Murdoch-Fox wants DirecTV-Hughes

washingtonpost.com
Washington Post Staff Writer
Saturday, November 29, 2003; Page E01

By Frank Ahrens

Hughes Replies to Concerns About Deal

Safeguards Promised If DirecTV Is Sold

The parent company of DirecTV, the home satellite service, has promised
several federal agencies that it can address concerns about foreign
ownership of sensitive U.S. communications systems if it wins approval of
its proposed merger with Australian-controlled News Corp.

Rupert Murdoch's company, which owns the Fox television network, Fox News
Channel, FX cable channel and 20th Century Fox movie studio, is attempting
to buy a 34 percent controlling interest in Hughes Electronics Corp., which
owns DirecTV, in a $6.6 billion cash-and-stock deal.

The merger needs the approval of the Justice Department and the Federal
Communications Commission, which are examining its potential antitrust and
public-interest impact. The FCC staff has recommended approval.

Corporate rivals and consumer groups are worried that the merger will give
News Corp. too much control over programming and pricing, creating the
first-ever combination of programming and a distribution system.

But the merger also has drawn the scrutiny of the Department of Homeland
Security, the FBI and Justice Department divisions in addition to the
antitrust department. The deal would bring DirecTV's five satellites and
sophisticated communications system under the control of a company based
outside the United States.

Chief among the U.S. concerns is that a foreign-owned satellite system and
communications system could be used for illegal surveillance on U.S.
citizens and facilities, according to documents passed this week among
Hughes, News Corp. and the federal government.

"As the [FCC] is aware, the DOJ, FBI and DHS have taken the position that
their ability to satisfy their obligations to protect the national security,
to enforce the laws, and to preserve the safety of the public could be
significantly impaired by transactions in which foreign entities will own or
operate a part of the U.S. communications system, or in which
foreign-located facilities will be used to provide domestic communications
services to U.S. customers," read a letter filed at the FCC by the three law
enforcement agencies last week.

The Committee for Foreign Investment in the United States, a group made up
of executive departments and representatives from the State, Defense,
Treasury and Commerce departments, typically reviews transactions involving
foreign ownership of businesses that serve the United States. In September,
for instance, the committee approved the reorganization plan for Global
Crossing, a telecommunications company being acquired out of bankruptcy by a
Singapore-based firm. .

In February, the Department of Homeland Security was added to the committee,
as foreign owners of technology and telecommunications such as Hughes have
drawn special scrutiny after the terrorist attacks of Sept. 11, 2001. The
News Corp. purchase of Hughes is the first major media merger to be vetted
by these agencies.

If the News Corp. deal is approved, Hughes would split off from parent
General Motors Corp., which has been seeking to offload the company for cash
to prop up its sagging pension fund. Hughes would be controlled by News
Corp. under a new subsidiary called Fox Entertainment Group, and its stock
would trade publicly.

To answer the government concerns about foreign ownership, Hughes said that
the audit committee of the new Hughes/Fox satellite company, which would
have to have at least three members, would be composed entirely of U.S.
citizens and that the committee would have "exclusive jurisdiction" over
company policies related to U.S. national security and law enforcement.

In addition, Hughes promised to make a yearly report on any company policies
related to national security.

Among national security policies overseen by Hughes's audit committee,
according to its bylaws, are: "Requests from a foreign government or other
foreign entity to conduct electronic surveillance using the domestic
communications network or to obtain information relating to domestic
communications or electronic surveillance conducted using the domestic
communications network . . . [and] . . . any attempt by a foreign government
or other foreign entity to induce an employee of the corporation to violate
United States law."

In a letter to the FCC on Tuesday, Justice, the FBI and Homeland Security
signaled their acceptance of Hughes's proposal, provided the FCC makes it a
condition of approving the merger.

The merger would give News Corp. DirecTV's more than 12 million subscribers
and the final piece to its global satellite network, which beams programming
to Europe, China and Australia. The deal has been opposed by DirecTV's
biggest rival, EchoStar Communications Corp., owner of the Dish Network,
which has 8 million subscribers.

The proposed merger has also raised concerns among some consumer advocates
and people in the cable industry -- it marks the first time a programmer
such as Fox has owned its own distribution system, in this case, the
pizza-sized satellite dishes that more consumers are choosing as an
alternative to cable. They worry that owning DirecTV would give News Corp.
added muscle in negotiating with cable companies such as Comcast Corp. over
the price it will pay for Fox programming, such as NFL games and "American
Idol."

This is not the first time Murdoch and his News Corp. have drawn regulatory
scrutiny because of their foreign roots. When the FCC approved News Corp.'s
purchase of its first U.S. Fox television stations in 1985, it did not
know -- it admitted later -- that even though Murdoch was a naturalized U.S.
citizen, the Fox stations would be owned by an Australian company. U.S. law
prohibits controlling foreign ownership of U.S. broadcast outlets. The FCC
later granted a waiver allowing News Corp. to retain control of the
stations.

) 2003 The Washington Post Company

------------