BSkyB's monopoly puts it ahead of the game

COMMENT: 'While everyone else, the BBC included, is getting cold feet over going it alone in digital TV, BSkyB is forging ahead; interactive TV, even the Internet, will soon be available via the little black box'
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BSkyB's stock market value edged its way through the pounds 10bn mark for the first time yesterday. In itself this is an unremarkable occurrence, for joining the Ten Billion Pound Club doesn't alter BSkyB's relative position in the FT-SE 100 Index; it remains Britain's 16th most highly valued company. Nonetheless, achieving that kind of market capitalisation is an important milestone for any company, and in this case it is doubly so for it has been reached at record speed; Sky is little more than 10 years old and in its merged BSkyB form it is only five years old. It is now larger in market value terms than household names such as Sainsbury, Guinness and Grand Metropolitan.

What is BSkyB's secret? In the main, it is called being an unregulated monopoly. Nobody else has yet managed to get a look in on British pay television. While so much of the rest of television remains "free", and BSkyB continues to maintain its grip on key movies and sports events, nor will they. BSkyB is largely free to charge what it likes.

To be fair, however, there is a little bit more to it than that. Rupert Murdoch took big risks in supporting Sky when most observers said it couldn't possibly work. He bet his company, and his own personal wealth, in doing so. More remarkably still, BSkyB has proved highly effective in defending its monopoly, both politically and commercially. BSkyB was never going to let go of the Premier League and it paid what it took to keep it. Its position was barely touched by the Broadcasting Act and when the Office of Fair Trading eventually bit, it was a mere shadow of the organisation that originally barked.

Clever defence of monopoly has been accompanied by imaginative extension of its boundaries. While everyone else, the BBC included, is getting cold feet over going it alone in digital television, BSkyB is forging ahead; interactive television, even the Internet, will soon be available via the little black box. As a lesson in how to get something for nothing, BSkyB's negotiations with the German media tycoon, Leo Kirch, have proved masterful. Mr Kirch seems to have given away half his company because he feared the consequences of having Mr Murdoch and Sam Chisholm offside rather than on.

There are plenty of good reasons BSkyB should not command the sky-high rating it does. No monopoly lasts forever and BSkyB will soon have to invest heavily in programming and technology to support it. On present form, however, BSkyB still looks nimble enough to stay one step ahead of the game. The BSkyB phenomenon is no mere investment bubble.

The Pru must exercise caution with the coffers

Peter Davis should be a happy man. He has secured a good price for Mercantile & General and will soon have pounds 1.75bn of loose change jangling about in his back pocket. In one fell swoop, the Pru has amassed a sizeable war chest to fund its long-stated ambition of acquiring either a building society or a mutual life company. Targets, including the Woolwich, have already been identified and an acquisition will be announced shortly. Before the Pru goes on a buying spree, however, it still needs to explain why this strategy is such a good idea.

The argument advanced by Mr Davis is straightforward. What we are seeing, he claims, is a transformation of the financial services industry. The Pru reflects this trend, but in addition aspires to be among the top six or seven players world-wide. This means strengthening and expanding its retail business in the UK, and eventually expanding overseas. Buying a building society would seem to further this ambition for it would add several million new customers to the Pru's 6 million-strong client base. That's a lot more pensions and life cover for Prudential salespeople to sell to.

The problem is that the cost of buying this presence is going to be high. Woolwich's sale price is now rumoured to be upwards of pounds 3.5bn and rising, quite a lot for a set of shopfronts in Dudley town centre and elsewhere. For your money you get a large and attractive mortgage book, and a good spread of well-heeled savers. But here's the bad bit; you also get an increasingly redundant cost base. Nobody is suggesting that the Woolwich would prove as poor an acquisition as the Pru's ill-fated expansion into the business of estate agents in the late 1980s, but just remember, it was the same sort of logic that applied then as well - the idea of convergence of all areas of personal finance.

After a slow start, telephone banking and mortgage lending is beginning to take off. The traditional business and customer bases of banks and building societies will look very different 10 years from now.

This is not to condemn Mr Davis's strategy before we have seen it properly unveiled. But to have pounds 1.75bn burning a hole in your back pocket can be a mighty dangerous thing. The risk of overpaying seems high.

Lloyd's brinkmanship wins the day

Deadline, what deadline? Until now, it had been widely assumed that Lloyd's must prove to the Department of Trade and Industry by the end of August that it is solvent, or risk being forced to close its doors to new business. A similarly tight deadline was said to exist on the other side of the Atlantic, where the lead regulator for the US, the New York Insurance Department, is expecting proof of solvency by 1 September, or at the very latest by the end of next week.

This Armageddon-type message, that the rescue must go through by the end of the month, has been used liberally by lawyers for Lloyd's in the US, in their attempts to fight judicial delays to the pounds 3.2bn rescue plan. Yesterday it proved wonderfully persuasive, as three US appeals court judges sided with Lloyd's and overturned a lower court injunction delaying the rescue.

But the decision was certainly not a foregone conclusion. The regulators themselves - preparing for the worst - were taking pains earlier yesterday to backpedal from the idea that the end of the month or indeed the beginning of September represented some great cliff over which Lloyd's would fall if it failed to prove solvency in time.

According to the DTI, British law requires an annual proof of solvency, but the end-August date is a matter of custom and is not set down in the regulations. The solvency test is sometimes completed in August, at other times in early September, but officials have flexibility and could wait longer if it were thought necessary.

The New York Insurance Department was equally dismissive of the supposed early September deadline for passing the solvency test in the US, which a spokesman said was simply based on the timetable for the rescue plan set in the UK by Lloyd's and the DTI. In other words, if the DTI is flexible and allows Lloyd's further time to pass its solvency test, then the US authorities could decide to be just as helpful.

In the event, they have been spared the necessity. Lloyd's has played a game of bluff and brinkmanship in a masterly fashion, and now seems home and dry.

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