Murdoch's Mess

News Corp.’s British newspapers have put the future of Murdoch’s empire in question

On July 19, Rupert Murdoch is scheduled to sit before a U.K. parliamentary committee investigating the phone hacking and corruption scandal engulfing his media empire. For Americans the setting may be exotic, but the structure of the drama will feel familiar. An executive stares down grandstanding legislators and makes a choice: a tight-lipped defense of conduct or an apology for prior sins.

Murdoch—the Oxford-educated son of an Australian newspaper man—did not forge himself into the chief executive officer of the 21st century’s dominant global media empire by issuing apologies. This time he might want to make an exception.

If even a handful of the accusations being leveled against some of News Corp.’s journalists turn out to be true—hacking a murdered girl’s voice-mail messages; tampering with evidence; bribing police; procuring the medical records of a Prime Minister’s ill son—News Corp. will have been guilty of, at the very least, abysmal management. Given the level of scrutiny the company has brought upon itself, it’s almost certain those accusations will now, finally, be fully investigated.

But by letting the damage get so severe before conceding there might be something rotten at News Corp., Murdoch and his management team have allowed the tiny print newspaper division—just 3 percent of overall profit in the most recent quarter—to imperil the broader company. His decision, really a capitulation, to pull its $12.5 billion bid to gain full control of British Sky Broadcasting, the U.K.’s largest pay-television broadcaster, has effectively cratered the strategy of bolstering News Corp.’s digital operations and tapping into BSkyB’s rising cash flow. Members of the House of Commons are now questioning whether News Corp. is fit to hold on to the 39 percent of the company it already owns. In Washington, two senators are calling for probes into whether Murdoch’s reporters tried to hack into the phones of Sept. 11 victims and their families.

The revealing thing about the News Corp. scandal is not that journalists can be ruthless in pursuit of a scoop. It’s that News Corp.’s influence on Western media—and British culture specifically—is so pervasive. Aside from the countless celebrities, public figures, and victims of tragedy whose privacy News Corp. journalists are reported to have violated, the trickling revelations have shown that British media and power are inextricable.

Prior to the scandal, Prime Minister David Cameron was focused on implementing the U.K.’s most austere budget in generations. Now he’s scrambling to explain why he hired Andy Coulson, a former News of the World editor, and cultivated friendships with a circle of senior Murdoch executives and family members, including Murdoch’s son James and Rebekah Brooks, the CEO of News International and another former editor of News of the World. “British politicians had gotten the idea, rightly or wrongly, that they couldn’t win a general election without the endorsement of Murdoch and his newspapers,” says Tim Bale, a professor of politics at the U.K.’s University of Sussex. “[Cameron’s] judgment looks questionable, and it makes him look like he’s part of this elite group who felt they were bulletproof and could do anything, including possibly misleading Parliament and the police.” It is safe to say that no one in British public life has been ennobled by the scandal.

When allegations first surfaced about sleazy tactics at the 2.8 million circulation News of the World, Murdoch blamed them on a solitary rogue reporter at the newspaper who had been fired. In 2007 the episode appeared to be subsiding; the reporter, Clive Goodman, and an outside private investigator, Glenn Mulcaire, were put behind bars for tapping the phones of members of the royal family. The British police then closed their investigation, citing a lack of evidence.

This failure to unearth the alleged journalistic malfeasance within News Corp. may have stemmed in part from official laziness and corruption, but it also reflected an effective stall-and-obfuscate strategy employed by the company, according to Peter Clarke, the former deputy assistant commissioner of the Metropolitan Police. News International blocked early police inquiries by its “complete lack of cooperation” and “lies,” Clarke told lawmakers on Parliament’s Home Affairs Committee on July 12. “This is a global organization with access to the best legal advice in my view deliberately trying to thwart a criminal investigation,” Clarke said as he tried to explain why police had not dug deeper. “I was as certain as I could be that they had something to hide.”

Murdoch insisted throughout that the questions about his journalists’ methods were baseless. Rival businesses and liberal politicians, he said, were trying to gin up a fake controversy. “We’ve challenged—and the police have challenged—some of these allegations,” Murdoch said in answer to a shareholder question about “the phone-bugging issue” at News Corp.’s annual meeting last Oct. 15. “Give us the evidence,” he added defiantly. “No one has been able to.”

Now that the evidence has arrived, its impact on shareholders has been significant. The company has lost more than $5 billion in market capitalization since July 4, when the Guardian in London reported that News of the World journalists had hacked into the cell phone of murdered schoolgirl Milly Dowler, not the usual cause of a stock rout. Eight days later, News Corp. scrambled to reverse the slide by announcing that it was almost tripling its share buyback plan, to $5 billion worth of stock.

The refusal of Murdoch and his executives to apologize or engage earlier in a complete and open investigation was not a momentary tactical mistake. According to Murdoch biographer Michael Wolff, author of the 2008 biography The Man Who Owns the News, it was a practiced corporate strategy. It’s “part of the News Corp. ethos,” says Wolff. “If you are attacked from the outside, you defend. It’s always us-vs.-them. We’re right, you’re wrong.”

News Corp.’s belief in its organizational infallibility—or an insufficient appreciation for transparency—has played a key role in the phone hacking fiasco. So far, London police have made at least eight arrests, including that of Coulson. He long denied any wrongdoing or knowledge of reporters who tapped into phones while he led News of the World. During hearings in 2007 and 2009, executives including Les Hinton, former chairman of News International and now CEO of Dow Jones, the News Corp. unit that owns the Wall Street Journal, said there was no evidence that more than one reporter had been involved in phone hacking. Yet in his July 7 note to employees announcing the closure of the tabloid, James Murdoch, 38, a top aide to his father, acknowledged that in certain past statements company executives had misled the British Parliament. (Bloomberg LP, the owner of Bloomberg Businessweek, competes with News Corp. units in providing financial news and information.)

When Rebekah Brooks was asked in 2003 by a parliamentary committee whether her paper at the time, the Sun, had ever bribed the police, Brooks responded yes. Later she said she couldn’t recall any specific instances of bribery. Politicians and News Corp. employees in recent weeks have called for Brooks’s firing. Instead, when Murdoch arrived in London on July 10 to take charge of the hacking crisis, he strolled with her through a pack of photographers, grinning and murmuring words of support.

The backtracking and confusion have only empowered News Corp.’s critics—among them former Prime Minister Gordon Brown—who have alleged that other Murdoch papers, including the Sun tabloid and the more sober Sunday Times of London, have used possibly illegal methods for gathering private information about their subjects. Knowledgeable observers are already suggesting that the Murdochs will have to get out of newspapering altogether, at least in the U.K. “Police investigations have to play out over several months, and the regulatory and political environment has to change,” says Richard Greenfield, a media industry analyst with BTIG, a New York-based trading firm. “News Corp. may well not own U.K. newspapers in a year.” Greenfield, for one, thinks that would be a smart move. “The newspaper business was such a small pimple for them. Now it’s become a hot potato. It would be great for the stock for them to exit.”

Making matters worse for News Corp. is that ripples from London have already reached American shores. Democratic Senators Barbara Boxer and Jay Rockefeller on July 13 asked the Justice Dept. and Securities and Exchange Commission to investigate the company. “The reported allegations against News Corp. are very serious, indicate a pattern of illegal activity, and involve thousands of potential victims,” the senators wrote in a letter to the agencies. “It is important to ensure that no United States laws were broken and no United States citizens were victimized.” News Corp. owns 27 broadcast television licenses in the U.S., which are overseen by the Federal Communications Commission. U.S. law requires that broadcast licensees be of “good character,” although that requirement is rarely cited by the FCC to revoke licenses, Rebecca Arbogast, a Washington-based analyst with Stifel Nicolaus, told Bloomberg News.

Hearings before American legislators are hardly a sure thing, whereas Murdoch’s July 19 moment before Parliament—he’ll be joined by Brooks and James Murdoch—is guaranteed to be a defining moment for News Corp. and the leadership of the U.K. “The problem for Cameron is that the inquiry and the criminal proceedings could go on for months, if not years,” says Bale, the Sussex political scientist. “Every time Coulson and Brooks appear in the media, the questions are going to be asked once again: ‘What was [Cameron] doing employing this guy? Why was he getting close to these kinds of people?’ ”

Murdoch has been famously loyal to those who stay loyal to him. Even as the Prime Minister has urged Brooks to step down from her position, Murdoch has backed her and other members of his management team. Loyalty, though, is a luxury of success. In the face of regulatory scrutiny about their influence and ethics, it’s possible newspapers might be, too.

— With assistance by Roben Farzad, Jonathan Browning, Lindsay Fortado, and Thomas Penny

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