BSkyB shares crash land as Murdoch warns on profits

£2bn wiped off shares as subscriber growth falls short and huge investment planned

One-fifth was wiped off the value of BSkyB yesterday after the pay-television company warned that profits would be hit as it invested for future subscriber growth.

One-fifth was wiped off the value of BSkyB yesterday after the pay-television company warned that profits would be hit as it invested for future subscriber growth.

James Murdoch, the chief executive, saw his long-term strategy presentation overshadowed by City concerns about short-term profitability. Sky shares closed down 19 per cent at 488p, their lowest close since autumn 2002. The fall took £2.2bn off the value of the company, even though it pledged to return "surplus capital" to shareholders. The market was also disappointed by the company'ssubscriber growth figures. Analysts said this made it appear as if Sky had to invest just to fire up its present subscriber numbers, to hit the target of 8 million homes by the end of next year, rather than spending to meet long-term goals.

Sky said it had added a net 81,000 subscribers in the fourth quarter of its financial year, to take its total to 7.4 million. After the company's aggressive marketing campaign during the fourth quarter period, many in the City had expected it to add more than 100,000 homes. Mark Beilby, at JP Morgan, said: "There is a feeling out there that momentum is ebbing away, which I don't think is true."

Mr Murdoch said the company must invest now so that it does not come "gasping" over the line in meeting the 8 million target and then see its subscriber base stall or fall away. That meant that Sky had to find ways to bring on board the 14 million households that have not taken pay-television in this country. He set a new subscriber target of 10 million homes by 2010.

The company will ramp up its marketing expenditure and invest £450m over the next four years to build an infrastructure to support a higher customer base. That includes spending £50m on its customer relationship management systems and £300m on upgrading its west London base. Sky will also go after segments of the population it has previously neglected in favour of premium customers. It will also push its top-end Sky+ box and persuade existing subscribers to have Sky in more than one room.

Mr Murdoch said increased expenditure meant Sky would see "margin compression" in the current financial year, running to June 2005, and the following year. The company abandoned its aim of getting profit margins to 30 per cent in 2007. While most analysts agreed the new strategy was "sensible", they cut profit forecasts for 2005 by 12 to 20 per cent and for 2006 by up to 25 per cent. The company would still grow profits in those years but not by as much as expected.

Mr Murdoch said pay-television penetration would reach 80 per cent over the next 15 years ­ which would mean 21 million of the country's 25 million homes. At that point, subscription levels would peak or reach "equilibrium". He said: "We've only scratched the surface ... This is still a story of a business that's got its best years ahead." Many in the City had hoped Sky would cash in on past investments, including the £2bn spent on digital television, which had resulted in three years of losses, until the group finally returned to profit last year. Instead, analysts said, the company provided another "jam-tomorrow story".

Sky's full-year results, to 30 June 2004, saw revenues increase 15 per cent to £3.7bn, while underlying operating profit climbed 65 per cent to £600m.

Last Friday, Goldman Sachs, one of Sky's financial advisers, placed £170m worth of shares in the company at 599p. Market sources said that those who had taken the shares were "feeling pretty sore" yesterday.

THE GROWTH PLAN

* 10 million Sky subscribers by 2010

* Quarter of subscribers signed up for Sky+

* 30 per cent of subscribers with Sky in more than one room

* £500m share buy-back

* Invest £450m on the infrastructure

* £75m-a-year advertising campaign

* Eventual pay-TV penetration of 80 per cent