Kate Bulkley, Media Analyst.

Fathers and Sons

By Kate Bulkley

Cable & Satellite Europe

01 September 2004

We've all had those difficult conversations with Dad. "I've failed my exams, father," or "I crashed the car, pa." But how about this one: "Hey pops, I've just wiped £2bn off the share price of the family business." Now that's the way to get the patriarch's attention.

Imagine the conversation between Rupert Murdoch and his son James after the rookie CEO delivered a long-term growth plan for BSkyB that caused the company's shares to plummet. One morning of presentations to analysts and the press wiped a fifth of the value off the pay-TV giant. The ensuing weeks haven't provided much uplift.

This unique father and son relationship - Rupert is chairman to James' CEO - has attracted criticism ever since it emerged late last year that Rupert favoured his 31-year old son to run Sky. In the weeks following the share drop, the elder Murdoch has closed ranks with his son, saying to reporters that he believes Sky's management has adopted the right strategy. There has even been press speculation that the torpedoing of the share price could help make a 5% share buy-back proposed later this year less expensive. Conspiracy theories aside, it's hard to believe that the discussions on the day would have been easy listening for Murdoch minor. Rupert's counsel to disgruntled shareholders who opposed James's appointment as CEO earlier this year was to sell their shares. Many now seem to be taking the patriarch's advice.

So did James deserve what he got? Sky has certainly tapped out the so-called early adopters who flocked to Sky to get live sport and movies. The mantra of continually rising subs coupled with ever-increasing ARPU for new services such as interactive betting was being questioned even in the final days of the former CEO, Tony Ball.

James certainly did his homework before delivering the new strategy for Sky. His virtuoso performance showed a mastery of Powerpoint as well as stamina; the presentation, which ran to nearly two hours, was delivered several times to different audiences. But what he meted out was rather too much for a City that has built its forward financial models on steady and sustainable quarterly growth both in subs and ARPU. "As a management team you have to be focused on the long term," James told the press at lunchtime when asked if he was worried about how far the share price had already fallen that morning.

James realises that he must broaden the attraction of Sky to those who have so far refused pay-TV. One way is by lowering the price. This will surely kill the high ARPU that Sky enjoys (currently more than half of Sky's subs take the expensive £40 (€59) a month package) but the hope is that the ARPU losses will be made up by volume gains.

The plan is for more packages at the bottom and the top end of the scale. Sky will offer new options and there will also be a focus on products like the Sky Plus PVR and a push to sell more than one set-top box to every home. There will also be the new free-to-air satellite offer which the CEO hopes will attract digital TV refusniks. And there are plans to launch an HDTV service in 2006.

Armed by a new marketing campaign, a focus on broadening the subscriber base and some new jazzy products, the younger Murdoch forecasts that Sky will reach 10m customers by 2010, up from 7.4m today. The problem for Sky watchers is two-fold: this plan is going to cost money and it's going to take time. The cost will be an additional £450m over the next four years to redevelop Sky's offices and studios and upgrade customer service and broadcast facilities.

Meanwhile, ARPU growth will slow, profit margins will be compressed, subscriber acquisition costs will rise and subscriber additions will limp along, only regaining some traction in the latter part of 2005. Is it any wonder that analysts have revised down their forecasts and share price targets?

Despite this rocky start, James Murdoch might win in the end. His dad isn't going to fire him and, even though Sky is a public company, no one likes to second-guess Rupert. The City will slowly start to value Sky more as a utility than a growth story (although James must hope that Sky will be a very seductive utility). Just as Sky got through the transition from analogue to digital, it now has a plan to move from ARPU to what James called "overall profitability".

The jury is out and is likely to remain out for some time. Threats include competition from revitalised cable and the ongoing appeal of the Freeview digital TV option.

Will Sky be able to attract a wider audience? The younger Murdoch must hope that with a stock slide of this magnitude behind him the only way is up. And father or not, success is surely the only way to keep conversations with Dad from turning ugly.

 

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