Tough times at the family firm

James Murdoch has already presided over plunging share-prices at BSkyB. And if he can't deliver, blood ties won't help him, says Raymond Snoddy

Rupert Murdoch's second son James got a very nasty shock last week, probably the worst of his short career. By the time the chief executive of BSkyB had finished outlining his ambitious new strategy to sceptical City analysts, the shares of the satellite broadcaster had already dropped by more than 50p. Once the young Murdoch had repeated his two-hour, virtuoso, one-man performance before equally sceptical journalists, the share price was in free-fall, and on the way to wiping £2bn off the value of the company.

Rupert Murdoch's second son James got a very nasty shock last week, probably the worst of his short career. By the time the chief executive of BSkyB had finished outlining his ambitious new strategy to sceptical City analysts, the shares of the satellite broadcaster had already dropped by more than 50p. Once the young Murdoch had repeated his two-hour, virtuoso, one-man performance before equally sceptical journalists, the share price was in free-fall, and on the way to wiping £2bn off the value of the company.

This was not part of the meticulously choreographed script. BSkyB executives had discussed possible reactions and the consensus was that the fall would be no more than five per cent. No one, for a moment, envisaged that the elaborately worked-out presentation would slice a fifth off the value of the company. "What a day," said one BSkyB executive, as he watched share options settle below the waterline, as if they had been torpedoed.

Murdoch has made it clear to his executive team that he believes there was little to justify the "outsize" City reaction to what was, after all, only a marginal, if poorly defined, "adjustment" to medium-term profit margins. For goodness sake, the company had just announced operating profits for the year, before exceptional items, of £600m and even after the share free-fall, BSkyB would not exactly be teetering on the edge of a financial precipice.

The slide was so steep and the volume of trading so extensive that the BSkyB chief executive has ordered an urgent examination of the share register to see whether the company was hit by hedge-fund cowboys - who deliberately try to drive down a company's share price in order to benefit from bets they have placed.

The truth is, though, that the City scented something of real importance was happening at BSkyB that would affect future growth and with it Murdoch's prospects as heir-apparent to his father's crown.

The immediate reaction was, of course, exaggerated. But what became absolutely clear on that torrid Wednesday morning was that the company needed to take urgent, and expensive, action to prevent a continuing slowdown in subscriber numbers.

With admirable thoroughness and bluntness, BSkyB has produced a coloured chart to illustrate the matter. In the three months to the end of June the company added 81,000 new subscribers, compared with 133,000 in the same period last year. In the first three months of the new Murdoch reign, the gap was even more dramatic - 66,000 compared with 150,000. To have one bad quarter is forgivable. Two is a trend. It is now also clear that, unusually for BSkyB, there appears to be no Plan B.

"The company was heading towards the buffers and the current management have been left with the job of fixing it," commented one close observer.

All the signs are that the former chief executive, Tony Ball, and his sidekick, the former finance director, Martin Stewart, were mesmerised by the perfectly respectable twin targets they had set themselves. These specified that by the end of next year BSkyB would have eight million satellite subscribers and that they would be paying the company an average of £400 a year. With the average annual subscription already at £380 and two Christmas selling seasons to come before the 2005 deadline runs out, the targets will be met and BSkyB will continue to amass profits. But where was the strategy for the years after that?

Murdoch will not comment on the performance of his predecessors other than to insist, as last week, that "the business evolves, the marketplace evolves." But few markets evolve all that much between November, when Murdoch Jr was appointed chief executive amid cries of nepotism, and January, when he started creating the outlines of the new policy.

As he embarks on his greatest challenge, it would be easy to underestimate the quietly spoken James Murdoch. He is still largely an unknown quantity, in public at least. His media management experience was, after all, mostly gained in far away Hong Kong at Star TV. Even though it is a truism that he would not be where he now is without his genes, he is engaging, intelligent and inclusive, and there is obviously no place for the ranting, raving, furniture-kicking school of management at today's BSkyB. His programme chief, Dawn Airey, a woman not noted for sycophancy, says of James Murdoch, "He is a 21st-century leader. He is collaborative and he is exceptionally bright."

The Murdoch steel is, however, not far under the surface and he reveals nothing that he does not want to reveal, as one journalist found out when he pressed the BSkyB chief executive on how badly profit margins would be hit. "Fishing for short-term targets isn't going to get you anywhere," said Murdoch firmly, and that really was the end of the conversation.

The new targets are ambitious and very comprehensive, ranging from increased spending on everything from programmes and studios to technology, marketing and the creation of a "prospects" database to profile the 14 million "non-subscribing" households in the UK. "It sounds creepy, but it really isn't," insists Murdoch. "It's pretty straightforward. It's about understanding attitudinal values." He has now firmly nailed his colours to the mast: 10 million subscribers by 2010.

Mathew Horsman, a director of the specialist consultants Mediatique, has 8.5 million subscribers in his financial model for the end of the decade. To get to the 10 million, Horsman thought initially that BSkyB would have to rely on "free" Sky viewers - those who pay a one-off £150 fee for the equipment and installation but no subscription going forward. The 10 million target is, however, for paying subscribers. Any "freesat" viewers are on top, although considerable efforts will clearly be made to persuade them that buying a sports or movie package would be a good idea. Other targets include 25 per cent of subscribers using of the Sky+ personal video recorder by the end of the decade (the present number is only 397,000) and 30 per cent paying for a second receiver box (the current total of "multiroom" subscribers is a mere 290,000).

The real task is to relaunch Sky or, as Murdoch euphemistically puts it, "reintroduce the brand to the country as a whole." It will take a considerable marketing effort to move Sky away from, as Murdoch describes it, the "cheap, cheap, cheap" heritage and instead emphasise its value.

By letting all his aims, ambitions and challenges hang out so openly, James Murdoch is massively exposing himself if things go wrong. He personally decided on a policy of complete frankness, rather than trying to condition the market by dripping the new policy out piecemeal through the usual mechanism of selective leaks and confidential briefings.

Murdoch may have established himself in the role of BSkyB chief executive as if to the manor born - which, of course, he was. But he will now have to deliver. Should he fail, family sentiment is unlikely to sway the chairman of BSkyB: Rupert Murdoch.

James has a chart especially aimed at sceptics in the press and the City. It shows that, in the past, BSkyB has consistently beaten, and by a wide margin, outside forecasts of subscriber numbers. The BSkyB chief executive, who believes that eventually 80 per cent of the UK population will sign up for pay television, has told friends he will not be wrong about the new targets. "We are going to do it," he told Sky executives.

The hedge fund artists would be unwise to bet too heavily against James Murdoch making it happen.