Murdoch’s move opens the door for BSkyB’s Darroch

stuart smith

With the Murdochs’ takeover of BSkyB looking like a formality, the big question is who will run the new acquisition?

When News Corporation announced last week that James, son of Rupert Murdoch, was to take up new, enlarged responsibilities running the global media organisation from the US, much attention rightly fastened on the dynastic succession issue.

This much is certain. The promotion signalled to the outside world that James was not just the intended successor to Rupert, but the heir apparent, as opposed to an heir presumptive who might yet be toppled by another sibling. The inference is that it can only be a short time before James now becomes chief executive of NewsCorp.

Less attention has been focused on the distancing effect of the appointment. Although James retains his current titles of chief executive of NewsCorp in Europe and Asia (of which the most important component is the newspaper operation, News International) and non-executive chairman of pay-TV company BSkyB, working in New York will mean he is physically removed from the operations where he has had most visible personal impact. In particular the pay TV platforms BSkyB, Sky Italia, the risky investment in Sky Deutschland and Star TV in India.

Some say that moving around the world like this is an inevitable byproduct of being groomed for power. The more cynical (but not necessarily inaccurate) have also noted that James’ promotion removes him from the menacing maelstrom of the News of the World phone-tapping scandal. While Murdoch Jr can scarcely be blamed for the misjudgements that led to the scandal in the first place, his subsequent handling of events has not covered his reputation with glory. So, out of sight, out of mind.

Sky is now one of Britain’s biggest and most successful brands. Its annual marketing budget dwarfs ITV’s programme budget, at £1.2bn a year, and under the successive leadership of James Murdoch and Darroch it has breached the ambitious target of 10 million customers when many believed it would not. After all, there are only 26 million households in the UK

Still less remarked so far is what a career opportunity these developments offer to Jeremy Darroch, chief executive of BSkyB, should he wish to cash in on it.

While media and culture secretary Jeremy Hunt has yet to officially sanction the Murdochs’ bid for the 61% of BSkyB they do not already own, few doubt that he will do so because the substantive issue blocking any deal – the integrity and financial independence of Sky News – has been settled. Full ownership is now a matter of price, barring minor legal wrangles. Although independent shareholders have been holding out for eye-watering amounts (like 950p a share, when the Murdochs have not gone a penny above indicating 700p so far), it only seems a matter of time before common sense prevails. After all, the Murdochs are the only bidders in the ring. In fact, they are the only bidders able to enter the ring.

All this leaves Darroch in a curious position. Whatever his private intentions post-merger, he is not able to signal them in public. His job as CEO will be to extract maximum value for all shareholders when the bid goes ahead; he cannot afford to be seen as a partisan of the Murdochs.

As might be expected, he was thoughtfully impartial when put on the spot at last month’s Financial Times Digital Media Conference. He could not confirm that he would stay on at BSkyB under full Murdoch ownership, but he did discreetly endorse the deal brokered over Sky News, claiming it would provide the channel with the “long-term security” it currently lacks.

In fact, there are compelling reasons for supposing he might wish to stay should the bid go through.

Sky is now one of Britain’s biggest and most successful brands. Its annual marketing budget, just to give the flavour, dwarfs ITV’s programme budget, at £1.2bn a year. Under the successive leadership of James Murdoch and Darroch – who learned his trade at Procter & Gamble and Dixons – it has breached the ambitious target of 10 million customers when many believed it would not (there are only 26 million households in the UK).

Nevertheless, it is significant that having reached the 10 million mark, Darroch has not set an official new target. Does that matter? Not immediately. Sky’s supreme skill lies in raising revenue per customer through innovation-led audience segmentation. Good examples are its high-definition, Sky 3D, Sky Atlantic and mobile Sky Anywhere services. There is no sign of the pace of that innovation abating.

But with volume growth moving towards UK saturation, there must be questions in the boardroom about how much extra the individual customer will bear.

Imagine for a moment that the merger has gone through. Sky (no longer BSkyB) is now a significant contributor to the whole of NewsCorp’s global cashflow – perhaps 30% of it – and its profits. Just for starters, it would bolster Murdoch’s other satellite interests when it came to bidding for film and sports rights (not to mention slashing their overheads). In the UK context of News International, meanwhile, it is wholly dominant – the dynamic business driving NI growth.

Who might be your ideal candidate to run all of this? James has got his hands full elsewhere and Rebekah Brooks is a newspaper doyenne with no experience of running TV operations, as far as I know. There may be other managerial options but the blindingly obvious thing to do would be to persuade Darroch to stay on in a new, enhanced role. That role would as likely as not embrace UK newspaper operations, which might expect to benefit from Sky’s well-honed subscriber revenue-generating skills.

As I say, it’s a scenario. The merger might fall through or Darroch might prefer to take his money and run. But it’s an interesting one all the same.

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