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Building up an airtime debt can be a dangerous business. In the early 90s, the Yorkshire-Tyne Tees TV sales house, MAS, collapsed following the introduction of a new trading mechanism, which left it owing large sums of money to media agencies. It was subsequently bailed out by LWT.

But it's a problem that hasn't gone away. Sky Media is experiencing a little trading difficulty at the moment and it could finish the year owing some agencies millions of pounds.

While no-one suggests that it is anywhere near the scale of the MAS debacle, agencies are still monitoring the situation closely and, with a number of Sky's third-party sales contracts also up for negotiation, you can bet the other broadcasters are too.

Sky's press office carefully controls the information that comes out of the organisation, and refused contact with the managing director of Sky Networks, Dawn Airey, and the managing director of Sky Media, Nick Milligan, preferring to field a spokesman.

Advertising revenue only contributes 12 per cent of Sky's total revenue (last year it was about £223 million) with the bulk of the rest coming from subscription fees, so the news is not a disaster.

But now that the number of new subscribers has begun to level off, it is likely that more pressure will be put on Sky Media to deliver increased revenue. And with James Murdoch, the chief executive of BSkyB, due to host his first annual general meeting at the beginning of next month, Sky is being particularly cautious.

The airtime debt owed to agencies is several million pounds, although it is difficult to put a precise figure on it because agencies will have built up different levels of debt with Sky Media depending on their levels of commitment.

Sky's spokesman would not elucidate further either. "The quantum of our trading balance is not something that we would discuss," he says. However, he is adamant that this trading position has improved year on year.

The debt has been accrued for a variety of reasons, but it mostly comes down to the poor performance of Sky One, Sky's flagship premium entertainment channel.

While it is still the biggest multi-channel general entertainment channel, Sky One has seen dramatic declines in its share of impacts. The success of Freeview has not helped as Sky One is not available on the platform.

The spokesman acknowledges that the amount of competition has made things more difficult for Sky One. "Sky operates in a tough environment - the number of entertainment channels has doubled since 2001," he says.

Barb data shows that Sky One's audience figures, particularly for its key trading audience of 16- to 34-year-old adults, has dropped year on year. Figures for this year so far show that they have fallen 23 per cent; the second quarter of the year is even more dramatic with the audience down 30 per cent.

The Sky spokesman disputes the impact this will have had on Sky Media's deal debt. "Sky One's profile is still young and this (the fall in 16- to 34-year-old impacts) has not upset the trading balance."

Given the growth in the number of channels, particularly those targeted at the younger market, on the digital platforms, it is quite understandable that audiences would drop. But there is also criticism that Sky has failed to invest in the product to arrest this decline, instead raiding Sky One's programming budget to buy sports rights.

The spokesman says: "We don't disclose our programme budgets but the acquisition of programmes such as 24, Dead Wood (a feature of its autumn schedule) and Nip/Tuck are all about reasserting Sky One's position as the best of US programming."

In addition to programming, some agencies lay part of the blame for the debt at the door of Sky Media and the way it sells its airtime.

Sky Media operates a mixed economy. It deals its airtime in three different ways: it sells off a fixed price, particularly to DRTV advertisers; it sells off a Sky price that relates to how its channels are performing and it also discounts off whatever ITV's price is expected to be.

It is this final trading mechanism that has added to the problem. In the past, ITV's costs per thousands have traditionally increased but over the past couple of years they have fallen to levels not seen since the mid-90s. Given that Sky would be selling its airtime at a cheaper rate than ITV, its price has also fallen.

Despite this, the spokesman says that there is no intention to change these trading mechanisms.

Sky Media has also been accused of operating with an anachronistic airtime trading system. Milligan, the former deputy chief executive of five, was known to keep a close eye on the trading book and installed his own airtime management system during his time at five, so it is likely that this area will be tightened up.

It is important that Airey's investment in programming and Milligan's re-ordering of Sky Media's management reduces the debt problem as quickly as possible, otherwise it may enter the negotiation season on the back foot.

YEAR-ON-YEAR CHANGE IN SKY ENTERTAINMENT IMPACTS

Audience Sky One Sky One Mix Sky One and

(% change) (% change) Sky One Mix

(% change)

Adults -19.9 15.1 -15.2

ABC1 adults -17.4 9.2 -13.9

16- to 34-year-old adults -29.7 3.0 -25.7

Children -19.6 -13.8 -19.0

Housewives -15.8 25.4 -10.4

Housewives with children -24.6 10.7 -20.1

Source: Barb April-June 2004 vs April - June 2003.