Quotes of the Day

Let's say you own the largest share of a company that dominates British pay television; your subscription base has nearly doubled over the past four years; and you've just announced stellar earnings. How do you treat your chief executive: a) Extend his contract or b) show him the door? If you're Rupert Murdoch, the answer just might be B.

Murdoch seemed at his restless best last week as headlines announced that BSkyB's Tony Ball, who has led the company since 1999, may be on his way out. On his way in, according to unnamed sources in all the papers, is Murdoch's 30-year-old son James. For many public companies, such a move would be considered drastic for its blatant nepotism. But this tasted like vintage Murdoch. For decades the global mogul has made a habit of replacing successful bosses within his vast $17.5 billion News Corp. empire (which owns 35.4% of BSkyB).

But even if it's in character, Ball's removal, if true, raises serious questions. After all, BSkyB wasn't falling, so why mess with a winning formula? Or is Ball leaving of his own accord? Does he have a better offer? Is James Murdoch best qualified to run one of Europe's largest public media companies? And does the potential shake-up mean that BSkyB's best days are behind it?

One thing is certain: 47-year-old Ball, who earned north of $3 million in Sky's fiscal year ended June 30, did an enviable job. When Ball took over, Sky was in an uncertain state, facing genuine competition from a now defunct digital-TV firm OnDigital, and from cable firms ntl and Telewest. Under his tenure, the company embarked on a risky $3 billion conversion to all-digital technology, to offer more channels and support interactive services. The plan seems to have paid off: in August BSkyB reported a pretax profit of $418 million on sales of $5.13 billion in the year ended June 30.

Financial success, however, doesn't necessarily mean consensus, and analysts have been probing for an explanation for Ball's rumored departure. One theory is that Ball wanted to pay a dividend on BSkyB stock, rewarding shareholders who saw the company through its long and costly digital conversion, and that Murdoch nixed it; he would rather use the cash to fund his expensive acquisition habit. "After enormous investment, BSkyB has become a cash machine, and different shareholders have different views of how the cash should be used," says Robert Talbut, chief investment officer of Isis, a London fund-management group with a position in BSkyB. "Some people may believe that if James Murdoch were to move in, [the cash] would be less likely to be returned to shareholders."

Another explanation holds that Ball was getting too big for his britches — and Murdoch didn't like it. Murdoch's lieutenants have a history of vanishing when they become too prominent. In 1994 Sunday Times editor Andrew Neil felt the sting, and in 2001 editor Xana Antunes left the New York Post amid a 10% circulation rise. Ball has certainly developed an appetite for the spotlight. In mid-August he was vocal about supporting a dividend payout, and later in the month, at a television festival in Edinburgh, Ball assailed the bbc for wasting its public funding.

It may well be that Ball, whose contract expires in May, wants out for his own reasons. Possible noncompetition clauses permitting, Ball would be a prime candidate to run the soon-to-be-merged Telewest and ntl, the two cable-TV companies that have suffered the most from BSkyB's success. Telecom-giant BT might also take an interest in Ball as it moves into broadcasting through mobile-phone and broadband technologies.

What's curious about the bouncing Ball story is that it appeared almost out of thin air. Several British papers — including Murdoch's own Times — reported the ouster last week as nearly a fait accompli, even though News Corp. and BSkyB officials were saying nothing for the record. Regardless of where the information came from, Murdoch's organization got a taste of investors' reaction to the idea of putting James in charge. Judging from last week, there's little cause for alarm. On Tuesday, the day the story broke, BSkyB stock fell only 2%, to $10, though the overall market rose that day. By the end of the week BSkyB's share price was back exactly where it closed on Monday before the news hit.

Yet some shareholders are certainly scratching their heads. "Investors are concerned about James' relative lack of experience and with the family connection," says David Cumming, head of U.K. Equities for Edinburgh-based Standard Life Investments, a significant shareholder in BSkyB. Part of the concern is that bringing in Murdoch blood could threaten BSkyB's relative independence within News Corp. Under James, decisions about stock dividends, accounting procedures, acquisitions and expansion could be driven from New York City and Los Angeles, the two cities that the Australian-born Murdoch Sr. calls home these days, instead of from London, where the local market expertise resides. Installing James could even signal an attempt by News to buy a controlling share in BSkyB, or to place more News directors on the 15-person BSkyB board, which already boasts chairman Rupert, son James and three other News Corp. executives.

A starker question is whether James, the youngest of Murdoch's four adult children, is really the right man for the job. He was a reluctant entrant into the family empire, having started his own independent hip-hop label after dropping out of Harvard. He had a hand in one of Murdoch's early Internet ventures, Delphi, which was a costly disaster. He then took over the entire new-media sector for News Corp., which lost hundreds of millions of dollars and never created a leading web-site in any category. Since then, however, James has scored higher marks for his performance as head of STAR TV, the Hong Kong-based pan-Asian broadcaster that turned profitable last year.

Whoever takes over at BSkyB is going to face a difficult future. The company is hitting a subscriber ceiling. Its 6.8 million customers represent almost one-third of all households in the U.K.; a good portion of the rest resent the idea of pinning a satellite dish to their walls. In many areas historic-preservation laws bar the devices anyway. Add to that a nascent bbc-sponsored "free satellite" movement — in July the bbc made its satellite transmission free to anyone with a satellite receiver — plus a feisty new multichannel TV operation called Freeview (which attracted 1.6 million customers in less than a year), and BSkyB could be looking at much more modest growth.

As the subscriber pool diminishes, BSkyB is under increasing pressure to extract more revenue from each user. Yet the percentage of viewers signing up for the pricey $61-per-month premium service is in slow decline relative to those committing to the $19 basic service. BSkyB hopes to offset this in part by pushing its high end Sky+ service, in which it sells a TiVo-like "personal video recorder" for $322 to subscribers. But sales of Sky+ have crawled along.

There are other threats, too. BSkyB lacks the technological goods to deliver what soothsayers believe to be the next big thing in television: video-on-demand (VOD), a service that allows viewers to select from an immense archive of films and programs through their television remote control. But vod requires land-based technology — like cable TV lines or high-speed telephone wires — and BSkyB, a satellite service, has neither. To offset this threat, BSkyB could conceivably team up with a telecom company to run broadband lines into its set-top boxes.

And regulators are paying close attention to the powerhouse these days. Among their concerns: that BSkyB's new $1.65 billion deal for exclusive live rights to major-league soccer in the U.K. could be unfair. Clearly, BSkyB has "a number of long-term issues they have to address,'' says media analyst Mathew Horsman, head of London consultancy Mediatique.

So whether Ball quits or is forced out, his expected exit may be exquisitely timed. From here on out, BSkyB's future — good or ill — looks like a family affair.

• MARK HALPER
• Is Rupert Murdoch moving out BSkyB chief Tony Ball to install a son?