Smith on mission to beat cable with DirecTV.

To Hughes Electronics Corp.'s Mike Smith, 5 million is the magic number.

That's how many subscribers his company's DirecTV subsidiary needs to leverage exclusive distribution deals with Hollywood studios - deals that Smith believes hold the key to DirecTV's future.

"We are definitely interested in forming alliances with the studios," the Hughes chairman and chief executive said in an interview at his new El Segundo office.

"Once we sign up all these customers, we're going to need specialized programming to keep them from switching back to cable," Smith said. "It's one thing to have a lot of channel capacity, which we do; it's quite another to offer the best channel capacity. And that takes quality programming."

To that end, Smith is willing to take operating losses in a rush to sign up hundreds of thousands of new subscribers for DirecTV, the nation's dominant satellite-based, direct-to-home television business with 3.5 million subscribers.

"We have decided to postpone profitability in our DirecTV business another year because we think it's better to lower our prices and add more subscribers now while cable is still vulnerable," Smith said. "They haven't yet gone to digital (signals), they are threatening to do a lot of things that they haven't done yet, and there is a lot of anti-cable sentiment out there. We are trying to take advantage of this window that we have now."

So far, the strategy seems to be working. Last summer, DirecTV subscriber growth slowed once it hit the upper 2 million range. But since DirecTV lowered the price on its 18-inch satellite dish and channel box to $199 (and $99 for a second one), the number of subscribers has climbed from 2.9 million to 3.5 million.

The key concern on Wall Street, though, is whether DirecTV will dig itself too deep with operating losses while it goes after new subscribers.

"Within reason, going after new subscribers makes sense," said Douglas Shapiro, an analyst with Deutsche Morgan Grenfell in New York. "DirecTV has a really narrow window to capture as many subscribers as possible before cable goes digital and it becomes difficult to wean cable subscribers away. But you can't go hog-wild with this strategy. If the churn rate starts to climb, they may not make enough money per customer to pay back their up-front costs."

While DirecTV is luring new subscribers, it is also looking toward Hollywood in search of programming deals. Last fall, DirecTV signed a deal with a division of Burbank-based Warner Bros. Studios to create music programming, including a weekly music magazine show and live concert events.

"Securing these studio partnerships is key because DirecTV is going to have to differentiate itself with original programming," said Marc Crossman, an analyst with CIBC Oppenheimer.

DirecTV is one of Hughes' fastest-growing segments. Last year, its revenues more than doubled to $1.28 billion, from $621 million in 1996.

Smith, 54, took over as chairman of Hughes in October after then-Chairman C. Michael Armstrong left to take over AT&T Corp. He is still very much a man on the move - literally.

On the day of the Business Journal interview last week, Smith was moving into Hughes' new executive offices in El Segundo - on the opposite side of Los Angeles International Airport from Hughes' old corporate headquarters in Westchester.

He and his wife are still looking for a home in L.A.; as vice chairman of Hughes Electronics, he made his living in Virginia.

When he became chairman of Hughes in October, Smith said too much was made of the fact that his elder brother, John, is chairman of General Motors Corp., which owns Hughes.

"My being named chairman has not in any way changed the relationship with my brother. We talk to each other just as much as we did before. In fact, the biggest problem with it is that the media seemed to have glommed onto this as some sort of human interest story," he said, referring to a lengthy Wall Street Journal profile of the two brothers last fall.

Smith (that's Mike Smith) said that when he was growing up, he never even dreamed of becoming a corporate CEO. He attributes his success to the values instilled in him by his parents and through his schooling at all-male schools.

"All-male schools have a strict approach to education and they stress the relationship to family," he said. "Those values have served me well throughout my career."

In his new position, Smith said he plans to continue looking for business opportunities for Hughes' satellite and other telecommunications businesses in Asia, despite the current financial turmoil in the region.

"We may be looking at Asia with a jaundiced eye, but we think there are still opportunities there that will pay off over the long term," he said. For instance, the company is now selling telecommunications equipment to two local telephone providers in India that are taking on that country's newly deregulated telephone monopoly. Smith said Hughes is also considering pursuing satellite deals in Asia.

And, Smith said, he wants to instill more of a teamwork attitude inside the $5.1 billion company, especially now that Hughes has sold off its defense business to Raytheon and has two core markets: satellites and telecommunications.

"Until recently, there has been a series of little independent 'duchies' inside the company. Those working on a project would tend to regard it as their personal fiefdom. Only in times of crisis would people come together for the good of the company," he said. "The biggest challenge I face is getting people within the company to work better together. If we can't pull this off, it will be one of the impediments to the future growth of the company."