July 12, 2011
Since its phone-hacking scandal erupted in late June, News Corp has closed its profitable News of the World, the paper at the center of the scandal; its takeover of British Sky Broadcasting is looking more and more in jeopardy; and analysts are beginning to speculate about ripple effects on the company at large. Not surprisingly, investors are not responding kindly: News Corp's stock has fallen about 15 percent since hitting a high for the year in late May. Can Chairman and CEO Rupert Murdoch keep this wildfire from spreading further?
Murdoch has to keep the scandal's tentacles from reaching across the Atlantic, where he has valuable operations, including Dow Jones, The Wall Street Journal, the Fox TV networks, and the 20th Century Fox film studio. “The attacks on him are multiplied more than they are for other media operations,” says Scott Sobel, president of Media and Communications Strategies, a Washington-based crisis management public relations firm. Of the current phone-hacking scandal, he says, “It's going to raise the ire and the attention of his detractors.”
News Corp has a perception problem, not a financial problem. News of the World, with profits in the tens of millions of dollars, accounted for only a drop in the bucket for the company, with its total 2010 revenues of $33 billion. “Perhaps ironic is the fact that the least valued division of the corporation by investors is creating the most negative headlines,” says Nomura analyst Michael Nathanson, who maintained his “buy” rating on News Corp stock (NWSA) last week.
But those negative headlines are turning into a substantial liability. Murdoch, his son James, and Rebekah Brooks, chief executive of News International, News Corp's UK newspaper division, have been asked to appear before a parliamentary committee to answer questions about the phone-hacking scandal. There have been calls for Murdoch and Brooks to resign and even some speculation that the senior Murdoch could be arrested, as was former News of the World editor Andy Coulson. “It's inevitable that [the negative publicity] will have a long-term impact on the company, just from the public relations side of things,” says Sam Hart, an analyst at Charles Stanley in London. “It's inevitable that it will impact the underlying performance of the business.”
Most urgently under threat is the suddenly beleaguered conglomerate's planned $12.4 billion takeover of British Sky Broadcasting, or BskyB. Murdoch is digging in his heels in to push the deal through even as an ominous regulatory review gets under way – something that may not have occurred without the intense public scrutiny the company is currently under and which means the takeover, if it is approved, will not be completed this year. In Parlaiment, both Conservatives and Labour say they will support a motion callingon Murdoch and News Corp to drop the bid.
The current head of Dow Jones and publisher of The Wall Street Journal, Les Hinton, was chairman of News International from 1995 to 2007, meaning much of the misconduct happened under his watch. Hinton testified to Parliament in 2009 that phone-hacking at NOTW was limited to one rogue reporter. If he is now implicated in the scandal, Dow Jones would almost automatically come under increased scrutiny, as well.
Sobel says Murdoch now needs to reach out to both the American public and his contacts in government. “If regulators were to decide to hamper his business or hold hearings, that could be much more damaging... than public opinion.. Of course, he has to care about public opinion because that also will influence politicians and regulators,” Sobel says. “He has to use every personal and media contact he has to deny that there were any endemic … ethically bankrupt actions.”
Sobel suggests some PR moves for Murdoch to make to repair his empire's reputation. “He needs an objective … journalist or organization to lead an investigation and come up with lessons learned," he says. Murdoch also should undertake initiatives to demonstrate his commitment to journalistic integrity, says Sobel – things such as sensitivity training for all employees, support for organizations promoting journalistic excellence, and legal training for all managers.
CourtTV founder Steve Brill predicted on Sunday's "This Week with Christiane Amanpour" that News Corp's FCC licenses will come under review. “I am reasonably certain that someone, maybe someone from the political left … is going to make a big deal of whether [News Corp. is] fit to have their FCC licenses under the current management,” he said.
And this Monday, there were reports that Murdoch's two other London papers, which were expected to snatch up NOTW readership, are now implicated in alleged misconduct involving phone hacking and other personal information, targeting former Prime Minister Gordon Brown and Queen Elizabeth II. Brown has charged that Murdoch’s newspapers hired “known criminals” to obtain personal information about him. Laura Martin, an analyst with Needham and Co., told Bloomberg News that all this might be too big a hit to overcome. “The stock price is implying that News Corp. is going to have to get out of the U.K.,” she said.
It remains to be seen whether such a drastic move will be necessary to save the company. It also remains to be seen if Murdoch will be able to restrict the scandal to his British holdings. But some observers predict that Murdoch will pull some rabbits out of his hat. “Historically, it's been wrong to write off Rupert Murdoch and News Corp,” says Hart.
More about News Corp’s problems:
Former British PM says Murdoch’s Papers Hired ‘Known Criminals’ (Washington Post)
The Global Reach of Murdoch's News Corp (BBC News)
News Corp's $7 Billion Loss Shows Hacking Concern Growing (Bloomberg Businessweek)