Mini-Me Murdoch rules BSkyB

James takes reins despite nepotism concerns

LONDON — The spat over the allegedly nepotistic appointment of James Murdoch as satcaster British Sky Broadcasting’s CEO smolders on — but no one should ignore the scale of the challenge facing Rupe’s younger son.

“James will need to work out how to consolidate the huge achievements made by his predecessor Tony Ball in making Sky Digital work,” says a veteran of Blighty’s pay TV sector. “BSkyB is now a mature business and it is never easy growing a mature business.”

On the plus side, the 30-year-old Murdoch has shown he’s a chip off his father’s block by successfully turning around Star TV in Asia in just four years.

He also inherits a strong senior management team and a flourishing operation responsible for making the U.K. the world’s most successful digital TV market. Last year revenue surged to $3.6 billion, and BSkyB made a profit after the huge investment in digital, launched in 1998.

Churn is at a low of around 9%, and it has more than 7 million subscribers — three months ahead of target.

But as future subs’ growth looks likely to level off, Murdoch fils will need to extract more coin from customers and boost advertising revenues.

Crucially, he also needs to satisfy a skeptical City that BSkyB chairman Murdoch pere, whose News Corp. is a 35% stakeholder in the company, will not lean on him to divert funds away from shareholders to other parts of the News Corp. empire.

Ball resisted this strategy, refusing to use BSkyB to expand Murdoch’s interest in Italy. Instead, the new digital platform Sky Italia was acquired via News Corp.

Ball’s independence, backed by non-Murdoch stockholders, soured relations with Rupe and prompted his reluctant resignation earlier this fall.

Rebel stockholders claim Murdoch Jr. lacks the experience to run BSkyB. But they are more concerned that a family member will be more amenable to Murdoch Sr.’s bidding than an outsider like Ball.

James Murdoch has already gone on a charm offensive, seeking to soothe City sensibilities in an interview carefully placed in the prestigious Financial Times the day after his appointment. “I hear the shareholders’ concerns, but we don’t have any plans or strategies to run off and do this and that in terms of acquisitions. We think there’s a lot of growth in BSkyB’s home markets.”

How much growth is the question. Competition is heating up, ironically, from Freeview, the digital terrestrial service run jointly by BSkyB and the BBC.

As the number of Freeview homes continues to expand, making it more attractive to advertisers, BSkyB may use the platform to fulfill Rupert Murdoch’s ambition to secure a terrestrial foothold in the U.K. — more than 20 years after regulators forced him to sell his stake in ITV station LWT.

In September, BSkyB’s chief operating officer, Richard Freudenstein — who applied for the job that went to Murdoch Jr. — signaled that Sky might use Freeview to launch Channel 6, competing directly with the five existing British terrestrial nets.

But before that happens, the new boss will need to prove once and for all that flagship web Sky One can perform strongly.

“The problem James has got is how to make Sky more than just a retailer of sports events,” says a multichannel programmer. “Sky One’s programming is really very weak, and the only way to fix it is to invest. Historically, Sky has never done that, but that is the only way Sky will begin to take advertising away from rivals like ITV.”

In this area, the omens are not good. Just over a year ago Ball poached terrestrial tyro Five CEO Dawn Airey to beef up content. Airey is still to make an impact: Sky One’s ratings are not strong, and a month ago the woman she hired to run Sky One, Sara Ramsden, resigned.

There is speculation that Airey may quit because so little new money is being put into original productions.

“James will need to do everything he can to keep his top tier of management in place,” says media analyst Theressa Wise, a partner at Accenture. “Until now, Sky has been a one-trick pony. James now has to expand the brand.”

The betting is he will succeed, especially since he knows only too well that when his sister Elisabeth ran Sky’s content arm, she, too, resigned without achieving any real breakthrough.

In this particular media saga, family pride and the bottom line are at stake.

But first the son has to get through BSkyB’s annual meeting Nov. 14, when shareholders are threatening a revolt. In reality it will be hard to mobilize opposition as the equity is spread thinly across investors — the largest holding after News Corp.’s is just 3.07%.

But Rupe may be forced to sacrifice his old friend Norman St John Stevas, who headed the selection committee that chose James, to shareholders angry at the way the process was conducted. He has already been publicly targeted by the National Assn. of Pension Funds, which wants him off the board.

But Murdoch Jr. is ready to tough it out.

Using an American football metaphor for his task, he told the FT he plans to go “through the hard yards” of each issue facing BSkyB.

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