Television: He's a couple of billion down, but he's not out

At 31, James Murdoch is the youngest ever chief executive of a FTSE 100 company. Every day he makes a telephone call to BSkyB's chairman, his father Rupert. James has not revealed what he said to Rupert last Wednesday, after £2bn was wiped off the stock-market value of BSkyB, but it is unlikely to have been, "You picked the wrong guy, Pops."

Critics of the hereditary principle might argue that is what he should have said. Among the few who really know Rupert Murdoch there is a view that his treatment of his children reveals a rare streak of sentimentality. James's big brother, Lachlan, oversees The New York Post and Fox Television. Their sister, Elisabeth, was director of programming at BSkyB until she left to set up her own production company in May 2000.

How, sneer the critics, can a true believer in market capitalism justify appointing senior executives according to their DNA? As the former Sunday Times editor, Andrew Neil, once said of his former boss: "In the end, picking the people to run a company on the basis of their genetic make-up is not the way to survive."

Rupert Murdoch told last year's AGM of his parent company, News Corporation, that he has postponed his retirement "for ever". But he also said James and Lachlan were "showing great promise". Analysts believe he has set the pair off on a race to determine who will succeed him. Until last week, the consensus was that James was well ahead.

Then BSkyB, which needs to sign up 100,000 new subscribers every quarter if it is to hit its target of eight million viewers by the end of 2005, revealed that it gained only 81,000 subscriptions between April and June. That raised market fears that the long-term strategy of boosting subscribers from the current 7.4 million to 10 million in 2010 may not be achievable.

BSkyB also revealed an impressive 75 per cent increase in operating profits, but the pressure on James Murdoch is intense. Quarterly subscriber growth has tumbled from its peak of 244,000. James must make Sky attractive to 14 million households that have consistently rejected it. He must do so against the rapid spread of Freeview, the free-to-air digital service that has attracted four million users since launch in 2002.

But, according to media analysts, this is where James's critics underestimate him. Sky was always going to hit a subscription level at which growth would slow. There are only a finite number of people willing to pay subscriptions of £30 or £40 a month for access to football and films. Future profitability will depend on selling cheaper packages. Before the analogue television signal is switched off in 2012, BSkyB must attract viewers who want more choice than Freeview offers but not the full range offered in existing Sky packages.

The evidence is that James anticipated the trend. Last Wednesday he called it "thinking about new pockets of demand". BSkyB will target new subscribers with low-cost packages and, simultaneously, seek to maximise returns from existing subscribers via premium services, including the Sky Plus box that allows users to pause and rewind live programmes. His objective is to sell Sky Plus to one viewer in four.

James was on a steep learning curve from the moment that he and a friend launched Rawkus Entertainment, a hip-hop record label, after he had dropped out of university. The business had to be rescued by his father. But since taming a rebellious streak during which he contributed a cartoon, Albrecht the Hun, to the satirical magazine Lampoon, he has demonstrated real business acumen.

In 1999, he went to Hong Kong to take control of News Corporation's ailing satellite service Star TV. It was losing $100m a year. He outraged human rights activists by the extremes to which he was prepared to go to placate the Chinese government, but profits followed. Now that the British pay-television market that BSkyB has dominated for a decade is becoming more competitive. But it would be foolish to ignore James's capacity to deal with it.

Then what? Well, his father may have been rejuvenated by his third marriage to Wendi Deng but he is not immortal. If there is to be a Murdoch dynasty, then a family member must be ready to take the reins. James's 36-year-old sister, Elisabeth, has made her decision. Friends say that she is more interested in recognition for her own achievements than contributing to her father's empire.

Lachlan, 33, who was once considered his father's natural successor, gives the impression that he acknowledges James's ascendancy. During the controversy over his brother's appointment to BSkyB he drew attention to James's achievements at Star. Market wisdom is that Lachlan can expect to run News Corporation's newspaper titles, including The Sun, The Times and The Sunday Times.

As a student, James's lifestyle infuriated his parents. But he has shown dedication at BSkyB. If Rupert Murdoch did engineer a succession battle between his sons, then James remains the one to watch - and nothing that happened in the markets this week has changed that. One analyst says: "There is no case for believing that Rupert would have done better by going outside the family. Pay television is changing fast and James knows as much about it as anyone. Anyway, are we supposed to pretend that Rupert would not have the final say if the CEO were not called Murdoch?" That would be naive.