Sky proves too tall an order for Virgin

James Murdoch, chief executive of BSkyB, may be mildly upset that Ofcom has rebuffed his attempts to build a pay-per-view service on the Freeview platform. And he would be less than human if he did not fret a little over what trade secretary Alistair Darling intends to do with the hot potato “public interest” inquiry – in the guise of BSkyB’s preemptive 17.9% stake in ITV – that has just been lobbed back into his lap.

But by and large events are lining up very positively for BSkyB and its triple-play strategy of Surf, Speak, See. Nothing, for example, will have given Murdoch jnr greater pleasure than the spectacle of Virgin Media, the much-touted new kid on the media block, tearing itself to shreds in a splat-fest of self-recrimination.

The surprise has to be that investors are so surprised at Virgin Media’s lacklustre performance, in the light of the first quarter figures just published. True, they don’t make very inspiring reading: a net loss of nearly 47,000 customers, which is even worse than the 37,000 lost in the final quarter of last year before the merger had been fully effected. But is this any reason for the panic that has spooked Virgin Media’s two top shareholders, Virgin Group (11%) and Franklin Mutual Advisers (9% ), into demanding a full review of the company’s strategy and corporate governance?

Knee-jerk genuflection before the quarterly reporting seasons is no way to solve the kind of problems confronting Virgin Media. It seems that too much was expected of a £25m marketing campaign fronted by Uma Thurman; in the deluded belief, perhaps, that the Branson magic could be applied almost overnight to what was already a structurally flawed organisation, stressed even further by the weight of the Virgin Mobile merger.

The unenviable customer service reputation of NTHell’s organisational structure was never going to be solved by a quick spray of advertising paint. But the key point about Virgin Media is that it has not been able to deliver on very much of the four-play content deal so seductively promised by Uma. The cable telephone service is uncompetitively priced, so it’s no surprise to find it the biggest single loser of subscribers. Ominously for the Virgin component, mobile customers are also falling off. Broadband has made progress (97,600 in Q1 up from 78,100), but Virgin Media will have to work very much harder to fend off Carphone Warehouse or, for that matter, seriously dent Murdoch’s aim of becoming the biggest UK broadband provider after BT.

Against the odds, however, the TV operation – despite the very public fracas between Branson and Murdoch and the subsequent withdrawal of high-traction Sky programmes – managed to gain customers.

The very real worry, here, is that this last trend will not last. Why should it? Where is the extra, quality content going to come from? Murdoch has no compelling reason to settle soon, especially now that the carriage issue has gone to court. And he is also gatekeeper at ITV which, as the abortive Branson bid showed, is regarded in Virgin Media circles as an invaluable source of future content. Even if Murdoch is subsequently prised out of ITV by political force majeure (and it’s a big if, given the Labour Party’s electoral vulnerability), it won’t be in a hurry. Meantime, he will have made use of a useful attritional tactic in damaging a major UK competitor.

Virgin Media shareholders had better get used to it: this is going to be a long haul. Not even Ruby Wax can fix it.

Stuart Smith, Editor

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