January 27, 2011 10:31 pm

Murdoch battles to expand media empire

Phone-hacking scandal raises questions
 
Rupert Murdoch

Rupert Murdoch: ‘He is very unhappy about all this. he fears it will scupper his chances of getting full control of Sky. I know that for sure,’ says Andrew Neil, former editor of the Sunday Times and a close associate of Mr Murdoch for many years

Has the man who owns the news lost control of it? Rupert Murdoch, the press baron behind titles ranging from The Australian to The Times and The Wall Street Journal, is suddenly making the headlines rather than writing them.

With assets worth $56bn that stretch from Star TV in India to Fox News in the US, his News Corp is the first truly global media group. No stranger to controversy, it now finds itself the subject of legal, media and political scrutiny of an intensity seldom seen before.

That follows fresh allegations that journalists on the News of the World, its racy UK Sunday tabloid, intercepted voicemail messages of scores of public figures. Buckingham Palace called in the police, Hollywood celebrities ran to their lawyers, Britain’s prime minister sacrificed his communications chief and Scotland Yard faced accusations of fumbling its initial inquiry.

For 18 months after Clive Goodman, the News of the World’s royal editor, was jailed in January 2007, the “phone hacking” issue seemed to vanish. The revelations had seemed to confirm long-held suspicions about a widespread culture in the UK newspaper industry. Ruthless competition coupled with chequebook journalism had fuelled an “anything goes” atmosphere in some titles.

For the police unit that investigated, it was convenient for this to be a limited event. NI, believing that it could contain the damage, maintained a “rogue reporter” defence. Then, in July 2009, The Guardian asserted that the practice had been much more widespread than the police investigation or NI’s statements had uncovered. It also revealed that the publisher had quietly settled three outstanding civil suits for breach of privacy, paying at least £1.7m. The House of Commons select committee on media reopened its inquiry, but Scotland Yard quickly said there was nothing more to investigate.

It was when the New York Times published the results of a seven-month investigation last September, in effect alleging a police cover-up and accusing NI of concealing the extent of phone hacking, that “suddenly, a lot of people started to worry about it again”, a senior executive at a rival tabloid group says.

A new police investigation now looms after NI this week turned a strong investigative light on itself and began – finally – to clean its house. Its decision to fire a former News of the World head of news and hand its findings to the Metropolitan Police came as the New York-based Mr Murdoch headed for London on a trip that was supposed to be a stopover en route to Davos. Instead, the 79-year-old chief executive shunned the World Economic Forum to huddle with top UK lieutenants, taking meals not in a Swiss chalet but in NI’s sixth-floor canteen, which is said to resemble an Ikea showroom.

London was where the Australian-born Mr Murdoch established himself on the world stage, buying the News of the World in 1969. Kelvin McKenzie, a former editor of The Sun, that paper’s daily sister, says of Mr Murdoch’s actions this week: “Rupert has not stayed in business for 60 years by turning a blind eye to things like this and he has acted as the CEO of a public company should.”

Even so, tabloid tactics pose unpredictable financial and personnel risks to his empire, while bringing the perennial topic of succession back to the fore. Moreover, although the scandal’s origins date back five years, “the timing of it could not be worse”, one former executive says. Last June, News Corp revealed a £7.8bn ($12.4bn) plan to buy the 61 per cent that it does not already own in British Sky Broadcasting, the country’s main satellite television service. The still unresolved deal would be Mr Murdoch’s largest ever acquisition, reshaping his company and, critics argue, changing the face of media in Britain.

Yet the unfolding events around the News of the World have clouded its prospects. After intense lobbying from rivals including the BBC, a “media plurality” review could now stall the deal for six to eight months.

Any delay matters because with each passing month, the target becomes more costly. Sky’s free cash flow, the core of its appeal to News Corp, is soaring after a wave of investment subsided. But as Sky’s finances have strengthened, so too has its stock. The shares, trading at barely 600p before News Corp revealed its 700p approach, have risen to 762.5p.

“He is very unhappy about all this. He fears that this will scupper his chances of getting full control of Sky. I know that for sure,” says Andrew Neil, former editor of the Sunday Times and a close associate of Mr Murdoch for many years. “He thinks the whole News of the World thing has been handled appallingly and he has moved in to do it himself, cancelled Davos and all that, but he fears that what they are doing now, being seen to clear out the stable, is too little too late. But he is a fighter and he is still trying to do it.

“You wouldn’t believe what a cultural change this [openness] is for News. Normally when they are up against it, they survive on a code of omerta. The problem for Rupert is that he has to be seen to be doing something, but he just doesn’t know where what he has set in motion will lead or whose job it might cost.”

Mr Murdoch, who nearly lost control of his company as start-up losses spiralled at Sky 20 years ago, has come back from worse. But as he moved to get the bid back on track, some around News Corp, especially senior figures outside the UK, ask how the scandal happened, why it was not contained and what its handling says about today’s News Corp.

. . .

News Corp is a disciplined place, where executives are paid handsomely and expected to remain loyal. In interviews with a dozen insiders, former executives, advisers and others close to the company – most of whom regard themselves as friends of the company – none was prepared to speak on the record. Yet clear if competing narratives emerge, highlighting rival factions around the company’s different family members, cities and generations.

There is disbelief in some quarters that a five-year-old London story has been allowed to drag the group’s reputation through the mire. “I have never in my life felt more like I am in a John Grisham novel. A series of very, very significant errors of judgment have been made over something relatively unthreatening,” says one person close to the group.

Inside NI, fingers point at external forces. The company sees an opposition Labour party eager to keep in the headlines a story that led to last week’s resignation of Andy Coulson, a former News of the World editor, as director of communications for David Cameron, prime minister. It thinks fee-chasing lawyers are trying to squeeze settlements from the empire. And it believes those rivals that have chased the story have had commercial motives. It includes the Financial Times in this group.

sky

Some other fingers point at James Murdoch, the mogul’s second son, who was running Sky when the alleged phone hacking took place, but took oversight of NI three years ago when he was made chief executive of News Corp Europe and Asia. While he signed off on large payments to settle out of court on cases that could have undermined attempts to contain the scandal, a friend points out that this came just weeks into his tenure and was done on the advice of others.

Still, he came into the role “guns blazing”, one former colleague says, marking himself out with withering criticism of regulators, a blistering speech about the BBC’s “state-sponsored journalism” and one incident where he stormed into the newsroom of the rival Independent newspaper and delivered a tirade against its editor laden with four-letter words.

James Murdoch’s sharp elbows made him few friends, three people say, and several insiders believe that those he lashed out against are now getting their revenge. His father generally gets his way in a quieter fashion. “If Rupert were [based] in London, this would have been killed somehow. It would not have reached this crescendo,” one long-term colleague argues.

Some on both sides of the Atlantic suggest that the UK newspaper operation suffered from the departure of an older generation of experienced executives such as Les Hinton, who handed the reins of NI to Rebekah Brooks, a former editor of The Sun, when he went to run Dow Jones in 2007.

Governance questions have spilled into speculation over who will lead the company after Murdoch Snr. James emerged as heir presumptive only after his older brother Lachlan stepped down from executive duties in 2005. The Sky deal could be James’s crowning achievement, giving him command of a big engine of growth. But Elisabeth, Mr Murdoch’s second daughter, is playing a more visible role, and is in talks that could lead to tighter ties between News Corp and her Shine production company.

James’s current status as first among his sibling equals means he also has most to lose should events in the UK take any further unexpected turn. He has yet to win around some company critics who disagreed with his aggressive but costly investments in ITV of the UK and Sky Deutschland. But one ally says: “James’s view is that this is the time for the family and colleagues to be fighting for the company and fighting for the family.”

The more pressing question of when, and with what conditions, the Sky deal will get done comes at a time when News Corp is in need of new profit drivers. Its last big deal, the $5.7bn acquisition of Dow Jones in 2007, was followed by a $2.8bn writedown. In the wider company, investors wonder how News Corp plans to stem losses from MySpace, the once-hot social networking site that has lost ground, and millions of dollars, as Facebook has soared. Chase Carey, News Corp’s chief operating officer, has warned it may be sold.

Shareholders’ “constant fear” of unexpected acquisitions such as MySpace and Dow Jones has left News Corp trading at a discount to its peers, one investor notes. Nomura analysts calculate that, putting News Corp’s booming cable networks to one side, investors value its other assets at just two times annual earnings. News Corp could improve its rating by spinning off its newspapers, this investor says. Bankers have occasionally pitched that idea but no executive has ever dared champion it. “It would be like telling Rupert he’d have to spin off one of his children,” a former executive says.

. . .

Investors still see the Sky deal as the best use of News Corp’s cash. If it wins, the deal will shift News Corp’s axis further from print to pay-TV platforms and content, and a more even mix between US and other assets.

Even as Fox News faces criticism for some of its commentators’ rhetoric, the cable division it leads is bringing in more than half News Corp’s operating income. Once the group can include BSkyB’s results in full, cable and satellite will account for two-thirds of the total. As Roger Ailes has proven as head of Fox News, profits translate into power at News Corp. So for James Murdoch, that larger contribution to the bottom line could be critical to his future standing.

Only one man knows the succession plan, though, and close associates say he is “in very good shape”. Mr Murdoch will turn 80 this year – but his mother will turn 102 next month. “Rupert’s not going anywhere” is a common company refrain.

As a result, insiders tend to take the long view. Recalling the uproar that greeted Mr Murdoch’s battles with print unions a generation ago at Wapping, NI’s east London base, one supporter says: “We’ll get through this.”

When Mr Murdoch showed up unexpectedly at the morning news conference at The Times on Wednesday, editors took it as a sign that he was reasserting his personal control. Mr Murdoch was “like a bull in a china shop” in addressing the crisis, Mr Neil says, adding: “Wapping is not a place you want to be just now.”

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