECWAY(R) brand. These existing satellite broadband services are
provided using leased Ku-band transponders. HNS is also deploying the SPACEWAY
system, a next generation, Ka-band satellite platform that will provide many new
broadband services at faster speeds than ever before. SPACEWAY is currently
scheduled to begin North American service in 2004, assuming successful launch of
its first satellite later this year. HNS also manufactures telecommunications
equipment and DIRECTV set-top boxes.
Directly and through its subsidiaries, PanAmSat owns and operates a fleet
of 22 satellites around the world that operate in the fixed-satellite service
bands, as well as a comprehensive system of teleports and complementary
terrestrial resources. PanAmSat carries programming for broadcasters and other
programmers worldwide, provides Internet backbone support to Internet service
providers, supports private business communications networks to corporations,
and provides pipelines worldwide for
------------------
/11/ DIRECTV voluntarily surrendered the DBS channels previously assigned to it
at the 157(Degrees) W.L. orbital location in May 1998. See Public Notice,
Rep. No. SPB-127 (rel. June 10, 1998).
/12/ Of these subscribers, approximately 9.9 million subscribe directly to
DIRECTV, while the remaining approximately 1.5 million subscribe through
the National Rural Telecommunications Cooperative. Hughes also has
interests in direct-to-home ("DTH") and other satellite services in several
foreign countries. For example, it indirectly holds a 74.7% interest in
DIRECTV Latin America LLC, which provides subscription DTH television
services throughout Latin America. DIRECTV Latin America has one
Commission-licensed earth station that is included on Attachment A.
However, licenses for the services provided in foreign countries are not
part of this Application.
6
telecommunications providers. PanAmSat and its subsidiaries also hold various
FCC satellite earth station licenses./13/
2. The News Corporation Limited
News Corp. is a corporation formed under the laws of South Australia with
securities that are publicly traded on both the New York Stock Exchange and the
Australian Stock Exchange. It is a diversified international media and
entertainment company with operations in a number of industry segments,
including: filmed entertainment; television; cable network programming;
magazines and inserts; newspapers; and book publishing. The activities of News
Corp. are conducted principally in the United States, the United Kingdom,
Australia, Asia, and the Pacific Basin. News Corp. provides DTH television
services in Italy and has joint venture interests in DTH television services in
Latin America. News Corp. is well known to the Commission, as its subsidiaries
hold a number of broadcast and other licenses. K. Rupert Murdoch, a U.S. citizen
and Chief Executive, directly and indirectly controls an approximately 16%
equity/30% voting interest in News Corp./14/
Liberty Media Corporation ("Liberty"), a Delaware corporation that holds
preferred limited voting ordinary shares of News Corp. representing
approximately 17.6% of the total issued and outstanding stock of News Corp., is
the only other
-------------
/13/ PanAmSat also holds various space and earth station licenses issued by
other countries, which are not part of this Application.
/14/ This approximate percentage is calculated based on 2,095,999,003 ordinary
shares outstanding on December 31, 2002, and includes ordinary shares owned
by (1) Mr. K. Rupert Murdoch, (2) Cruden Investments Pty. Limited, a
private Australian investment company owned by Mr. K. Rupert Murdoch,
members of his family and various corporations and trusts, the
beneficiaries of which include Mr. K. Rupert Murdoch, members of his family
and certain charities, and (3) corporations which are controlled by
trustees of settlements and trusts set up for the benefit of the Murdoch
family, certain charities and other persons. In addition, Mr. K. Rupert
Murdoch, Cruden Investments Pty. Limited and such other entities
beneficially own 220,076,801 preferred limited voting ordinary shares.
7
shareholder with a greater than 10% interest in the company./15/ Liberty holds
interests in domestic and international video programming, interactive
technology services, and communications businesses in the United States, Europe,
Latin America, and Asia. Among its holdings are majority ownership interests in
Starz Encore Group LLC (100%) and Liberty Satellite and Technology, Inc. (86%),
and minority interests in a number of other companies./16/ The News Corp. shares
that Liberty holds have no voting rights except in a limited number of
instances./17/ Thus, Liberty's interest in News Corp. is purely passive and it
exercises no control over News Corp. In addition, News Corp. does not have any
interest in Liberty and does not exercise any control over Liberty.
News Corp. holds its U.S. programming interests through its Fox
Entertainment Group, Inc. ("FEG") subsidiary, a Delaware corporation in which
News Corp. currently
--------------
/15/ Liberty has an option, which must be exercised by September 30, 2003,
through which it may acquire $500 million of additional preferred limited
voting ordinary shares of News Corp. If Liberty does not exercise that
option, News Corp. has the right to put those shares to Liberty upon the
consummation of the transaction proposed herein. Assuming exercise of the
Liberty option prior to consummation of the proposed transaction, Liberty's
ownership interest in News Corp. would increase to approximately 19%.
However, upon consummation of the proposed transaction, Liberty's ownership
interest could be diluted to as little as 17.1%. If Liberty does not
exercise its option and News Corp. does not exercise its put rights,
Liberty's interest in News Corp. could fall below 17.1% after consummation
of the proposed transaction.
/16/ Companies in which Liberty holds a minority interest include Discovery
Communications (49.8%), OpenTV Corp. (46%), QVC (42%), Sprint PCS Group
(21%), and USA Interactive (20%). Liberty also holds a less than 1%
interest in the GMH tracking stock issued by GM. A Liberty affiliate also
holds interests in two entities other than Hughes that hold Commission
licenses for Ka-band space stations: a controlling interest in Astrolink
International LLC (with an application pending to acquire substantially all
of Astrolink's assets), and the largest plurality interest in Wildblue
Communications, Inc. ("Wildblue").
/17/ A holder of News Corp. preferred limited voting ordinary shares is entitled
to vote: on a proposal to reduce the share capital of the company; on a
proposal to wind up or during the winding up of the company; on a proposal
for the disposal of the whole of the property, business and undertaking of
the company; on a proposal that affects rights attached to such preferred
shares; on a resolution to approve the terms of a buy-back agreement; and
during a period during which a dividend (or part of a dividend) in respect
of the preferred shares is in arrears.
8
holds an approximately 80.6% ownership and 97% voting interest. FEG is
principally engaged in the development, production and worldwide distribution of
feature films and television programs, television broadcasting and cable network
programming. Its programming interests include FOX Broadcasting Company, Fox
Television Stations, Twentieth Century Fox Film, Twentieth Century Fox
Television, Fox News Channel, and Fox Cable Networks./18/
News Corp. indirectly holds interests in a number of subscription DTH
services, all of which operate entirely outside the United States. Among these
is the 36.2% indirect interest that News Corp. holds in BSkyB, the leading pay
television platform in the United Kingdom and Ireland, providing a broad array
of programming directly to over 6.1 million of its own DTH satellite subscribers
and indirectly to over 4.1 million additional subscribers of cable and other
delivery platforms./19/ However, News Corp. has no interest in satellite
operators serving the United States./20/
In addition, News Corp. holds an approximately 42.9% interest in Gemstar-TV
Guide International, Inc. ("Gemstar"), a global technology and media company
that develops proprietary technologies and systems that simplify and enhance the
viewing and recording of video and television programming and provides print,
electronic, and interactive program listings. Among other things, Gemstar
produces an electronic
------------
/18/ Attachment F contains a list of News Corp.'s national and regional cable
programming interests in the United States, including those owned
indirectly through Gemstar-TV Guide International, Inc.
/19/ In addition to BSkyB, News Corp. holds interests in Sky Italia (80.1%), Sky
Brasil Servicos Ltda. (49.7%), Innova S. d R.L. de C.V. (30%), Sky New
Zealand (29.5%), FOXTEL (25%), and Sky PerfecTV (8.1%), which provide DTH
services in Italy, Brazil, Mexico, New Zealand, Australia, and Japan,
respectively.
/20/ News Corp. indirectly through Gemstar holds an interest of less than 0.3%
in the Wildblue Ka-band satellite system.
9
program guide ("EPG") that is used by MVPDs as an on-screen guide that enables
subscribers to navigate program offerings.
News Corp. also holds an approximately 79% equity interest in NDS Group plc
("NDS"), a supplier of open end-to-end digital pay television solutions for the
secure delivery of entertainment and information to television set-top boxes and
personal computers. NDS' conditional access systems also enable its customers to
provide enhanced television and interactive services, such as electronic program
guides, games, interactive advertising and television commerce. NDS has also
developed DVR technology.
Attachment C includes a chart that summarizes the relevant News Corp.
ownership structure prior to the proposed transaction.
B. Description of the Proposed Transaction
GM proposes to split off Hughes and divest its interest in Hughes such that
Hughes will become a separate and independent company. As a result of these and
several related transactions, News Corp. will control a 34% interest in Hughes,
three GM employee benefit trusts managed by an independent trustee will have a
combined approximately 20% interest in Hughes, and the remaining 46% interest in
Hughes will be held by the general public./21/ The transaction - which is
subject to several conditions, including regulatory approvals, a tax ruling, and
GM and Hughes stockholder approval - will be accomplished in a series of
interrelated steps that transpire essentially simultaneously, as follows.
-------------
/21/ See the Separation Agreement, Merger Agreement, and Stock Purchase
Agreement, included in Volume II of this Application.
10
The Split-Off of Hughes. At present, a "tracking stock" GM security related
to the financial performance of Hughes is held by the public and is traded on
the New York Stock Exchange as GM Class H common stock ("GMH shares"). This
tracking stock is designed to provide holders with financial returns based on
the financial performance of Hughes. The total number of GMH shares issued to
date and currently outstanding represents an approximately 80.1% indirect
economic interest in the financial performance of Hughes, the largest block of
which is held by three GM employee benefit trusts. GM itself owns all of the
common stock of Hughes, holds all of Hughes' voting power and retains the
remaining approximately 19.9% economic interest in the financial performance of
Hughes.
As one of the first steps in the transaction, after the payment by Hughes
to GM of a $275 million dividend, GM will distribute to the GMH shareholders new
shares of Hughes common stock in exchange for all of the outstanding GMH shares
(on a share-for-share basis). As a result, the GMH shares will be redeemed and
cancelled. Prior to the stock purchase described below, GM will hold all the
outstanding shares of another class of Hughes securities - Class B common stock
- representing GM's approximately 19.9% economic interest in the company.
The Stock Purchase. Simultaneously with the split-off described above, News
Corp. will purchase GM's approximately 19.9% interest in Hughes, represented by
Hughes Class B common stock, for $14 per share (approximately $3.8 billion,
subject to adjustments as described in the Stock Purchase Agreement) payable in
cash, or at News Corp.'s election, up to 20% of this amount may be paid to GM in
News Corp. preferred limited voting ordinary American Depository Receipts
("ADRs").
11
The Merger. News Corp. will form a new subsidiary specially created to
merge with Hughes (the "Merger Subsidiary"). Immediately following the split-off
and stock purchase described above, the Merger Subsidiary will merge with and
into Hughes, with Hughes, a U.S. corporation, being the surviving corporation.
In connection with the merger, News Corp. will acquire from the former GMH
shareholders an additional 14.1% of Hughes for $14 per share (subject to
adjustment as described in the Merger Agreement) payable at News Corp.'s
election (to be determined at least three business days before closing) in the
form of News Corp. preferred ADRs, cash, or a combination of preferred ADRs and
cash. As a result of the merger, each former GMH shareholder will receive for
its shares of Hughes stock owned before the merger consideration of which
approximately 82.4% will consist of equity in Hughes and 17.6% will consist of
News Corp. preferred ADRs and/or cash. In addition, automatically upon
consummation of the merger, the Hughes Class B common stock acquired by News
Corp. from GM will be converted (on a share-for-share basis) into "regular"
Hughes common stock. Thus, after the merger, News Corp. will hold 34% of the
Hughes common stock and the former GMH shareholders will hold 66% of the Hughes
common stock.
Immediately after the merger, the shares of Hughes acquired by News Corp.
will be transferred to FEG or a wholly owned subsidiary of FEG for a combination
of a promissory note and stock in FEG. The acquisition of this stock will
increase News Corp.'s ownership interest in FEG to approximately 82%.
The Resulting Ownership and Management Structure. As a result of these
transactions, Hughes will become an independent company incorporated in the
United States with a single class of common stock that is publicly traded on the
New York Stock
12
Exchange. News Corp., through its FEG subsidiary, will control the single
largest block of shares in Hughes with a 34% interest. The remaining 66%
interest in Hughes will be held by the former owners of GMH shares. Of this
public shareholding, trusts established under various GM employee benefit plans
will hold, in the aggregate, an approximately 20% interest. The United States
Trust Company of New York serves as the independent trustee of each of those
trusts with respect to such shares, and therefore is expected initially to hold,
in the aggregate, approximately 20% of the voting power of Hughes common stock.
Subject to its fiduciary duties as trustee, US Trust will have sole discretion
in exercising those voting rights. The remaining shares will be widely held by
the public at large. Hughes will continue to own indirectly approximately 81% of
the shares of and control PanAmSat. After the transaction, GM will no longer
hold any shares of Hughes common stock. Attachment D includes a simplified
presentation of the relevant Hughes ownership structure post-transaction.
Hughes' board of directors will consist of 11 members, including six
independent directors./22/ The parties have agreed upon an initial slate of
directors, all of whom are U.S. citizens, which includes Rupert Murdoch as
Chairman of the Board; Chase Carey, News Corp.'s former Co-Chief Operating
Officer, as Chief Executive Officer and full-time Hughes executive; and Eddy
Hartenstein, Hughes' Corporate Senior Executive Vice President, as Vice
Chairman./23/ The board will have an Audit Committee comprised entirely of
independent directors. Among its other functions under Hughes' By-Laws, the
Audit Committee will review and approve all related-party transactions in such
----------------
/22/ A list of the directors is included in Attachment D.
/23/ There is no corporate governance mechanism that ensures that News Corp.
will continue to have four representatives on the board of directors, or
that Messrs. Murdoch and Carey will continue to hold the positions of
Chairman and Chief Executive Officer, respectively.
13
amounts and related to such matters as the Audit Committee determines.
Accordingly, because News Corp. and its programming vendor subsidiaries would be
considered related parties, any transaction they might enter into with Hughes or
DIRECTV may be subject to review and approval by the independent Audit
Committee.
No single shareholder will have a de jure controlling interest in the
company either through a majority interest in voting stock or majority
representation on the board. Thus, voting control will rest with the public
shareholders. However, by virtue of the fact that News Corp. will indirectly
control a 34% interest in Hughes and, at least initially, its former employee
will be Chief Executive Officer, the Commission may deem News Corp. to exercise
de facto control over Hughes under its totality of the circumstances test for
purposes of the Communications Act. Accordingly, the parties presume such
control for purposes of this Application./24/ GM will no longer control Hughes
in any respect.
II. Standards for Review
As with any such transaction, the Commission will approve the proposed
transfer of control if, after weighing "the potential public interest harms of
the [transaction] against the public interest benefits," it concludes that, "on
balance," doing so would serve
---------------
/24/ Because the concept of "control" for purposes of the Commission's analysis
may vary from the way that term is defined in other statutory and
regulatory contexts, the parties' presumption for purposes of this
application should not be read as applicable to any other purpose, such as
for securities law, accounting or tax purposes. See, e.g., Committee for
Full Value of Storer Communications v. FCC, 101 FCC 2d 434, 442 (1985)("The
meaning of a statutory reference to `control' will also vary from statute
to statute depending upon the purpose of the statute, the context, and the
legislative intent. We do not believe we are bound, therefore, by statutory
and common law definitions of `control' in securities law [when
interpreting Section 310(d)] . . . ."), aff'd sub nom. Storer
Communications, Inc. v. FCC, 763 F.2d 436 (D.C. Cir. 1985); Helvering v.
Edison Bros. Stores, Inc., 133 F.2d 575, 579 (8th Cir. 1943) (a ruling by
one administrative department of government concerning income accounting
does not control that of another department made for an entirely different
purpose under another act of Congress).
14
the public interest, convenience, and necessity./25/ Accordingly, where the
potential harms are great, the potential benefits must be great; conversely,
where the potential harms (if any) are small or limited, the potential benefits
need only be of a similar scale./26/ In making this determination, the
Commission first must determine whether the proposed transaction complies with
the specific provisions of the Communications Act, other applicable statutes,
and the Commission's rules./27/ The public interest analysis also involves an
examination of potential effects of the transaction on competition in relevant
markets./28/ The Commission has repeatedly admonished that a transfer of control
proceeding must focus on benefits and harms that are specific to the proposed
transaction, and is not an open forum for raising pre-existing or industry-wide
disputes./29/
----------------
/25/ See, e.g., Comcast Corporation, AT&T Corp., and AT&T Comcast Corporation,
17 FCC Rcd. 23246, 23255 (2002) ("AT&T/Comcast); Time Warner Inc. and
America Online, Inc., 16 FCC Rcd. 6547 at (P) 1 (2001)("AOL/Time Warner");
MediaOne Group, Inc. and AT&T Corp., 15 FCC Rcd. 9816, 9821
(2000)("AT&T/MediaOne"); see also 47 U.S.C.(S).310(d).
/26/ See, e.g., AT&T/Comcast, 17 FCC Rcd. at 23329 (observing that "in balancing
the public interest harms and benefits, we employ a sliding scale approach"
that "examine[s] the likelihood and the magnitude of the potential public
interest harms").
/27/ See, e.g., id. at 23255.
/28/ See, e.g., EchoStar Communications Corporation, Hughes Electronics
Corporation, and General Motors Corporation, Hearing Designation Order, 17
FCC Rcd. 20559, 20576 (2002) ("EchoStar/Hughes"); AT&T/MediaOne, 15 FCC
Rcd. at 9821.
/29/ See, e.g., AOL/Time Warner, 16 FCC Rcd. at 6550 ("The Commission recognizes
and discourages the temptation and tendency for parties to use the license
transfer review proceeding as a forum to address or influence various
disputes with one or other of the applicants that have little if any
relationship to the transaction or to the policies and objectives of the
Communications Act").
15
As discussed below, bringing together the expertise and assets of News
Corp. and Hughes will create substantial public interest benefits, and there are
virtually no offsetting public interest concerns - especially given the parties'
willingness to agree to a list of prophylactic program access undertakings.
Accordingly, the Commission not only should grant this Application - it should
do so expeditiously.
III. The Proposed Transaction Complies With the Requirements of the
Communications Act, All Other Applicable Statutes, and the Commission's
Rules.
Unlike many recent mergers with which the Commission has struggled, the
proposed Hughes/News Corp. transaction does not implicate any aggregation,
cross-ownership, or other similar restrictions imposed by the Communications
Act, any other applicable statute or the Commission's rules./30/ News Corp.
currently holds controlling interests in a number of companies that are
Commission licensees. The qualifications of all relevant parties are therefore a
matter of record before the Commission, and have been reviewed and endorsed in
prior proceedings.
IV. The Proposed Transaction Will Yield Significant Public Interest
Benefits.
For more than two decades, Hughes and its subsidiaries have been at the
forefront in developing, introducing, and deploying innovative satellite
services for both businesses and consumers in the United States. Hughes was the
first to launch an all-digital, high-power DBS service, the first to launch a
high-speed satellite Internet access service, and the first to launch a DBS spot
beam satellite capable of re-using its spectrum efficiently
----------------
/30/ As discussed above, all but six of the licenses controlled by Hughes are
non-broadcast and non-common carrier authorizations and therefore not
subject to the foreign ownership limitations of Section 310(b)(4) of the
Communications Act of 1934. PanAmSat has applied to convert those six earth
station licenses to non-common carrier status, and upon grant foreign
ownership limitations will become totally inapposite. PanAmSat has also
notified the Commission of discontinuance of service under its inactive
Section 214 authorizations.
16
to provide the signals of more local broadcast stations in their own local
markets. Later this year, HNS expects to launch the first SPACEWAY satellite,
part of a Ka-band network utilizing the first processor-based commercial
spacecraft to serve the U.S., which will provide classes of service and levels
of spectrum efficiency never before realized over a satellite network.
Such innovations have spurred other satellite and terrestrial service
providers to upgrade their systems and improve their services. For example,
cable operators have invested more than $65 billion since 1996 to upgrade their
infrastructure so that they can deliver digital television and two-way broadband
Internet access services./31/ The number of digital cable subscribers is
estimated to be over 20 million and has been forecast for the first time to
exceed the total number of DBS subscribers served by DIRECTV and EchoStar./32/
Responding to DIRECTV's initiatives, EchoStar has launched two DBS spot beam
satellites within the last year for use in providing local-into-local offerings
and has used DBS spectrum at "wing" slots to provide local-into-local and niche
services as well. EchoStar has entered into transactions that will increase its
spectrum advantages over DIRECTV,/33/ and EchoStar's net growth in 2002 exceeded
DIRECTV's by 300,000
----------------
/31/ See Annual Assessment of the Status of Competition in the Market for the
Delivery of Video Programming, Ninth Annual Report, 17 FCC Rcd. 26901,
26917 (2002) ("Ninth Cable Competition Report").
/32/ See, e.g., Press Release, Leichtman Research Group, "Digital Cable Poised
to Overtake DBS" (rel. Feb. 25, 2003) (available at
www.leichtmanresearch.com/press/022503release.pdf). In a recent study, the
Yankee Group projected that DBS will grow only 6% over the next four years,
from 20.6 million households in 2003 to 27.1 million households by year-end
2007. This figure is 9% lower than the Yankee Group's previous forecast, a
reduction based on the lower net growth rate for DBS in 2002 and the
anticipated impact of digital cable. The Yankee Group forecast that digital
cable will maintain its lead over DBS, growing from 22.6 million households
in 2003 to 39 million households by year-end 2007. A discussion of this
study can be found at
www.yankeegroup.com/public/home/daily_viewpoint.jsp?ID=9587.
/33/ See "SES Americom to Provide Satellite Capacity to EchoStar," Press Release
(Mar. 26, 2003)(available at www.ses-americom.com/media/26_mar_03.html)
(describing a "multi-
17
subscribers. Thus, as predicted by basic economic theory, DIRECTV's introduction
of competition in the MVPD market has resulted in an increase in innovation and
service quality, all to the benefit of American consumers.
Nonetheless, as the satellite services industry moves into a more
mature stage, GM and Hughes find themselves at a crossroads. GM needs to focus
its energy and capital resources on its core automotive business. At the same
time, the video, broadband and fixed-satellite services businesses have become
ever more competitive, requiring companies in those areas to redouble their
efforts to present more compelling products and services, and to capture
increased efficiencies in their operations. As the Commission has observed,
[M]arkets for video services have broadened and grown, reflecting
shifts in market demand and supply in recent years. Competitive rivalry
between and among suppliers of video services has intensified as
consumers find increased choice of video programming and new vendors
that supply video programming and video delivery services. Increased
competitive rivalry intensifies the pressure on management to (1)
improve internal operating efficiency by using inputs of production
more effectively and organizing the firm to reduce redundancy in
staffing or business functions; and (2) reorganize the firm through
horizontal and vertical mergers to achieve economies of scale and
scope./34/
Reflecting these competitive pressures, a number of companies with diversified
holdings have decided to divest operational units in an effort to refocus their
efforts on their core businesses. Recent cases include GE's decision to sell its
satellite services subsidiary to
-----------------
year service agreement to provide satellite capacity to EchoStar
Communications Corporation" that EchoStar plans to utilize "to seek ways to
offer a combination of satellite TV programming bundled with
satellite-delivered, high-speed Internet services").
/34/ Amendment of Section 73.658(g) of the Commission's Rules - the Dual Network
Rule, 16 FCC Rcd. 11114, 11120 (2001) (footnote omitted).
18
SES Global and AT&T's decision to sell its cable systems to Comcast./35/
GM is world renowned as a leader in the automotive industry, but it has
no special expertise in the provision and marketing of satellite services or
programming. Moreover, GM has decided to withdraw from the communications
business in order to focus its resources on its core automotive business and to
help satisfy retiree pension and health benefit legacy costs. GM's continued
ownership of Hughes therefore presents an obstacle to the development of both
companies because (1) GM cannot focus as fully on its core automotive operations
and address its legacy costs, and (2) Hughes does not have the support of a
company with a core competency aligned with its satellite operations and the
capability to enhance the company's competitive position.
In order to address this situation, GM embarked on a search for an
investor that offered a good strategic fit with Hughes. This process has
resulted in the proposed transaction with News Corp., a company with experience
in operating satellite DTH systems outside of the United States as well as in
developing, packaging and marketing popular and groundbreaking video news,
sports, entertainment and other services. As importantly, News Corp. has the
proven ability to inject real competition into markets that - like the MVPD
market - have traditionally been dominated by well-established and well-funded
incumbents. DIRECTV will be able to draw upon experience gained by News Corp. in
competing with great success in other multichannel video and interactive
services markets outside the United States. Based on News Corp.'s history of
changing the dynamic of markets it chooses to enter, the proposed transaction
can be expected to further invigorate Hughes and enable it to reach its full
potential as a competitor.
-----------------
/35/ See AT&T/Comcast, 17 FCC Rcd. at 23246; General Electric Capital Corp. and
SES Global, S.A., 16 FCC Rcd. 17575 (2001) ("GE/SES").
19
As discussed below, the transaction will generate direct and tangible
public interest benefits from a number of sources. First, News Corp. has a
proven track record of innovation in programming and DTH services, and will
apply these same attributes to Hughes. Second, News Corp. is dedicated to
increasing the amount of local-into-local, high definition television ("HDTV"),
and broadband services Hughes provides to American consumers. Third, by drawing
upon its DTH experience and rationalizing the use of facilities across the two
companies, News Corp. will increase operating efficiencies at Hughes. Fourth,
the affiliation of News Corp. and Hughes will create economies of scope and
scale that will help drive down costs and reduce the risks of innovation. Fifth,
by introducing new or enhanced capabilities to the DIRECTV platform, News Corp.
will increase customer satisfaction and as a result achieve greater subscriber
growth and lower churn. Sixth, the proposed transaction will improve Hughes'
capital structure and enable it to access the equity markets. Lastly, News Corp.
will bring to Hughes its significant commitment to diversity and equal
opportunity.
A. News Corp.'s Proven Track Record
News Corp. comes to this transaction with an established history in
media services generally, and in the satellite DTH service in particular. News
Corp. has been involved with operating satellite DTH systems since 1989 and
holds interests in DTH platforms outside the United States serving over 12
million subscribers worldwide. It is the world's leading distributor of
television services via satellite and has amassed an invaluable reservoir of
expertise in this area. In addition, News Corp. has an impressive record of
programming and technical innovation in the United States. In launching the FOX
network, Fox News Channel, Fox Sports Net, and National Geographic Channel,
20
and investing heavily in establishing local news services in owned television
stations where none previously existed, News Corp. not only aggressively entered
areas dominated by formidable incumbents, but also demonstrated a long-term
commitment to compete in those areas - and ultimately its ability to do so
successfully. News Corp.'s proven track record illustrates and substantiates the
kinds of compelling public interest benefits that will result from the proposed
transaction and the boost it will give to competition in the marketplace. And
because Hughes' satellite signals are available nationwide, the benefits of this
competition - more innovative services at better prices - will be available to
consumers throughout the United States, including in rural and other areas that
are underserved, or totally unserved, by terrestrial MVPDs.
1. A Tradition of Innovation In DTH Technology
Outside the United States, innovation has been the rule for the DTH
platforms in which News Corp. holds an interest. The example with the longest
history is BSkyB, which News Corp. launched in 1989 - five years before DIRECTV
launched. At that time, BSkyB transmitted only four channels of programming. By
1995, that number had grown to 25 channels, but the platform's analog technology
constrained further increases. Rather than accept this limitation, BSkyB decided
to convert to digital technology, and in 1998 it launched a digital service that
offered 140 channels. More than 100,000 digital decoders were sold in the first
30 days. In 1999, BSkyB offered free set-top boxes and dishes to help speed the
conversion and drive penetration, resulting in 1.2 million gross subscriber
additions in just 10 months. In 2001, BSkyB had reached a total of five million
subscribers and completed its transition to digital technology - after three
years and at a cost of nearly one billion dollars. As a result, the viewing
public in the U.K. had
21
access to a much larger array of video programming options, and BSkyB has grown
to over six million DTH subscribers. Today, BSkyB offers more than 375 channels
delivering programming 24 hours a day.
BSkyB's transition to digital technology also fed other innovations. For
example, in 2000, BSkyB launched the world's first interactive TV news service,
Sky News Active, which, among other things, allows viewers to choose from
multiple segments being broadcast simultaneously on a news channel. Over the
last three years, BSkyB has continued to introduce additional ITV services and
capabilities to its subscribers, and today its SkyActive service delivers online
shopping, banking, games, e-mail, travel, tourism, and information services with
all the look, feel, and immediacy that customers expect from television. With
this technology, viewers can, for example, view multiple screens of programming
within a certain genre and click on the one that interests them, and can choose
from among multiple camera angles during the broadcast of sporting events. In
addition, in 2001 BSkyB launched Europe's first fully integrated DVR, Sky+,
giving viewers still more interactive capabilities. These sorts of innovations
provide subscribers with a greatly enhanced viewing experience and lead to
greater customer satisfaction.
Upon consummation of the proposed transaction, News Corp. will bring this
same spirit of innovation to Hughes. DIRECTV currently offers limited ITV
capabilities to its subscribers, but few subscribers appear to be making use of
those capabilities. Drawing on the experience and expertise gained in launching,
marketing, and operating the SkyActive service, News Corp. intends to enhance
the ITV capabilities available to DIRECTV subscribers and to create a greater
level of awareness among consumers.
22
News Corp. believes that this exciting new capability will increase DIRECTV's
operating earnings by approximately $29 million to $43 million after a two to
three year ramp-up period./36/ Similarly, while DIRECTV's manufacturing partners
offer set-top boxes ("STBs") with integrated DVRs, consumer adoption of this
technology to date has been limited to a small audience./37/ News Corp. will
make a concerted effort to increase the penetration of DVRs by drawing on the
marketing expertise within FEG, BSkyB and other affiliated companies to create
consumer awareness of and demand for the product. News Corp. firmly believes
that increasing the use of ITV and DVR technology will help to attract and
retain subscribers and make DIRECTV a better competitor in the MVPD market.
2. A Tradition of Innovation In Programming
News Corp. has consistently been an innovator in the field of video news,
sports and entertainment, and in the process has demonstrated its willingness to
adopt unorthodox strategies, enter new fields, and challenge incumbents - and to
do so successfully. In the United States, this drive for innovation has taken
many forms familiar to the Commission.
News Corp. launched the FOX network in 1986, at a time when three networks
had dominated television broadcasting for three decades. Many were skeptical
that a fourth network could survive, let alone compete./38/ Not only has FOX
survived, it has
----------------------
/36/ See Declaration of Peter Giacalone at (P) 20 ("Giacalone Dec."). The
Giacalone Declaration can be found at Attachment E to this Application.
/37/ See, e.g., "Digital Video Recorder Growth on Pause," Leichtman Research
Group (rel. April 8, 2003) (study finding that 1% of cable and DBS
subscribers report having a DVR, and only 5% view themselves as very
familiar with the product).
/38/ At the time, the conventional wisdom was that a fourth network could not
survive. See, e.g., Gene Jankowski, President of CBS Inc.'s Broadcast
Group, May 1985 ("To say that one
23
flourished, redefining television in characteristic FOX fashion. During its
seventeen year tenure, FOX has launched successful, groundbreaking shows The
Simpsons (the longest running entertainment series on television), In Living
like Color (which revitalized sketch comedy and launched the careers of Jim
Carrey, Keenan Ivory Wayans and several others), America's Most Wanted (which
has been responsible for the apprehension of 750 criminals), and The X-Files
(which redefined the boundaries of science fiction television), and more
recently shows like 24, Boston Public, Malcolm in the Middle, and The Bernie Mac
Show. FOX's programming wins not only ratings, but also critical acclaim,
boasting countless Emmy, Golden Globe, Peabody, and Television Critic's
Association Awards over the years./39/
In 1996, ten years after the launch of the FOX network, News Corp.
launched the Fox News Channel and - despite initial resistance from a number of
cable companies and a chorus of doubters/40/ - has developed that programming to
the point where it has
------------------------
organization could come into existence, create programming and attract
enough advertising so that revenues cover expenses is a real stretch of the
imagination"); Barbara Bradley, Christian Science Monitor, May 1985
("Whatever its editorial stance, the new Fox broadcast group has little
chance of becoming a fourth network.").
/39/ The Simpsons alone has garnered 18 Emmy Awards, the George Foster Peabody
Award, the Television Critics Association Award for Outstanding Achievement
in Comedy, a People's Choice Award, Parent's Choice Awards, and Nickelodeon
Kids Choice Awards, among many others. In addition, 20/th/ Century Fox
Television, which produces shows for FOX and many other networks, has
earned more than 100 Emmy awards for such critically acclaimed series as
M*A*S*H, L.A. Law, Picket Fences, The X-Files, The Practice, Ally McBeal,
The Simpsons, King of the Hill, 24, and The Bernie Mac Show.
/40/ See, e.g., Bill Carter, "Murdoch Joins a Cable-TV Rush Into the Crowded
All-News Field," New York Times (Jan. 31, 1996)(Fox News announcement
"generated more skepticism than the earlier announcements because unlike
NBC or ABC, [News Corp.] is starting up a news channel without an existing
network news division"); Frazier Moore, "Fox News Pledges Balance As It
Faces Rivals," Associated Press (Oct. 7, 1996)("FNC will be battling one
other thing: skepticism from onlookers that, despite Murdoch's might and
Ailes' scrappiness, FNC joins the all-news free-for-all too small, too
late, too green - and, in practice, too much like the others").
24
overtaken CNN as the nation's most watched cable news network, growing from 17
million subscribers at launch to almost 82 million subscribers this month.
Paralleling its efforts in national news, News Corp. through its
subsidiary, Fox Television Stations, Inc. ("FTS"), has been an innovator in the
area of local news and informational programming. Today, the 35 full-power
television stations that FTS owns and operates (the "O&Os") air more than 800
hours of regularly-scheduled local news per week (an average of over 23 hours
per week per station). Prior to acquisition by FTS, many of those stations
provided little or no local news programming; in fact, FTS has increased the
local news programming hours across its O&Os on average by 57% per week as
compared to the period prior to FTS's ownership. In nearly all of their markets,
FTS O&Os air a three-hour (or longer) weekday morning news program. While the
O&Os and affiliates of other broadcast networks are limited to a few five-minute
cut-ins during their network's national morning news show, the FTS O&Os were
often the first (and in many markets are still the only) stations to offer hours
of innovative and unique local news and information programming each weekday
morning. FOX has also pushed to extend these practices beyond the O&Os to the
non-owned affiliates. For the past several years, FOX's standard affiliation
agreement has required affiliates to commit to launch or increase local news
programming, and FOX has provided affiliates support and resources to accomplish
these goals. Since 1994, FOX has assisted more than 100 affiliates in launching
local newscasts.
As with entertainment and news, FOX has been an innovator in sports. FOX
burst onto the sports scene in 1993 with a contract to broadcast NFL games, an
area that had been dominated by CBS, NBC and ABC. Since then, FOX has become the
25
recognized leader in developing innovative technology that marries information
and entertainment in a way that makes nationally televised sporting events more
viewer friendly./41/ These technological innovations, together with FOX's
innovative packaging of sports programming, have resulted in 18 Sports Emmys in
the seven major categories in the last 4 years, more than three times the number
of Sports Emmys won by NBC (4), ABC (1), and CBS (0) combined./42/
Taking this sports innovation to the MVPD world, News Corp. in 1997
co-founded Fox Sports Net, a national sports programming venture consisting of
regional sports networks that competes with ESPN, the dominant cable sports
franchise. Its 19 regional sports channels (10 wholly or majority owned and 9
minority owned or affiliated) now reach over 79 million homes. Fox Sports Net is
the only network that delivers what sports fans most passionately desire: live
home team games coupled with outstanding national sports events and programming.
And finally, in its most recent entry in the cable programming business,
News Corp. launched the National Geographic Channel in January 2001 with 9
million subscribers. It is now at 43.1 million subscribers and is the
fastest-growing network in
--------------------------
/41/ These innovations include the "FOX Box" that presents scores and other
related information on sporting events in graphical overlays on the TV
creen. That enhancement has now been widely imitated by virtually every
broadcaster worldwide and is considered standard fare by viewers. FOX
Sports was also the first to broadcast NFL games with a yellow line
superimposed at the first down marker. In baseball, FOX introduced the
"catcher cam" and enhanced audio coverage (including microphones in bases,
in the outfield wall, and in foul line markers), and in hockey the "glowing
puck." For NASCAR broadcasts, it pioneered the use of rich, real-time
graphic overlays that track the status and standing of individual cars. FOX
Sports was also first in routinely producing its broadcasts in Dolby
Digital Surround Sound.
/42/ The seven major categories of Sports Emmys include Best Play by Play, Best
Game Analyst, Best Studio Host, Best Studio Analyst, Best Studio Show, Best
Live Sports Special, and Best Live Sports Series.
26
the MVPD business in terms of distribution. National Geographic Channel is
gradually increasing in ratings against the industry leader, The Discovery
Channel./43/
As it did in the areas of entertainment, news and sports, News Corp. will
bring its demonstrated spirit of innovation, creativity, energy and expertise to
Hughes, with the goal of shaking up established incumbents and bringing
customers innovations that revolutionize the MVPD market.
B. Local-Into-Local, HDTV and Broadband
Among the most important areas in which News Corp. will enhance DIRECTV's
competitive position are: (1) dramatically increasing the number of designated
market areas ("DMAs") in which local broadcast signals are available to
subscribers, (2) increasing the amount of HDTV programming available nationwide,
and (3) developing a number of options for consumer broadband services.
News Corp. was the first proponent of local-into-local service,/44/ and in
fact conceived and designed a technological vehicle - a DBS spot beam satellite
- to accomplish the previously unheard of concept as part of its American Sky
Broadcasting ("ASkyB") venture./45/ News Corp., with its grounding as a U.S.
broadcaster, has always been convinced that DBS will be the strongest possible
competitor to cable only if it can provide consumers with the broadcast channels
they have come to rely on for local news,
------------------------
/43/ Discovery Channel is 49.8% owned by Liberty and 24.6% by Cox
Communications, Inc. See Ninth Cable Competition Report, 17 FCC Rcd. at
26980, Table C-1.
/44/ See, e.g., Testimony of Rupert Murdoch, Hearing on Multi-Channel Video
Competition before the Committee on Commerce, Science and Transportation,
U.S. Senate, at p. 22 (April 10, 1997).
/45/ ASkyB was originally formed as a joint venture between News Corp. and MCI
in 1996 to provide DBS service using channels MCI had won at the first DBS
auction.
27
weather, traffic and sports. Consequently, local-into-local was a key component
of the ASkyB business plan from the venture's inception.
This view has been borne out over the last few years, as DIRECTV and
EchoStar have increased year-over-year gains in subscribers dramatically in DMAs
where they provide local-into-local services/46/ - while at the same time
driving cable operators in those markets to increase their level of service in
response./47/ Thus, expansion into additional DMAs not only would have the
direct effect of offering local channels to more subscribers, but it also would
indirectly benefit cable subscribers in those markets by offering true
alternatives to cable and spurring cable operators to improve their service in
some respect.
Prior to entering into the proposed transaction with News Corp.,
DIRECTV had announced plans to extend its local-into-local coverage to
approximately 100 DMAs by the end of 2003, subject to the successful launch and
positioning of DIRECTV's newest spot beam satellite, DIRECTV 7S./48/ However,
under GM's ownership and capital constraints, Hughes has been unwilling to
consider investing the capital necessary to do more. News Corp. is committed to
dramatically increasing DIRECTV's local-into-local commitment by providing
local-into-local service in as many of the 210 DMAs as possible, and to doing so
as soon as economically and technologically feasible. To that
-------------------
/46/ See General Accounting Office, Telecommunications: Issues in Providing
Cable and Satellite Television Services, Report to the Senate Judiciary
Committee, Subcommittee on Antitrust, Competition, and Business and
Consumer Rights, at 9 (Oct. 2002) ("GAO Report") ("We found that in areas
where both DBS companies introduced local broadcast channels, DBS
subscribership grew by approximately 210 percent over this time period,
while in areas where local channels were not available, it grew by 174
percent in the same time frame").
/47/ See id. at 10 ("In areas where both DBS companie