01 December 2003

The appointment of James Murdoch to run BSkyB means that nepotism is alive and well at News Corp, the implications of which remain to be seen.

Despite the vocal misgivings of many investors, the 30-year-old son of Rupert Murdoch was elected Sky's CEO in early November. James is not untested - he has run Star TV in Hong Kong for the last four years - but he was nonetheless putting on a brave and serious face as he sat next to father Rupert at the Sky annual general meeting only days after his appointment.

"I can fully understand the suspicion of possible nepotism with my son as a candidate," said Murdoch Sr, chairman of News Corp and BSkyB. But he insisted: "None of the News Corp-affiliated directors took any part in the decision to appoint James."

That may be so, but Rupert wanted James to get the job and his PR machine and executives were all singing from the same sheet. Three senior internal candidates were also in the frame: COO Richard Freudenstein; CFO Martin Stewart; and the head of marketing Jon Florsheim. But Peter Chernin, the COO of News Corp, told me in October that News Corp believed that James "would fare very well under this [search] process".

In some ways appointing James makes perfect sense. Rupert is very much a hands-on manager and James and his brother Lachlan are being groomed to run the family company one day. It would make no sense for Murdoch Sr to put a bad manager at the top of the crown jewel of News Corp's stable of companies. "We have a track record of recommending CEOs who are going to do a great job," Chernin told me. "You look at [past Sky CEOs] Sam Chisholm, Mark Boothand Tony Ball.... We are trying to do whatever we can do to grow the business."

But if growing the business is the primary goal, why didn't Murdoch hold on to Tony Ball, who grew the business from a few hundred thousand digital homes when he took over in May 1999 to more than seven million today?

Senior News Corp executives tend to have a certain life span before they move on and clearly Murdoch Sr decided it was Tony's time to walk. With strong first-quarter profits and a promise of dividends ahead for shareholders, Rupert was able to shrug off protests like Legal&General Investment Management's Andy Banks' observation that "while both the chairman and chief executive may be best for the job, we have concerns about the combination of them."

At the AGM, James tried very hard not to look like the monkey to his father's organ-grinder. He had been trotted out to City journalists and key investors during the prior week to dispel qualms that he is too inexperienced or that he will be a push-over to his father's wishes. He said all the right things, but even if he's safe for the next few quarters (helped along by a price rise announced for January) there are some testing times ahead. Hitting seven million subscribers is a tremendous achievement, but hitting 10m may be a lot tougher. Early adopters are already signed up and other, cheaper digital TV technologies are emerging.

The problem is that if Sky offers cheaper packages of service to attract more subscribers, it risks having some current subscribers downgrade, reducing average revenue per user (ARPU), the City's benchmark for Sky's performance. Perhaps now that Sky is talking about a dividend, James will start talking about profit rather than ARPU?

When asked if the priority was ARPU or growing subscribers, Murdoch Sr paused and said there was "no conflict" between the two goals and that the subscriber base would continue to grow. He stood by growing ARPU to £400 (€574) by the end of 2005, but added: "The task of making up the £400 ARPU target may be a bit more difficult that originally envisioned."

Before his father could take a breath, James interceded: "We don't see any reason to change those targets now although the make-up [of revenue] may be different."

Is this an issue that divides father and son? Murdoch Sr claimed: "In our board meeting yesterday 90% of the time was spent with James and I arguing."

James may have a lot more arguing to do. Live football has been a fixture on Sky since 1992. But the most recent deal, for 2004-2007, is being questioned by Brussels. Meanwhile, Sky One, the driver of Sky's basic package, has lost ground from falling ratings and reduced cable revenue.

And then there is the threat from the fat pipe, or broadband downloading.