Sky-BT alliance would put competition at risk

COMMENT: 'At a time when new technologies should be opening up the world of pay TV and telephony to a legion of new players and competition, all manner of unholy alliances are being formed to defend the status quo'
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Any day now, BSkyB will be announcing its long-mooted link-up with British Telecom, Midland Bank and Panasonic to enable Sky to move into the digital satellite TV age. It is this partnership, codenamed Interactive Services Company, that will produce and sell the set-top boxes which enable the viewer to receive the new digital channels.

The deal is likely to be vintage Sky. At its peak the venture may require funding of anything up to pounds 700m; the idea of bringing in partners is so that they should carry the cost, leaving Sky with a pretty much risk-free ride should the quest of persuading its analogue subscribers to switch to more expensive digital not prove fruitful. If it doesn't work, it will largely be BT, Panasonic and Midland Bank which pick up the tab.

The deal holds varied attractions to the other partners. Midland is in chiefly to finance it, and Panasonic because it is a leading manufacturer of TV sets. British Telecom is in there ostensibly because interactive TV requires the use of a telephone line and therefore might over time generate extra telephone traffic. All very neat and, since nobody else is prepared to fund the drive into digital pay TV, hard to fault.

As always in the affairs of Sky, however, there's something deeply troubling about the alliance, which is why Don Cruickshank, director-general of Oftel, has asked for all aspects of the link-up to be revealed to him. What this deal marks is the final coming together of two of Britain's most entrenched and aggressive monopolists - Sky and BT. It's hard to put your finger on precisely why the alliance of two monopolies should make the situation any worse for the poor old British public than it already is, except that we all know instinctively that it will.

If Sky is successful in its bid for digital terrestrial too, the situation will be made doubly worse. At a time when new technologies should be opening up the world of pay TV and telephony to a legion of new players and competition, all manner of unholy alliances are being formed to defend the status quo. From the point of view of Sky and BT, this is an eminently sensible and understandable strategy, but from a public policy perspective it should be resisted at all costs. The opportunity that exists at present for the development of real diversity and competition in these markets is in danger of being squandered.

Not that we can hope for much relief from a Labour government. Both BT and News Corp have spent long months cultivating the new Labour leader. Pay time approaches.

Rice fails to keep shareholders sweet

When it came to sorting out who would have the upper hand at the merged car parts business LucasVarity, there was never any contest. The old Lucas culture was quickly swept aside along with every executive it contributed to the combined board. LucasVarity is Varity is Victor A Rice, its creator and now chief executive officer.

Where Mr Rice has run into trouble, however, is in trying to reconcile the conflicting expectations of his British and American shareholders. In the UK, Lucas shareholders have been brought up on a conventional diet of dividend growth. In the US, Varity investors are more accustomed to the share buyback.

Yesterday Mr Rice sought to please both but ended up satisfying neither. His strategy of rewarding shareholders through a combination of buybacks and conventional dividends once again failed to kick start the share price which is now languishing 25 per cent below last year's high.

Given the gap in corporate cultures, it is never easy forging transatlantic alliances, as British Airways discovered with USAir and BT may be about to discover with MCI. In Mr Rice's case he has exacerbated the problem with the messy mechanism he has chosen for distributing capital. It is neither fish nor fowl and has therefore antagonised both London and New York at the same time.

But his bigger problem lies in the lacklustre prospects that LucasVarity conjures up. Once Mr Rice has used up the cost savings that the merger will generate, it is difficult to see where the growth will come from to keep shareholders sweet. Operating margins are barely moving, some of LucasVarity's most important markets in the US and Europe remain obstinately flat and the aerospace business continues to sit uneasily alongside diesel engines and braking systems.

LucasVarity may be pleased with the progress it has made since last summer but no-one else is. The financial rationale for the merger looks as unconvincing as the industrial case. Poor Mr Rice is at his wits' end. He is not, he laments, getting the message across. In that, at least, he has the wholehearted agreement of the markets.

Government may tap into service sector

Renewed strength in the stock market, dragged up once again yesterday on the coat-tails of Wall Street, shows just how fixated investors have become on the Dow and on the hopes and fears for interest rates that are driving the American market. Research from BZW, suggesting equities are sitting on a pounds 10bn fiscal timebomb, made not a jot of difference.

Which is surprising, because if BZW's figures are right, and an incoming Labour government breaks with tradition and starts to do something about the creaking public finances, shares are in for an extremely bumpy ride. An underlying pounds 30bn borrowing requirement at this stage in the economic cycle is a clear sign that the sums are not adding up.

That sort of shortfall will take some unwinding and you can bet your bottom dollar that in the short term it will not be the electorate that picks up the tab but the corporate sector, where the damage can be more acceptably disguised by the present strength in profits and cashflows.

Talk about tighter fiscal policy is easy in principle, but what it means in practice is that someone has to actually pay higher taxes. Raising the headline rate of corporate tax is a no-no so soon after that charm offensive on the business community, even if it is one of the few tax rates Labour has not committed to leave unchanged, so raising the pounds 5bn BZW estimates companies will be asked to stump up will demand some cleverer ruses than that.

Capital allowances cost the Treasury pounds 20bn a year, making them an easy target even for a party as fiercely critical about Britain's investment deficit as Labour has been. Kenneth Clarke tackled "long-life" assets in his last budget. Gordon Brown will want to tread a careful line on an approach to fiscal tightening that might threaten the investment it claims to champion.

Even so, he will find few critics of a change that clamps down on the allowances given to pub groups to tart up their estates or to property companies to refurbish their portfolios. Leisure companies and other service sector businesses, which are already facing the uncertainties of a minimum wage and consumers potentially looking at higher tax bills themselves, look especially vulnerable in the search for new sources of revenue.