Unstoppable Sky machine rolls on as ITV troubles worsen

Tony Ball, BSkyB's chief executive, quipped earlier this year that ITV management were so incompetent that they "couldn't run a bath".

The weekend appeared to provide more evidence of the network's shambolic state as Dawn Airey, the head of Channel 5, who had been publicly courted by ITV to be its new chief executive turned down what should be the most attractive job in commercial TV. To add to this slap in the face, Ms Airey is going to ITV's nemesis, Sky.

Ms Airey's choice of employer speaks volumes about ITV and Sky. While ITV's long-term decline has accelerated sharply this year, Sky's ascendancy has been spectacular and seemingly unstoppable.

Six years ago, David Elstein left BSkyB to join Channel 5 to become its first chief executive. Over the weekend, Ms Airey moved in the opposite direction, from the top job at Channel 5 to Mr Elstein's old position. That, surely, is a sign of the massive progress made at Sky, which is now available in 43 per cent of UK homes. Rupert Murdoch's satellite business has secured the services of the hottest property in British commercial broadcasting.

Over the past year, ITV has had to give up on its £1bn investment in ITV Digital and with it any credible digital strategy. The network has seen its audience ratings plummet, with total adult viewing down 14 per cent in the first half of 2002 while the key 16-34 age group dropped 22 per cent.

Ms Airey will be managing director of Sky networks, as head of all non-sports content, overseeing a budget of between £750m and £800m a year (ITV has a similar programming budget for one channel). But the job doesn't even carry a board seat, so it came as a huge surprise that Sky managed to recruit her.

Nick Bell, an analyst at Bear Stearns, said: "ITV is the big job. If you can turn the ailing ship, you really will be a hero. My guess is that she'd have gone for the ITV job but the sad fact is that the structure of ITV meant that she wouldn't be in a position to turn it around. It's the bickering [ITV] shareholders."

It is thought that Carlton and Granada, the two big ITV companies, were not able to give Ms Airey sufficient assurance that she would have independence to run the network. Like her predecessor, Stuart Prebble, it looked like she would have to spend half her time trying to make sense of the conflicting agendas of two different bosses – Carlton's Michael Green and Granada's Charles Allen. And, when a single ITV is finally created, maybe in the next two years, what would her position have been? It seems that Ms Airey was not provided satisfactory answers on these points.

Analysts were yesterday united in pillorying ITV for having failed to secure the services of a talented TV executive and being left, apparently, with no plan B. It was a one-horse race to fill the post left vacant by Mr Prebble in May. With Ms Airey having opted for other pastures, ITV is left looking ridiculous.

The contrast with the fortunes of Sky could not be greater. With the exception of having to swallow a large write-down on its investment in Kirch, the failed German media group, Sky has been showering the City with good news over the last 12 months.

Now making money, Sky is on course to have 7 million subscribers by the end of next year. It has seen one of its competitors, ITV Digital, go bust while another, NTL, filed for Chapter 11 bankruptcy protection and the third rival, Telewest, is groping its way towards its own financial restructuring. And, in a deft piece of diplomacy, Sky jumped into bed with the BBC to emerge with three channel slots on the free-to-air digital terrestrial platform vacated by ITV Digital.

Now Rupert Murdoch's Sky has pulled off a real coup in recruiting Ms Airey. Tony Ball wasn't even looking for someone new to oversee Sky content until he read, to his surprise, that Ms Airey had been approached by ITV.

Mischievous and highly aggressive, Mr Ball may have poached Ms Airey just to spite ITV. But her appointment is much more significant than that. It signifies Sky's ambitions in overhauling its programming and a plan for a future in which it will have a mass-market terrestrial channel.

One BSkyB source said: "This [Ms Airey's appointment] is about our long-term play in content. Our distribution is very strong through three platforms [satellite, cable and digital terrestrial]. Now we need to make sure we have the right content offering."

Under Ms Airey, the company will create new channels, including Sky-branded music channels and a new general entertainment channel that will sit alongside Sky One. Over the next few years, a number of Sky's content deals with Hollywood studios and others come up for renewal and, with its new programming supremo, the broad-caster will rethink what it needs. For instance, Sky currently has a deal with every major Hollywood studio, but in future one or more of these may be dropped.

Mr Ball said: "Sky has an excellent suite of channels, and is securing wider and wider distribution for them every day. [Ms Airey's] role will be to develop Sky's content offering as our channels become available to everybody."

Sky sources said the company can be expected to commission more much original programming under Ms Airey – the model here appears to be the awarding-winning broadcaster HBO in the US, which has churned out hit after hit.

But as Mr Ball hinted, it is Ms Airey's experience of free-to-air television that is perhaps most compelling for Sky. The BBC has let Sky into the free TV game by giving it slots on the digital terrestrial platform. For the first time, Sky has moved beyond its pay-TV model. This is a new strategy and Ms Airey fits perfectly into it. Conor O'Shea, an analyst at BNP Paribas, said: "There's real ambition at Sky to build a sizeable free-to-air channel. It will then have two markets [free and pay] that don't impinge on each other and perhaps look to dominate both."

Sky isn't currently planning to offer an entertainment channel in any of its three slots on digital terrestrial but that is likely to change. Ms Airey's skills will be put to good use working up just such a channel that Sky will put on to digital terrestrial when it has built a big enough audience. With these routes into British households, Sky will be available to everyone long before the analogue signal is switched off, which is due to happen by 2010.

That future mass market terrestrial channel from Sky is going to provide direct competition to ITV, Channel 4 and Channel 5. Run by someone as capable as Ms Airey, this is bad news for these established terrestrial broadcasters. But the new Sky will also compete with BBC1 for viewers. The BBC may yet regret letting in the ferociously competitive Sky into the free-to-air TV arena.