Old man and the sky: the Brazilian antitrust implications for Rupert Murdoch's expansion of the Sky Global satellite network.

• Author: Drake, Geoffrey

ABSTRACT

To expand its global satellite network to the United States, Rupert Murdoch's News Corporation purchased DirecTV in 2003. Brazil's antitrust regulatory body, CADE, has expressed concern about a potential monopoly in the Brazilian satellite market controlled by Murdoch because News' Sky Latin America competes directly with DirecTV. If News opts to combine the two Brazilian satellite services, it will consolidate control of ninety-five percent of Brazil's satellite market, leaving satellite and cable competitors at a disadvantage. The Author argues that CADE should conditionally approve the acquisition because of the combination's ability to benefit Brazilian consumers, the government, and News Corporation itself through lower costs, lower subscription prices, and higher subscription numbers. At the same time, because of the negative market effects that may potentially arise from News Corporation's monopoly, CADE should place certain behavioral conditions on its approval of the combination.

TABLE OF CONTENTS I. INTRODUCTION II. THE DEVELOPMENT OF BRAZIL'S ANTITRUST REGIME A. Conselho Administrativo De Defensa Economica (CADE) B. National Telecommunications Agency (ANATEL) III. THE BRAZILIAN ANTITRUST EXPERIENCE: CADE SHOWING ITS TEETH A. The Toothpaste Decision: Leaving a Monetary Cavity in the Pockets of Brazilian Consumers B. The Beer Decisions: Leaving a Bitter Taste in the Mouths of Foreign Investors C. The Chocolate Decision: Not So Sweet for International Mergers IV. BRAZILIAN ANTITRUST IMPLICATIONS FOR THE NEWS-HUGHES COMBINATION A. The U.S. 's Rejection of the EchoStar-Hughes Combination B. The U.S.'s Approval of the News-Hughes Combination C. Recommendations for CADE's Final Ruling: Conditioning Approval of the News-Hughes Brazilian Venture on News' Adherence to Behavioral Requirements 1. Benefits of the News-Hughes Brazilian Combination 2. Concerns About the News-Hughes Brazilian Combination 3. Recommendation: Conditional Approval V. CONCLUSION I. INTRODUCTION

Rupert Murdoch "revolutionized the economy of sports, of animated films, children's programming, broadcast news, and television networks. [He] led television's trend to get down and dirty. And [he] has ended up in a race to win absolute control of a [global] media empire...." (1) Conceived as an Australian newspaper company, News Corporation (News), under Murdoch's leadership, "spans far and wide, setting foot on every continent except Africa and Antarctica." (2) With worldwide revenues totaling $12.8 billion, News "truly owns an 'unrivaled platform' that combines unparalleled entertainment and news media-market coverage across the globe." (8) In the United States, News owns the Twentieth Century Fox movie studio; Fox Broadcasting, including thirty-five Fox network stations; Fox Sports; Fox Entertainment; cable channels such as Fox News Channel, Fox Movie Channel, and FX; as well as newspapers such as the New York Post. (4) In Asia, News owns STAR TV satellite television, Channel [V] Music Networks, and ESPN STAR. (5) In Australia, News owns FoxTEL, a subscription television service, Sky News Australia, and Sky Channel. (6) In Japan, News owns eleven percent of Sky PerfecTV! satellite television and eighty percent of News Broadcasting Japan. (7) In Britain, News owns forty percent of British Sky Broadcasting (BSkyB), "the world's leading satellite pay television operator" with over 6.5 million subscribers and more than sixteen million viewers. (8) In Latin America, News operates Sky Latin America and cable channels Canal Fox, Fox Kids Latin America, and Fox Sports Americas. (9) Murdoch's holdings enable consumers across the globe to gain access to television, movies, news, and sports programming as never before.

Perhaps Murdoch's largest accomplishment in the last twelve years has been constructing Sky Global, "a worldwide satellite empire that began with BSkyB in Britain, stretched across Germany and Italy through the Middle East, India, Southeast Asia, Japan, covertly in China, down through Australia and New Zealand, through South America, and up to Mexico." (10) For the past several years Murdoch has sought to fill the only hole in his network, North America, by acquiring Hughes Electronics (Hughes) and its DirecTV satellite service and merging it into his international network. (11) Acquiring DirecTV and its twelve million U.S. subscribers (12) "would give Murdoch an unbroken world highway that could reach three-quarters of the world's population." (13)

In May 2001, DirecTV was within Murdoch's grasp. (14) In November, however, negotiations with General Motors, the parent company of Hughes and DirecTV, broke down as EchoStar, the number two satellite provider in the United States, (15) stepped in and purchased Hughes. (16) Fortunately for Murdoch, the U.S. Department of Justice (DOJ) blocked EchoStar's purchase of Hughes on antitrust grounds, (17) creating an environment in which Murdoch could finally purchase the last piece of his satellite puzzle.

On April 9, 2003, News purchased a thirty-four percent interest in Hughes from General Motors for $6.6 billion. (18) By the end of 2003, the Federal Communications Commission (FCC) and the DOJ had conditionally approved News' acquisition of Hughes, ignoring fears that News "would raise its programming prices to cable rivals, such as Comcast Corp., or threaten to pull Fox programming in order to drive customers away from cable and to DirecTV." (19) In approving the merger, the FCC cited News' history of adding channels and features, such as interactivity, to its other satellite systems, which would create a "more muscular competitor to the cable industry, which has monopolies in most markets." (20) As a condition of the acquisition, the FCC required News to "beam local channels into 100 of the nation's markets by the end of [2004] and to provide local service to the rest of the country's 210 markets no later than 2008" in order to comply with the agency's goal of localism. (21)

Although the acquisition received approval from U.S. regulators, hurdles must be overcome in Brazil, where antitrust watchdog Conselho Administrativo de Defensa Economica (CADE) and the National Telecommunications Agency (ANATEL) will review the acquisition. (22) With the combination of parent companies News and Hughes, Brazilian regulators worry that in Latin America, the only region where News and Hughes compete directly, (23) a combination of News' Sky Latin America (Sky) and Hughes' DirecTV Latin America (DirecTV) will follow. (24) Although News' purchase of Hughes did not explicitly provide for the fusion of Sky and DirecTV in Brazil, News stated that "[a]ny opportunities to improve operational efficiencies and reduce costs associated with the Latin American operations will be considered by the management and board of [Hughes] after the completion of the transaction.... "25 Additionally, a U.S. Bankruptcy Court's recent approval of DirecTV's reorganization brought News "one step closer to cleaning up and merging its two Latin American digital broadcast satellite platforms" by providing for News, through its control of Hughes, to increase its stake in DirecTV from seventy to eighty percent. (26) The companies' competitor, Tecsat, as well as Brazilian media analysts are "taking a regional merger for granted." (27) Paulo Hisse de Castro, director for new business at Tecsat, said "[i]f ... Murdoch buys DirecTV, he will certainly merge the operator with Sky to cut costs." 28 Tecsat officials testified before the FCC, to no avail, that approving the acquisition in the United States would provide for "de facto control to be exercised by News Corp. over Hughes and its subsidiaries [allowing] these 2 competitors in Brazil to act in concert to further [hurt] Tecsat in the [direct-to home] market by restricting access to programs." (29) In May 2004, CADE issued a preliminary ruling concerning the combination. (30)

A combination of Sky and DirecTV would give News control of ninety-five percent of the Brazilian satellite market, leaving Tecsat, a domestic operator with 50,000 subscribers, just five percent. (31) In a country with ten million satellite dishes already installed, (32) an enormous potential market exists for a combined Sky-DirecTV satellite television format. Sky formed in 1995 as an alliance between four mass media companies: News Corporation; Televisa Group, "a Mexican company recognized as a leading producer of television programming for Latin America"; Organization Globo, "which has interests in television production and cable programming; and Liberty Media, a leading U.S. cable television company." (33) At the time of the News-Hughes deal, Sky provided satellite-based digital television service to 730,000 subscribers in Brazil, (34) a 19.7 percent share of the market. (35) DirecTV is the "leading pay television service in Latin America and the Caribbean with approximately 1.6 million subscribers in 28 countries." (36) In Brazil, DirecTV has 500,000 subscribers, (37) an 11.3 percent share of the market. (38) Cutting costs may be particularly important to the long term success of both companies because of the financial hardships both suffered last year. In 2002, Sky lost $386 million, and in March 2003, DirecTV "filed for bankruptcy ... protection after a loss of $202 million in Brazil the previous year." (39)

Although regulators worry that giving Murdoch "a near unassailable lead across a region where people watch a lot of television" would be damaging to the Brazilian consumers, (40) other analysts point to News' uncanny ability to improve satellite television, thereby providing more programming options to the developing world. (41) This Note will analyze whether a combination between Sky and DirecTV would be detrimental to Brazilian consumers and how Brazilian antitrust regulators should respond to the combination. Part II of this Note will explore Brazil's antitrust regime in the context...