For a company that won domination of pay-TV by taking big, bold gambles, Sky's interest in a little string of cinemas seems like a sideshow - but the market could be in for a surprise.
For a company that won domination of pay-TV by taking big, bold gambles, Sky's interest in a little string of cinemas seems like a sideshow - but the market could be in for a surprise.

Last week's Broadcaststory revealing that Sky was planning to bid for six UGC cinemas led to much head-scratching in the industry.

There was puzzlement over why Sky would make such a move. Its motives remain unclear and the most likely scenario is that the cinemas would be used as marketing and media vehicles for Sky promotions as it bids to sign up 10 million subscribers by 2010.

But one thing seems certain: the UGC deal - estimated to be worth around£30m - isn't big enough to register as a significant shift in Sky's strategic direction. It's an interesting deal, but by Sky's standards it isn't a major one.

However, it does raise the question of what the next serious move will be from a company that has come to dominate pay-TV through a series of gambles.

Buying up exclusive Premiership rights, moving millions of its customers to Sky Digital and giving away free set-top boxes to kill off competition from ITV Digital - these were all big and bold masterstrokes of the sort that built the Sky empire.

So should we expect a similarly ambitious move from Sky's still relatively new chief executive James Murdoch? Unveiling the company's full-year results a fortnight ago, Murdoch's message was that a 32% increase in profits and improving margins meant that its current strategy was delivering the goods. It is introducing a new wireless audio receiver set, Sky Gnome, while high-definition television will follow soon after. Interactive poker is also on its way once the UK gambling regulations are relaxed, which seems likely to happen late next year.

But there has been heated speculation that a giveaway of Sky+ boxes could be Murdoch's next big move. Such a tactic would certainly help drive subscription towards the 10 million target through a mixture of faster gross additions and reduced churn. Average revenue per user (Arpu) would rise, given the propensity for Sky+ subscribers to take multiroom. However, according to analysts, such a tactic would cost around£1bn over three years. And although Murdoch will not rule out the possibility in the long term, he sees no need to implement such a costly initiative when sales of Sky+ boxes are strong.

"We have no plans right now to fully subsidise the Sky+ box," Murdoch said as the results were announced. "We're well on our way to our target by the end of the decade of having 25% or more of our base as Sky+ households."

So if a Sky+ giveaway is not as imminent as some have suggested, what are its other options for growing the business?

One, of course, is acquisition. Flextech, the content arm of Telewest which is up for sale, is the obvious candidate. Murdoch has made his interest in the business clear, saying, "Flextech is clearly in our core geographic market and business segment and in that context we might be interested in taking a look at it."

Acquiring Flextech, valued at between£700m and£1.1bn, would give Sky assets including the Bravo, Challenge, FTN, Living TV and Trouble channels, as well as 50% of UKTV (if the BBC didn't exercise its pre-emption right to buy) and Sit-Up TV, the retail broadcaster that has contributed£24m to Telewest's total revenues since 12 May, when the cable company bought the remaining 50.3% stake.

Flextech's real value, however, is as a strategic asset. As one analyst points out, "both ITV and RTL are likely to want Flextech to boost their digital presence and potentially take some of the channels free to air. Both of them have an incentive to ensure that Freeview rather than Sky is the majority platform in the future because the viewing share is a lot healthier in Freeview homes than Sky homes and advertising is key to them. It's in Sky's interests to stop them doing that." And as long as there are no regulatory issues, the City seems to think that Flextech would be a good buy.

Other acquisition options in TV land seem thin on the ground for Sky. Buying Five is unlikely now that RTL has full ownership and "because of the huge valuation RTL put on it which is roughly£700m" says former Five boss David Elstein.

Elstein notes that while Sky "could also buy 20% of ITV, I'm not quite sure what the advantage would be. They tend not to be minority shareholders of businesses and have had the option for a long time and haven't exercised it."

Radio also seems a remote prospect. "Sky could swallow GCap in the blink of an eye and wouldn't even notice it," says one analyst, and it was not in the running for Emap's recent purchase of Scottish Radio Holdings.

An alternative for Murdoch is to look overseas - but Sky has had its fingers burnt in the past, writing off over£900m-worth of investment in Germany's Kirch Pay TV.

So that leaves the option of investing in areas outside the core business. Sky could, in theory, add to the scale of the UGC deal by buying the 11 cinemas that the private equity group Terra Firma has to offload due to competition concerns after buying UCI cinemas. For Sky this could be a way of extending its brand. Although it is unlikely the company would embark on the sort of endless brand extension that Richard Branson and the Virgin Group did in the 1990s, Sky might see a real advantage in becoming an entertainment brand that exists beyond the TV screen.

Such speculation, however, is enough to strike fear into the hearts of analysts and investors who say the fashion is no longer to encourage risk-taking and rapid expansion. The pressure from the City is to give cash back to investors. Indeed, Sky has announced plans for a further buyback of up to 5% of its issued share capital over the next 12 months. If completed, the buyback will see a total of 10% of the company returned in a two-year period.

"As the returns in the stock market have fallen, we have become more interested in dividends and share buybacks because it is a guaranteed way of getting some performance on your funds," says one analyst. "People have become more risk averse and less trusting of so called growth strategies, and are happy Sky is focusing on the core UK digital TV market. We wouldn't really like to see acquisitions unless it's relevant for improving the valuation of the core business."

The pressure is on for fewer risks and more rewards for investors. But with a Murdoch running the show, it's hard to believe Sky won't have a few surprises up its sleeve yet.