BSKYB has an uncanny knack of exciting its shareholders – and not always by
piling on subscribers or operating profits. For the third time in four
years, the satellite broadcaster faces a row over how the company is run.
Rupert Murdoch, as Sky’s chairman, faced a nepotism row in 2003 after his son
James was named chief executive. Soon afterwards, there was a bust-up over a
share-buyback programme.
Now James Murdoch’s promotion to replace his father as chairman, twinned with
the move of his finance director, Jeremy Darroch, to chief executive, is
bound to stir up the corporate-governance brigade – even though similar
promotions have taken place at Standard Chartered, Scottish & Newcastle
and Cadbury Schweppes.
The changeover at the top of Sky is part of a far-reaching reshuffle within
News Corporation – owner of 39% of the satellite broadcaster – that has made
James Murdoch the favourite candidate eventually to succeed his father as
head of the global media empire.
At the age of 34, he is taking on direct responsibility for the strategic and
operational development of News Corp’s television, newspaper and related
digital assets in Europe, Asia and the Middle East.
The horizons of Sky’s other key shareholders are closer to home, however. One
of them, Legal & General, has told Sky it is worried that Darroch will
not be able to operate independently as chief executive with his former boss
as chairman.
“Investors are wary of these kind of moves and it could count against them,”
said Peter Montagnon, head of investment affairs at the Association of
British Insurers. “However, we can derive some comfort from a strong cadre
of independent directors that ensures the board makes robust decisions and
manages risk in the interests of all shareholders.”
Sky appears to be at pains for shareholders not to notice much difference at
the top. “It is the same two people, only in slightly different roles. Part
of James’s desire to move on and improve himself was to keep that
continuity,” said one source close to the company. Other investors were
pleased that the younger Murdoch would remain as chairman.
BSkyB directors reviewed external candidates for both the chairman and chief
executive role, but decided James Murdoch and Jeremy Darroch were the best
choices, according to insiders. Darroch beat two internal candidates: Mike
Darcey, the chief operating officer, and Tom Mockridge, head of Sky Italia.
A 45-year-old father-of-three, he is the first insider to be given the top job
in the company’s 18-year history. He was closely involved in developing the
strategy he must now lead. He was James Murdoch’s first senior appointment
when he was poached from Dixons, the electrical retailer, in 2004. He had
spent two years in that post and four years at the group, having initially
plied his trade at Procter & Gamble.
When news of his arrival emerged, Darroch said: “The opportunity at Sky is
something I couldn’t walk past. The business is much bigger.”
A Sky source said: “Clearly, he was not just a bean-counter. When he came in
he also had a very strong perspective on the consumer. He contributed far
more than your average finance director.”
He quickly became an affable foil to James Murdoch’s more direct demeanour.
But one source warned: “Just because you are pleasant to people, doesn’t
mean you can’t be tough. The people who bawl, shout and jump around are
usually the ones you don’t have to worry about.”
Just like James Murdoch before him, Darroch has someone else’s targets to meet
at Sky. The company has pledged to investors that it will have 10m
subscribers in Britain and Ireland by 2010.
When James Murdoch joined, he had his predecessor Tony Ball’s 8m benchmark to
shoot for. On reaching it two years later, he said: “Generally, when you
have other people’s targets to hit it is harder. When you set your own, you
invariably have a different view.”
He was determined to broaden Sky’s appeal. A plan to sink more money into
marketing and revamping its Osterley headquarters sent Sky shares sliding.
They are still 9% lower today than when he arrived. But his strategy has
been proved right: Sky is recruiting customers at a faster pace even in the
face of the runaway success of subscription-free Freeview.
Today, Darroch has a bigger armoury of products with which to elbow his way
into Britain’s living rooms. High-definition (HD) channels, Sky+ video
recorders and broadband internet have staved off any fears that Sky was
going to become a boring utility.
In the last quarter, it signed up 327,000 new customers, taking its total to
8.67m. More importantly, Sky+ gained another 323,000 users, a 14% rise,
taking its total to 2.7m. And HD is subscribed to by 358,000 people, a 23%
rise.
Although the broadband division will not become profitable before 2010, its 1m
customer base is snapping at the heels of Orange and Tis-cali, both
established far longer. The challenge lies in how Sky knits together
broadband with television in the delivery of programmes in competition with
Virgin Media.
“I don’t see too much change to the status quo for Sky,” said Paul
Zwillenberg, a partner at OC&C Strategy Con-sultants. “Jeremy has to
keep pushing local-loop unbundling and drive the triple-play proposition. He
must look at how to use the broadband channel to counter Virgin’s on-demand
advantage because they have a big, fat pipe going into the home.”
These are advantages Virgin has still to make the best of. The cable rival has
retrenched after a damaging battle with Sky that saw its “basic” news and
entertainment channels pulled from the Virgin platform.
Meanwhile, the regulatory outlook remains cloudy for Sky. Ofcom will publish a
consultation document on the pay-TV market before Christmas, as rivals such
as Virgin, Setanta and BT push for a full-blown market investigation to be
carried out by the Competition Commission.
Arguing that Sky’s share of subscriptions for premium TV channels is 86%, they
would like Sky to offer them on a wholesale basis to other platforms or face
a break-up.
On top of that, the Competition Commission will shortly pass on its verdict on
Sky’s 18% stake in ITV to John Hutton, the business secretary. Sky is
expected to have to sell down the stake, which would crystallise a loss on
its investment, made last autumn just as Virgin was poised to make an offer
for the broadcaster.
Meanwhile, James Murdoch will have a bigger picture to consider. As chairman
and chief executive, Europe and Asia, he will oversee Sky Italia, News
Corporation Europe and Star TV in Asia, which he ran before Sky.
His promotion puts him in pole position to succeed his father at the head of
News Corp, even though he will report into Peter Chernin, chief operating
officer, for the time being.
James was the only Murdoch offspring who remained directly involved with the
family business after his elder brother, Lachlan, resigned from News Corp in
2005 and his sister, Elisabeth, left Sky, where she was managing director,
to build up her own independent producer, Shine.
Born in Britain – he will be 35 on Thursday – James was educated in New York
and studied at Harvard, dropping out without completing a degree. He began
an independent media career by setting up a rap music label, but he later
joined News Corp and by 2000 was chief executive of Star Television in Hong
Kong.
Once he moves to a new office at News International in Wapping tomorrow, he
will be inducted to the world of print, one area where his experience has
been limited.
But he takes with him an understanding of the role of print in founding his
father’s empire and a valuable expertise in digital developments. He was one
of the first internet evangelists at the top of News Corp, urging Rupert
Murdoch to invest in the social networking website MySpace.
News International is completing a £650m investment programme in new colour
presses for its titles, The Sunday Times, The Sun, The News of the World and
The Times. But it is also rapidly expanding its online presence, an area in
which the new chief executive is expected to place even more emphasis.
Zwillenberg said: “His background is in internet and video and he’s going to
newspapers. That’s a pretty good thing, putting in somebody who gets it.”
James Murdoch is thought to believe that print still has a bright future but
that the industry needs to exploit all new means of communicating its
journalism.
His promotion was triggered by the imminent completion of News Corp’s takeover
of The Wall Street Journal and his father’s intention to move Les Hinton,
the respected executive chairman of News International, to New York to
become chief executive of Dow Jones, the Journal’s parent company. The
editor of The Times, Robert Thomson, is also going as publisher and will be
replaced by James Harding, the paper’s Business editor.
While his father may focus on the journal over the next few months, James
Murdoch will engage with his new empire with relish.
“He’s incredibly competitive and will see it as a challenge to crack his new
brief,” said one Sky insider. “He knows the power of his new box of tricks
and he will not hesitate to use them to improve the business. If I was a
competitor, I would be worried.”
