Will the rise of Sky be rudely interrupted?

Its 6.5 million customers and £11bn valuation make it the City's darling. But Clayton Hirst fears the flowers of romance may be wilting

Be My Valentine?" "Nobody Does It Better". "Interims to Confirm Market Leadership". Judging by the titles of this recent crop of reports about BSkyB from three leading investment banks, you could be forgiven for believing that the City was in love with the satellite TV company. And, to a certain degree, it is.

In a market littered with the casualties of the rout in the media sector, such as NTL and Telewest, BSkyB is relied on to deliver. This explains its sky-high valuation of £11.1bn, which is four-and-a-half times that of ITV companies Carlton and Granada combined.

If there are any lingering doubts that this valuation is just a little too high, then the company's competitive chief executive, Tony Ball, will do his damnedest on Friday to allay them when he presents the company's second quarter results. Mr Ball is expected to reveal that BSkyB now has over 6.5 million paying customers, each spending on average £350 a year to use the satellite service.

But among the chorus of approval for BSkyB, one or two lone voices are beginning to express concern about the future of the satellite company, which is 36.3 per cent owned by Rupert Murdoch.

Can it maintain its extraordinary growth? Is the pay-TV market nearing saturation point? Could BSkyB lose out when renegotiating its rights to broadcast live football? Are customers cancelling their contracts with BSkyB? Just one negative answer and BSkyB's extraordinary rating could take a hit.

Banc of America is one of the dissenters. It is the only investment bank which recommends that clients should sell BSkyB shares, against a tidal wave of "buys". Banc of America believes that it will be difficult for BSkyB to keep growing its customer revenues while containing costs. "There is no economic model in the world where this happens," says Ed Venables, a media analyst at the bank.

Customers are signing up to BSkyB's most expensive services but, according to Banc of America, later downgrading to cheaper packages. The bank believes that last year 697,000 people "traded down". Some analysts believe that if it had stronger competition, BSkyB – which has raised its average prices by 7 per cent a year since 2001 – would have seen some of these customers leave altogether.

The simplest way to ensure customers don't walk is for BSkyB to buy or develop more programmes. But this would eat into all-important margins, and the company has hinted that it wants to cut costs.

Bidding to renew its deal to show Premier League football could provide one opportunity to do this, but such a strategy carries huge risks (see right). BSkyB is also looking to cut ties with at least one of the seven Hollywood film studios it buys from. If it does scale back, Mr Ball could find it difficult to achieve his stated target of seven million customers by the end of the year.

"I don't believe that the target is realistic," says Davnet Cassidy, an analyst at the technology research firm GartnerG2. "I just don't believe BSkyB will be able to keep growing at its current rate."

Her opinion is based on research into the UK digital television market, which found that around 40 per cent of households don't have any intention of ever buying pay-TV. Of the rest, Ms Cassidy reckons that two-thirds already have digital TV. "We are probably getting close to saturation," she warns.

Last year's collapse of ITV Digital provided a fillip for BSkyB. Not only was it able to pick up thousands of former ITV Digital customers, it also paved the way for BSkyB to take a stake in its replacement, Freeview. With the BBC, BSkyB now provides programmes for Freeview, such as Sky News.

Because it isn't subscription-based, Freeview's take-up has been impressive; the first two months after launch saw the sale of 300,000 decoder machines. There are two views on how this may affect BSkyB. The bulls believe that once punters have seen BSkyB's stripped-down package on Freeview, they'll want to sign up for the real thing. But the bears believe that Freeview is potentially eating into BSkyB's future market; that it will attract the maybes who, given a year or two, might have signed up to Sky anyway.

Jon Watts, a digital television expert at the consultants Spectrum Strategy, says: "Most pay-TV companies have at some point had to decide between driving profits through customer revenues or building the customer base. Sky has been monumentally successful at both. But the big issue is, where is it going to go forward from here?" Mr Watts believes the answer lies in advertising.

Over the past 18 months media buyers and advertisers have started to view BSkyB as a real alternative to ITV, due to ITV's poor performance and BSkyB's increasing customer base. As a result BSkyB's advertising rates are understood to have gone up. The recent appointment of the former Channel 5 chief Dawn Airey as head of Sky Networks, and MTV's Lester Mordue as BSkyB's first head of music television, could lead to more advertising-friendly programmes.

This isn't without risk, however. The television advertising market is expected to remain sluggish this year. New programming will require extra investment, and at the thought of this, even some of BSkyB's army of cheerleading analysts are fretting. But the established view of BSkyB is unlikely to change overnight. Friday's results will certainly provide the reassurance the City needs. But, in the longer term, analysts' reports declaring their undying love for BSkyB may be a thing of the past.

EU calls foul on satellite footie

If there was a defining moment in BSkyB's 14-year history, then it came on 18 May 1992. The chairmen of the Premier League football clubs had gathered at London's Royal Lancaster Hotel to decide which broadcaster should get the lion's share of the rights to televise live matches.

Normally, it would have been a two-horse race between the BBC and ITV. But in 1992 an upstart had belatedly entered the competition, with an 11th-hour fax to the hotel. To everyone's surprise, BSkyB landed the joint rights with the BBC in a £304m five-year deal.

From then on, BSkyB has broadcast live Premier League games, gaining exclusive access in 1996. When the contracts were last negotiated, in 2001, it paid £1.1bn for just three years' footie.

Securing the Premier League rights has helped BSkyB boost its subscribers from 1.76 million in 1992 to around 6.5 million today, but now its dominance is under threat. Just as the Premier League is about to start renegotiating its contracts, the EU Competition Commission has stepped in. It believes that if the League sells to one broadcaster on behalf of all the Premier League clubs, that is "tantamount to price-fixing". As we report today on our front page, the Commission is considering forcing the league to sell live rights for different games to more than one company. This would wipe out BSkyB's unique selling point as the only place to watch live Premiership football. Privately, the BBC and ITV are rubbing their hands with glee.