David Prosser's Outlook: Sky's 200m bill for seeing off its rival

Don't bet on a credit card refund; Property investors are in panic mode
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The Independent Online

BSkyB may have lost the battle yesterday, having been told it will have to pare back its shareholding in ITV, but it has almost certainly won the wider war. When James Murdoch, now departed for bigger and better things, spent 940m last year on a 17.9 per cent stake in ITV, few believed his story that it was simply an investment stake. After all, Mr Murdoch had made the purchase shortly after it had emerged that Virgin Media was considering a bid for ITV, a competitive threat that Sky wasn't particularly keen on emerging, and its shareholding in effect scuppered a deal.

Assuming that the Secretary of State for Business, John Hutton, rubber-stamps the Competition Commission's ruling next month, Sky will be forced to book a loss of a little over 200m on its investment at today's prices. Still, Jeremy Darroch, Mr Murdoch's successor as chief executive of Sky, may well feel the money has been well spent. Had Sky's investment not been made, Mr Darroch might now be spending his first few weeks in the chief executive's office worrying about countering a Virgin-ITV combine that would have had a strong standing in the free-to-air and pay-TV sectors, as well as some very impressive production credentials. Instead, Sky's new boss can relax, safe in the knowledge that there is very little chance of Virgin resurrecting its interest in ITV even after Sky has moved its tanks off the lawn.

There's no doubt that Sir Richard Branson, who remains Virgin Media's figurehead, has long harboured ambitions of building a sizeable television operation. And as Sky itself has realised in recent months, the more customers you have as a TV operator, the easier it is to sell large numbers of phone and broadband accounts, a key objective for Virgin.

Unfortunately, much has changed in the 12 months that have passed since Virgin was seriously mulling a bid for ITV. It is now in a substantially weaker position, having pulled back from putting television at the forefront of its services and losing its chief executive. The spat with Sky over channel carriage didn't help either. Even if it were able to raise the money to make an offer for ITV, it would now be a much less credible bidder. And given the ongoing credit crisis, it almost certainly couldn't stump up the cash anyway.

All in all then, a neat albeit expensive result for Mr Murdoch's successors. Naturally, having insisted that the Virgin issue had never crossed its mind when it bought the ITV stake, Sky was pretty circumspect yesterday, saying only that it would consider its options and make representations to Mr Hutton. But don't expect too much in the way of any long-lasting protest.

Don't bet on a credit card refund

Don't get too excited about the 1bn bonanza trumpeted in some quarters yesterday following an EU crackdown on credit card interchange fees. This week's ruling against Mastercard, announced by the European competition commissioner, Neelie Kroes, is just the latest spat in a seven-and-a-half-year row over interchange fees. And despite a series of similar crackdowns during that period, shoppers have yet to see a penny of gains.

Interchange fees are an arcane little bit of the payments industry that nevertheless accounts for some large sums. Each time you pay for something by debit or credit card, the retailer has to send your details off to its bank. It then contacts your credit card issuer for payment and the cash is handed over, minus a handling fee, known as an interchange charge. Sometimes it's the same bank handling both sides of the transaction, but there's still a fee to pay.

Members of Mastercard, the credit card network, have now been ordered to cut interchange fees, and since the decision will also apply to Visa, its main rival, retailers should end up paying lower fees. Good news for consumers, you might think, once these savings are passed on in the form of lower prices.

There are, however, some pretty big flies in the ointment. Not least, can retailers really be trusted to share such savings with shoppers? Mastercard argues that the evidence from Australia, where interchange fees were forced down several years ago, suggests that retailers will simply keep the gains for themselves, enjoying slightly wider margins. Mastercard has an axe to grind, but it's not difficult to see how retailers might be tempted to keep the money, particularly in the current environment of slowing consumer spending.

Then there's the question of how credit card companies will react. They're about as likely to welcome smaller profits as retailers are to pass up on the chance for wider margins. And while the EU and the UK's Office of Fair Trading, which has also taken a keen interest in interchange fees, have the power to require a cut in these charges, they can't stop credit card companies recouping their losses in other ways through new fees, say, or higher interest rates.

Indeed, there's a very recent precedent here. Last year, the Office of Fair Trading told credit card lenders that unauthorised borrowing charges of more than 12 were likely to be considered illegal. Lenders, many of which had been charging 30 or more, were suddenly forced to bring these fees down, and took a major hit on profits. Since then, however, the industry has raised rates sharply, and invented a wide range of new charges it may not have recouped its losses in full, but it's certainly on the way towards doing so.

All this is not to say that Ms Kroes was wrong to take action against unduly high interchange fees. This racket has been going on for years, and regulators have repeatedly failed to get to grips with it. However, Ms Kroes' claim that she has delivered "an early Christmas present to consumers" needs to be taken with a pinch of salt. Chances are that the major beneficiary of this crackdown will prove to be the retail trade. And as credit card companies adjust their charges elsewhere, consumers could even end up worse off.

Property investors are in panic mode

Nervous unit-holders in commercial property funds are beginning to panic, triggering a sell-off that could cause a very serious collapse in what has been one of the most popular sectors with the investing public in recent years.

Yesterday's decision by Friends Provident to suspend withdrawals from its 1.2bn Property Fund is testament to just how serious the crisis of confidence in the sector has become. Up to 120,000 investors will be prevented from withdrawing their cash for up to six months because the fund's cash buffer the amount of assets it holds in liquid assets in order to fund redemptions is now at a third of its usual levels following a series of withdrawals.

What commercial property fund managers fear most is being forced into selling assets at bargain-basement prices in order to satisfy demand for withdrawals from investors. Barring redemptions, or putting withdrawal penalties in place as other managers have done, buys some respite from such a crisis, but it may only be a temporary reprieve. Once a manager makes this sort of announcement, it triggers a wave of unease among investors in all funds, potentially sparking a run on the sector.

Indeed, there is now a serious danger of a panic in the commercial property sector getting out of hand. That would be hugely unfortunate, because, while the value of assets has fallen this year, the declines do not justify wholesale desertion by investors. What's sparking the current sell-off is the fear among investors that everyone else is getting out. It's a vicious circle that is difficult to break.

The Financial Services Authority said yesterday that it was monitoring the commercial property sector closely. This is a dangerous-looking crisis that demands early intervention.