Michael Harrison's Outlook: The Sky falls in on Murdoch expansion plan

A 19 per cent fall in the share price was not quite the reception James Murdoch hoped to get for his grand programme of expansion at BSkyB. He obviously hadn't bargained for all those hedge funds that have piled into the stock of late, some courtesy of Sky's house broker Goldmans, in expectation that the new chief executive would announce a big pay-day.

A 19 per cent fall in the share price was not quite the reception James Murdoch hoped to get for his grand programme of expansion at BSkyB. He obviously hadn't bargained for all those hedge funds that have piled into the stock of late, some courtesy of Sky's house broker Goldmans, in expectation that the new chief executive would announce a big pay-day.

Sky's shareholders have lived on a jam-tomorrow diet for the last three years as its digital platform was bedded down. Now they have been told to survive on more of the same for another two as Sky invests massively in further growth. True, there will be a £500m share buy-back in the meantime, but that will be spread too thinly to make much impact.

Students of Murdoch père should not have been too surprised at the business operandi adopted by his son. Profits are nice but customers are better and Sky wants as many of them as it can get in order to dominate pay-TV as the Murdoch empire likes to dominate every market it enters.

At present 43 per cent of UK households are signed up to Sky or cable. What James is positioning himself for is the day when pay-TV is beamed into eight in ten homes in the land. In the Murdoch vision, no household is beyond reach. There are only existing Sky subscribers and future Sky subscribers.

At present, 7.4 million homes take Sky. The target is to increase that to 10 million by 2010, with multiple set-top boxes in one in three households and a quarter of subscribers signed up to the more expensive Sky+, the Murdoch answer to video-on-demand from the cable operators.

To achieve that, James will have to increase the marketing spend by a half and invest a further £450m in things like call centres and computer systems to process all those additional subscribers and a bigger headquarters building in west London to accommodate the extra staff that Sky will need. It is not quite as sexy as developing an entirely new platform such as digital and it is a tacit admission that his predecessor, Tony Ball, under-invested in the basic infrastructure of the business in the pursuit of profit and ever-bigger bonuses. Luckily, the Murdochs already control 35 per cent of the business, so James does not need to live off just his pay cheque.

The cost of all this expansion will take its toll on margins, which will experience some "short-term compression" in 2006 - that's telly talk for a profits warning. Scant surprise that £2bn of Sky's stock market value went down the tube.

The disappointing growth in subscriber numbers for the fourth quarter was not the most auspicious background against which to announce plans to increase customers by a third. Critical to the strategy will be the launch this October of Sky's answer to Freeview. There is an obvious danger that Sky's new free-to-air digital service will merely end up cannibalising its pay-TV market. But it is gambling on subscribers to the free service converting to paid-for channels once the set-top boxes are inside their homes. If it pays off, it will have been a masterstroke.

Whether it does rather depends on Sky being correct in its belief that no one is beyond the reach of pay-TV, except perhaps the very poorest. There will be those dish-snobs who will always insist on their diet of soft-porn and reality TV being discreetly piped into the living room by cable. But Sky reckons everyone else is fair game.

In order to correct consumer misconceptions that Sky is somehow poor value for money, or the preserve of only sports freaks and movie addicts, Mr Murdoch is about to embark on the most fearsome piece of market research ever undertaken. Every non-Sky household in the land will be analysed to see what makes them tick and how they might be converted to the cause through targeted marketing campaigns. Households which take The Independent will be top of list because only 21 per cent of them apparently subscribe to Sky - the lowest percentage of any national newspaper. Dear reader, you have been warned.

Pensions challenge

The financial Services Authority and the Department for Work and Pensions are in the firing line again. This time for saying that defined-benefit occupational pension schemes were "guaranteed".

Try telling that to the 65,000 people who have already lost their pensions after their employers became insolvent, leaving the pension fund short of money. Or the 40,000 UK pensioners of Turner & Newall, who stand to lose most of their pensions if the company is wound up, as expected, by its US parent.

The new Pension Protection Fund will bail out pensioners whose companies go bust in future and the Government has gone part way to help those whose pensions have already gone up in smoke with an offer of £400m in compensation. But is holding out against any compensation for the T&N pensioners.

The argument seems to turn on whether consumer booklets issued by the FSA and DWP before 2002 highlighting the risk of transferring from occupational pensions into defined contribution personal pensions constituted "advice" or merely "information".

The FSA has already sent the government pensions adviser Ros Altmann away with a flea in her ear, saying the booklets were never intended as "advice" and, in any event, "guaranteed" did not mean guaranteed in any eventuality.

But Ms Altmann insists there may indeed be a case for government compensation, on the grounds that consumers were misled into remaining in company pension schemes thinking they were safe.

But what if these booklets had highlighted instead the danger of an occupational pension being worth nothing in the event that the employer went bust?

Would those who then panicked and transferred out of a perfectly solvent occupational pension into a private money-purchase scheme and subsequently suffered heavy losses in the stock market melt-down also now have a case for compensation? Just a thought.

Aviva rip-off

I was a long-standing customer of Norwich Union until earlier this year when the annual renewal notices arrived, inviting me to pay 100 per cent more for my car insurance and 40 per cent more to protect my home, even though I had not made a claim on the motor policy and only a small one for household contents.

A quick trawl of the internet identified a rival insurer who was able to save me more than £1,000 in premiums. Judging by the £1.1bn profit announced yesterday by Norwich Union's parent company Aviva, other customers are not so price-sensitive.

Profits from general insurance were up by a stonking 60 per cent to £613m and the underwriting business itself made money with premium income exceeding the amount paid in claims.

Aviva does not say what the customer churn was but, if my experience is any guide, then it ought to have been huge. When will companies like Norwich Union learn that ripping off existing customers in order to win new business with subsidised rates is a zero-sum game?

m.harrison@independent.co.uk