Murdoch’s Air War (DirecTV has taken off like a rocket)

British Sky Broadcasting, or BSkyB, allows 7.4 million Brits to place an onscreen bet on a soccer game, and switch camera angles to better watch his favorite soccer team. Sky owns almost 70% of the pay-tv market in England.

Rupert Murdoch has taken over DirecTV (from Hughes Electronics, a unit of GM), and plans on upgrading it to the same level of interactivity of BSkyB. DirecTV has added 14 million viewers, 600,000 of which were cable viewers. Satellite is completely digital, whereas cable is still trying to upgrade its customers with digital systems. However, cable companies aren’t sacrificing profits today for possible customers tomorrow, as Murdoch is. He’s able to out spend them, and it’s paying off – right now.
And while cable companies are expanding to offering telephone and internet connections, Murdoch is staying focused on news and entertainment. It helps that they also own Fox News Channel. The first thing after the takeover that Carey, the CEO of DirecTV, did was to get rid of anything that didn’t have to do with satellite broadcasting, including the division that was manufacturing the set-top-box, so he could buy out Pegasus Communications and the National Rural Telecommunications Cooperative, because they had 1.4 million DirecTV customers, but Carey had no control over them.

Lowering the price of the DVR (digital video recorder) that is like TiVo, and offering 3-room setup in households with a one-year contract seems to be working. It helps to also work with Verizon, BellSouth and Qwest to market DirecTV. The problem? DirecTV’s cost of securing customers keeps increasing each year – from $670 in 2002 to $894 in 2004, and operating profits dropped $400 million. Even more scary is the fact that these customers may still run to cable when they’re finished with their contract. Their defection rate actually went up by 2/10ths of a percent, and it may be because sweetheart deals do not engender loyalty, but instead lead customers to go where the deal is even sweeter.

Carey signed a “five-year, $3.5 billion deal with the NFL to continue DirecTV’s Sunday Ticket offer, which gives subscribers virtually every game in the NFL each Sunday.” This was to head off cable companies grabbing the deal when DirecTV’s contract expired in 2005. Another problem? It will bring in $385 million in revenue, but cost $400 million in programming costs. But it was necessary intervention, and a perfect place to show off the interactive toys that will be coming soon. In England, 15 minutes before a kickoff, viewers can tune in a channel that shows eight live screens showing eight live games. 60% of customers from BSkyB use interactive tools at least once a month.

DirecTV and the NFL are also creating “2-minute highlight clips of every NFL game each Sunday evening to its Sunday Ticket subscribers who have DVRs.” Out of 2 million who pay extra for the feature, 1.3 million have DVRs. Eventually DirecTV will create the clips that the NFL produces now. What about the rest of the family? Kids can watch cartoons and switch to playing a game. Teens can play videogames via satellite with other players.

But how do they make Satellite interactive? Isn’t that cable’s playground? It’s really done with smoke and mirrors. “When a viewer switches to an alternative camera angle for a sporting event, what he’s really doing is switching channels; Sky broadcasts the same game on multiple stations. It’s a technological trick, but a simple one.” Polls are actually taken via old-fashioned phone lines. Interactive advertising comes next.

And how is satellite handling the “on demand” programming offered by cable? By beaming the most popular programs to the DVRs of subscribers, so they can watch them whenever they want. DirecTV will also offer an adrenaline pumping program on Sundays that will show only “games where a team is threatening to score.” This is also a boon to fantasy-league participants. Add real-time statistics and viewer selected camera angles and it will almost be like living in England.

Of course, Verizon and other phone companies are considering making a move into video service. But Murdoch isn’t worried. He’s been here before. The Abraham Lincoln of the entertainment industry, he has failed more than he has succeeded. But this may yet be the one success that matters.

BRAINSTORM:
Imagine the best of both worlds – digital satellite with interactive features, and low upfront costs due to the fierce competition between cable and DirecTV. Well, best of both worlds for us, but imagine if you are the satellite or cable company. What are we learning from this article?

First of all, if you are in business to gain customers and expand market share, and don’t have to worry about all the money you are losing to do it, go for it. However, if you are like the cable companies that actually can’t afford to lose money, loss-leader marketing ploys can come back to bite you. As I heard in an interview the other day, cable companies aren’t really making any money because they’re having to stay competitive to keep their customers. It almost sounds like the companies have painted themselves into a jail cell – they can’t make money, but they can’t charge more or they’ll lose what they have.


Another thing Murdoch is doing that we may be able to learn from is his entire focus on his niche. Once he acquired DirecTV, he and Carey unloaded every non-essential from the portfolio to acquire more control over DirecTV providers. He also continually focuses on the news and entertainment, and how he can make it better, instead of expanding his services with telephone and internet connections. Have you been spreading yourself too thin with your products and services? Do you have enough money left over to be number 1 in your primary focus area? Or should you unload distractions and money leaks in your company while you still can? How can you know when it’s time to expand and time to cut back to your primary focus?


Obviously, as we learn from both cable and satellite, we can lure people in with low upfront costs and loss-leaders like DVRs and free months of service. However, we also learn that the cost of keeping a customer can escalate out of control. It might be worth it if you were fostering loyalty along the way – but that’s not what the statistics say. As I’ve heard it said before, if you get it for free, people think it is worthless. So maybe instead of giving things away for free, you should be making people invest in the product so they won’t just walk away so freely.


The NFL deal sounds sweet at first, until you realize that revenues will not meet costs, and that once again, the tide is turning red. Yes, sometimes it’s important to cut your competition off before they take something valuable away from you. But if it will cost you an arm and a leg, is it really worth it? If you obtain all of the customers in the world, but lose your financial ability to run the company, what have you gained? Market share only counts if you are actively “in” the market – not bankrupt.


Notice how they are starting with NFL producing the 2 minute clips, going for the excitement jugular that sports fans live for, but will eventually bring that portion in house. And note how they have taken a good idea even further by planning to show live games and switch you back and forth to the point-making moments of each. No more watching slow or bad games – you only get to see the exciting parts.

So if DirecTV and NFL know what “excites” people, and are willing to create a product that will give them basically their heart’s desire, what is the heart’s desire of your clients? What, when you cut to the chase, are they really looking for? How can you get them just what they want, no frills attached, and make it work for them and make it profitable for you? The same goes for video on demand on cable and the facsimile of it from satellite. Give them the most popular stuff and let them use it whenever want to. If you do it en masse, it will cost you less than personalizing the program viewing, and you’ll hit 95% of your market most likely. Do you have a smorgasbord of products and services that you could supply to your customers so they have them ready when they need to use it, such as software that only takes a phone call to unlock?


What about curriculums, or ebooks, or audio books, or other data that people may want, but don’t want to pay for up front? Why not encode it and include it in a large format disc, like a DVD, which holds much more data than a CD? Devise the simplest way for a customer to unlock what they want when they want it. Could this work for you?