View from City Road: Competition may tarnish the BSkyB magic

Not since the Good Fairy did her bit with the pumpkin have perceptions changed so swiftly. Three years ago investors in BSkyB, newly merged from the troubled Sky and the financially crippled BSB, could barely have given their shares away. Today News Corporation, Pearson, Chargeurs and Granada are laughing all the way to the bank.

The company is beginning to generate cash at an impressive rate, formerly fainthearted bankers are falling over themselves to lend it money and once sceptical brokers keep doubling their estimates of its value - the consensus has soared to pounds 4.5bn.

The magic formula that has secured this transformation has been a combination of falling interest rates and BSkyB's conversion of its audience into paying subscribers.

BSkyB is now widely seen as a cash cow capable of multiplying its operating profits fivefold by the end of the decade, repaying the remainder of its pounds 1.1bn shareholder debt and generating free cash flow in excess of pounds 800m a year by the end of the millenium.

Yet its shareholders would be well advised to remember what happened when the clock struck twelve. All the evidence points to movies and sport being the dominant reason why customers subscribe to BSkyB. Films and sport account for half and 30 per cent of its programming costs respectively. The widespread assumption is that those costs will be contained, but is that really likely?

BSkyB faces growing competition for scarce programming resources. Long before the end of the decade cable - which could be available to three-quarters of the population by 1997 - will be a significant competitor. Witness the way a group of cable companies recently paid pounds 7.5m for the rights to the 1996 cricket World Cup. In 1992 the same rights cost Sky pounds 1m.

And then there is the imminent arrival of telecom competition in the shape of BT's video-on- demand plans. BSkyB's existing broadcasting rights mean its films usually lag behind video rental releases by a year or more. Video on demand could be a serious competitor both for BSkyB's audience and for rights when BSkyB, as it must to compete, introduces pay-per- view.

The sensible thing for BSkyB's shareholders would be to cash in while the City is dazzled by the rewards, rather than the risks, of the media revolution. Up like a rocket, down like a stick, as they say.

Yet only Granada, with 13.5 per cent, is keen to float the company. News Corporation, as ever, is following its own agenda. Ownership of BSkyB suits its wider purposes, and it is in the happy position of having control. Chargeurs' motives and aspirations are a mystery. And Pearson, true to form, seems keen to increase its stake rather than capitalise on its value.

Hence, some time in the next year or so, Chargeurs and Pearson are likely to buy out Granada which, if BSkyB is indeed worth pounds 4.5bn, would see Granada pick up around pounds 600m - or roughly the cost of buying LWT. If the cost of programming does leap, the apparently high price it paid for LWT, with all its programming expertise, could yet look inspired.