Scandal at News Corp.

How Will Citizen Murdoch's U.S. Empire Fare in Scandal's Wake?

Top Executives Resign on Both Sides of the Atlantic, but Worst U.K. Anarchy (Probably) Won't Spread Here

By Published on .

As the past week went on, many people wondered whether fallout from News Corp.'s phone-hacking disaster would cross the Atlantic to the U.S., the company's headquarters, its most important market and Rupert Murdoch's adopted home.

Rebekah Brooks and Rupert Murdoch
Rebekah Brooks and Rupert Murdoch
By late Friday afternoon, when the scandal forced Dow Jones CEO and Wall Street Journal Publisher Les Hinton to abruptly exit the company after some 50 years of employ by Mr. Murdoch, the question was only how bad the fallout here would get.

But even after a week of stunning setbacks, News Corp.'s U.S. portfolio still seems poised to make it through the crisis -- shaken but intact.

How can that be?

Events have knocked one into the next, seemingly tripping over themselves to fulfill the alarming promise from News International CEO Rebekah Brooks, who was editor of the News of the World when it hacked the voicemails of countless Brits: "This is only going to get worse."

She'd been addressing the staff at the News of the World, who must have thought the situation was bad already, a day after News Corp. suddenly said it would close the 168-year-old newspaper and lay off all 200 of them.

They, and the world, interpreted the shutdown as a draconian attempt to protect Ms. Brooks as well as the company's $12 billion effort to buy the rest of British Sky Broadcasting. If that was the aim, however, it failed. News Corp. gave up its play for BSkyB on Thursday; Ms. Brooks resigned Friday; British police arrested her Sunday. (U.K. politicians and police aren't faring much better: The head of Scotland Yard resigned over the scandal Sunday as well.)

Ominously for News Corp., meanwhile, the scandal gained attention in a variety of avenues stateside, from law enforcement to pop culture: The FBI opened a preliminary investigation into whether News Corp. reporters hacked 9/11 victims' phones in search of scoops. The Justice Department began reviewing three Senate Democrats' requests for a look into whether the company broke laws against bribing foreign officials. The U.S. press, especially the outlets that don't report to Mr. Murdoch, played the story big. Even godmother of punk Patti Smith railed against News Corp. at a Manhattan concert, working denunciations of hacking and Mr. Murdoch into her performance.

News Corp.'s crisis may have gone nuclear in Britain, moreover, but the stakes are higher in the U.S. Mr. Murdoch became an American citizen in 1985 (removing an obstacle to buying U.S. TV stations). The company reincorporated from Australia to the United States in 2004. And the U.S. and Canada provide the majority of its business.

"If a very senior officer is implicated or indicted, or the company is found guilty of wrongdoing or phone hacking, I think it would have far more serious implications in the U.S. simply because this is where the company is domiciled and the majority of revenues are generated," said Tuna Amobi, media and entertainment analyst at Standard & Poor's Equity Research. "Any suggestion that there could be culpability in the U.S. means all bets are off."

All that said, Mr. Amobi reiterated a "buy" rating on News Corp. stock as recently as July 13.

Keep in mind that News Corp.'s revenue is hardly tied up in the news assets at the center of the storm. Its publishing businesses, including newspapers, contributed 26.5% of the company's $24.4 billion in revenue over the nine months ending in March. Its TV networks, TV programming, movies and satellite-TV services operations contributed 70% of that revenue. Is anyone really going to stop watching "American Idol" on Fox or boycott 20th Century Fox movies over phone hacking by a British newspaper?

And very few advertisers, such as Renault and Shop Direct, have even explicitly widened their boycott from News of the World to News Corp.'s other British newspapers. None has indicated it would pull ads from any News Corp. assets beyond British papers.

So how much risk do News Corp.'s prominent U.S. news outlets face?

Les Hinton
Les Hinton Credit: Scott Gries

The Wall Street Journal is unhappy and abruptly missing its top executive, but safe on the whole.

The senior Mr. Murdoch seems to have been the only one at News Corp. who really wanted Journal parent Dow Jones, which News Corp. bought for more than $5 billion in 2007. And if money is a corporation's most tangible goal, the doubters received some vindication when News Corp. wrote down Dow Jones' value by $3 billion in 2009.

Now the News of the World scandal is overshadowing and threatening to erase one of the intangibles that Mr. Murdoch bought with the Journal -- journalistic legitimacy in the U.S. Several members of the Bancroft family, which sold Dow Jones to News Corp., told ProPublica last week that they would have opposed the deal, or opposed it more vigorously, if they knew then what they know now about journalistic ethics elsewhere in Mr. Murdoch's empire.

And by Friday, the Journal had lost Mr. Hinton, who had been CEO of News International, the British newspapers division, during the News of the World's hacking.

Mr. Hinton had worked for Mr. Murdoch since 1959, when Mr. Hinton was 15 years old, with the exception of only a couple of years. "It is a deeply, deeply sad day for me," Mr. Hinton said in an email to staff.

But nothing about the scandal has tarnished the Journal's editorial credibility. Nobody has suggested that the Journal's newsroom would engage in the kind of tactics apparently common at the News of the World and perhaps much of Fleet Street . None of this seems terribly likely to hurt its ad revenue or circulation at all.

"An issue with an executive of The Wall Street Journal, I don't think that pollutes The Wall Street Journal unless a more direct connection can be found," said Alan Mutter, the newspaper veteran turned Silicon Alley entrepreneur. "Murdoch has always had an array of publications and they're aimed at various markets. He also publishes the Times of London, which is generally considered right up there as a very staid and respectable paper."

"Each product has its own positioning in the marketplace," he added. "I see nothing here that suggests that The Wall Street Journal is going to be discredited." The New York Post may be coming in for more scrutiny. Last week veteran media reporter Howard Kurtz talked to former Post reporters who accused the paper's leadership of telling reporters not to touch certain people, considered friends, while suggesting others to target .

One of those former reporters, not for nothing, was Jared Paul Stern, who wrote for the Post's Page Six gossip column until a hidden video camera captured him apparently demanding money from the billionaire Ron Burkle in return for favorable coverage. That caused a scandal for the Post in 2006, which the Post handily survived after parting ways with Mr. Stern.

More recently the Post labeled Dominique Strauss-Kahn's accuser a "hooker," citing an anonymous source on Mr. Strauss-Kahn's defense team, which landed it on the receiving end of a lawsuit. Stories also circulated last week about Post reporters routinely engaging in behavior such as accepting favors and pretending they weren't reporters in order to get information.

But these aren't new allegations for the Post. Nor is any of it criminal. What really got the U.K. uproar going was the News of the World's hack of a missing teenager's phone. And Americans aren't going to go to war with a U.S. paper over its sibling's transgressions abroad.

"Yes, it's Britain, but still Americans, whether they're investors or congresspeople or whatever, don't care what happened in another country," said Kurt Andersen, a writer, host of public radio's "Studio 360" and former editor of New York magazine. "And the New York Post plays by different rules than many other newspapers do, and we had the Strauss-Kahn victim being called a prostitute as the most recent example of that , so one could imagine, but still. I feel even then it would have to be pretty big and bad for it to have people suddenly saying 'Oh my god, the whole thing is teetering."

And what about Fox News?

It's no more likely to go overboard for scoops than any cable news channel: The business model is talk, not investigations. When its talking heads attract unhelpful attention -- whether it's E.D. Hill musing that an Obama fist bump might have been a "terrorist fist jab" or Glenn Beck scaring off big advertisers -- Fox News sanctions them or shows them the door.

Fox News sometimes seems to contort itself to make a story fit its favored narrative. Witness Friday morning's "Fox & Friends" segment on the News of the World scandal, which discussed the paper as if it was a victim of hacking, not a perpetrator.

"Shouldn't we get beyond it and really deal with the issue of hacking?" asked the guest, communications consultant Robert Dilenschneider. "Citicorp has been hacked into, American Express has been hacked into, insurance companies have been hacked into. We've got a serious hacking problem in this country."

"All the right things have been done from a crisis point of view in terms of this News of the World issue," Mr. Dilenschneider later said. "It really should get put behind us. Investigators, the courts should deal with this and we should move on and deal with the important topics of the day."

Replied host Steve Doocy: "I think you're right."

So what if a bunch of blogs mocked the segment later? "The margins at Fox News are amazing," Mr. Andersen said. "It's an amazingly profitable enterprise. And as long as they're going to exist, they're going to get slagged by the elite, which only probably makes them more money by reinforcing their brand."

"We see on Jon Stewart every second night fairly persuasive critiques of how they do what they do," he added. But however Fox News is critiqued, it's not in the same category as News of the World.

The more certain victim in the U.S. is the news business in general, according to Mr. Mutter.

"There's a lot of collateral damage," he said. "As luck would have it, I'm visiting friends, seeing people who are not in the business. They're saying, 'This just makes you more distrustful than ever of the press.' Everybody's saying to me, 'Don't American papers do the same thing that News of the World did?' I go, 'No, I don't think they do.' And they go, 'Well, how can you be so sure?'

"If people say they don't trust the press, it means maybe they'll keep those quarters and dollars in their pockets," he added. "This further erodes the health of the newspaper business, which by the way didn't need any help being unhealthy."

Of course, the depths of the scandal are a long way from being plumbed. "Unfortunately no one has any idea of how deep this goes or how far it goes," Nomura analyst Michael Nathanson said last week.

But what's his rating on News Corp. shares? "Buy."

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