Street eyes on increasing Liberty

DirecTV deal latest to boost firm's clout in entertainment sector

It was a busy year for John Malone's Liberty Media and one in which the executive team led by new CEO Greg Maffei made strides toward becoming a real operating company and one that combines content and distribution muscle.

Its deal last week with News Corp. that gives Liberty control of satellite TV giant DirecTV Group, together with this year's transformation of Starz into a cross-platform content player, is set to increase Liberty's visibility and clout in the entertainment industry and could attract a broader investor base, according to Wall Street observers.

Many are looking for the company to become an even more assertive player in 2007 as it leverages its newfound strength.

Not long ago, Liberty mainly was a holding company with stakes in media, online and telecommunications companies. But when Wall Street soured on that approach a few years ago, chairman Malone realized that he had to change his empire, and the hiring of Maffei last year accelerated that process, according to observers.

"Malone is a smart guy," said media expert Hal Vogel, president of Vogel Capital Management. "He was known as a portfolio manager but was then forced by the Street to make the company more of an operating company."

With big steps taken toward that goal, analysts expect investors to focus increasingly on Liberty's operational momentum.

DirecTV and Starz made for key deals in 2006.

"We have a host of content assets that don't have the distribution muscle they used to have" when Malone owned TCI, Maffei said at a recent investor conference, driving home the importance of the then-pending DirecTV transaction (HR 12/7).

Although industry watchers have been turning more bearish on satellite TV amid slowing subscriber growth and increased competition from cable operators, Maffei hailed its national footprint and the quality of its video offering.

He also signaled that under Liberty's control, DirecTV would re-energize its search for a high-speed Internet offering to replicate cable's strength in the space. Maffei has said that satellite broadband services firm WildBlue, in which Liberty has an investment, could be at least one part of the solution.

Either way, DirecTV makes Liberty the only major media company other than Time Warner with a major distribution business. Industry watchers expect Liberty to use DirecTV as a lever to boost its content operations, which also include the QVC home shopping network.

They "could potentially use DirecTV as a competitive threat to cable operators to coerce carriage by cable on more attractive terms," Sanford C. Bernstein analyst Craig Moffett said in a recent report.

Some believe that Malone and Maffei could next set their sights on merging DirecTV with competitor EchoStar Communications, though such a deal would depend on the willingness of EchoStar chairman and CEO Charles Ergen to sell.

"Such a deal would be very interesting to watch," said Bill Opet, principal and vp of the cable practice at TMNG Global, which provides strategic and operational consulting services to players in the communications industry. "If you put those two companies together, you have about the reach of Comcast (Corp.) — the largest cable company."

In the eyes of analysts, Liberty already boosted its content muscle this year via Starz's acquisition of IDT Entertainment. It also has launched its own film label, Overture Films, under the leadership of former top MGM executive Chris McGurk. The move finally allowed Malone — who in the past had bid for Vivendi's entertainment assets, which ended up in the hands of General Electric — to add a studio arm.

Liberty executives emphasize, however, that their content strategy differs from most in the sector. Starz chairman and CEO Robert Clasen said in a recent speech here that while many entertainment companies are cutting costs, Starz is taking different steps.

"In less than 12 months, we have gone from being a premium television business to being a fully integrated media company capable of producing any kind of programming and distributing it on any platform in any country," he said. "We at Starz have decided that we are not in the theatrical movie business or the DVD business or the cable and satellite business. We see ourselves as being in a different business: the business of audience aggregation."

Overall, Wall Street expects to keep a close eye on Liberty next year. Said Vogel: "It's going to be interesting to see where Liberty goes from here."
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