At DirecTV, Malone needs broadband fix

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NEW YORK - When Liberty Media Chairman John Malone takes control of satellite television operator DirecTV Group Inc. next year, finding a way to offer broadband Internet services will top his agenda, analysts said.

That is key for the growth of satellite television, which faces stiff competition from cable and telecom operators that can offer consumers combined TV, phone and Internet services.

"The consumer wants to buy these services as a bundle," said Todd Mitchell, an analyst at Kaufman Bros. "Malone is much more likely to do partnerships and to focus in on his part of the bundle," he said.

As part of an $11 billion deal for Rupert Murdoch to buy back Liberty's 16.3% stake in his company, Murdoch agreed to give Malone News Corp.'s 38.4% controlling stake in DirecTV and other assets.

The deal, announced Friday, is expected to be closed in the second half of 2007 and would herald the return of cable pioneer Malone to the U.S. television distribution business.

DirecTV, which has 15 million subscribers, has said it has looked at various wireless broadband technologies. It has also explored a broadband partnership with the smaller rival EchoStar Communications Corp..

Mitchell said figuring out a high-speed Internet service to add to DirecTV's offerings will be one of the first things Malone will want to do.

DirecTV already has marketing partnerships with Verizon Communications Inc. and BellSouth Corp., though analysts question how committed the telephone companies are to these deals when they are developing their own TV offerings.

"Obviously, DTV was looking at a number of options and these had been placed on hold" while its future was being decided by Murdoch, said Mitchell, adding, "I think Malone will go back and revisit all the different options they had."

Through Liberty Capital, Malone owns a 32% stake in WildBlue, a satellite-based broadband provider.

WildBlue this year signed a deal to provide Internet access to DirecTV's customers in rural America, where cable is less developed. One drawback, analysts said, is that Wildblue is currently too expensive to be competitive in urban areas.

WildBlue acknowledged there may be a stronger partnership with DirecTV in store, but gave no details. "Let's face it, they need a broadband solution and our solution works very well with that," said WildBlue Chief Executive Dave Leonard.

Malone also has a stake in Current Communications, which is one of the nascent companies trying to transmit broadband connection over electricity circuits in the home.

Ultimately, analysts say Malone has a history of being driven by cashflow rather than investment.

"I bet he's attracted to the cashflow that DTV creates and wouldn't want to risk more money into the company over his purchase price," said Oppenheimer analyst Thomas Eagan.

The Liberty-News Corp. transaction values DirecTV shares at about $21.50, a 14% discount to Thursday's closing price of $25 on the New York Stock Exchange. But the deal terms are in line with average trading prices over the past six months.

The stock was down 25 cents, or 1%, at $24.75 on the New York Stock Exchange Friday.

Any plans Malone may have for DirecTV will probably be held back until after the deal with News Corp. closes.

"I think DirecTV is actually going to be in a holding pattern for a while...The company will be limited in their ability to pursue this deal and timing of closing could limit DTV's initiatives," said Aryeh Bourkoff, analyst at UBS.

DirecTV had no immediate comment.
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