News Corporation looks likely to weather the News of the World scandal. But it may end up becalmed—and lose some crew to boot

TWO weeks ago News Corporation was a corporate giant led by a legend and on the verge of the biggest deal in its history. Now the deal is off and Rupert Murdoch is widely derided. Britain's three big political parties have ganged up on the company, along with the Church of England, every other media outlet and an array of celebrities. A once-feared colossus has become a pantomime villain, hissed from the stage.

News Corporation has been brought low by allegations that the News of the World, one of its British tabloids, paid the police for information and hacked into the voice-mail accounts of many people, some famous, some in tragic circumstances. The implications for British politics, and for the conduct and freedoms of the British press, will take a long time to play out (see article). The corporate impacts already look grievous.

Newspapers are not central to what News Corporation does (see chart 1). In the year to June 2010 they accounted for just 13% of its profits—down from more than 30% nine years earlier. The firm's British newspaper outfit, News International, adds only crumbs to that small slice. News Group Newspapers, the subsidiary that runs the News of the World and the Sun, has gone from being substantially profitable to being marginally profitable. The Times and the Sunday Times collectively lose money (see chart 2).

But newspapers are central to who Mr Murdoch is. News Corporation executives speak with bemusement or despair of the boss's obsession with what goes in his papers, down even to the placement of stories. They are also the source of his extensive political influence in Britain. Most British newspapers are predictably partisan. News International's papers combine a lot of readers with a willingness to swing both ways.

If the damage from the scandal was limited to British newspapers, or even to Mr Murdoch's reputation and political influence, it would be manageable for the company even if dire for him. It spreads beyond that. Police investigations and a public inquiry loom. News Corporation's leadership and succession, never exactly certain, now seem decidedly wobbly. And the collapse of the bid for BSkyB, a satellite broadcaster, has wrecked a scheme intended to transform the company. News Corporation is no longer free to develop in the way it had planned to, nor necessarily under the leadership it expected.

A protester wearing a giant Rupert Murdoch mask was parading in front of the media boss's London home this week dressed as a convict. For the man himself it surely will not come to that; for others it quite possibly will. British coppers are investigating both phone-hacking and bribery charges. They told Parliament on July 12th that they have informed 170 people out of almost 4,000 whose names appear in papers seized in 2006 from Glenn Mulcaire, a private investigator formerly employed by the News of the World. Just a small fraction of Mr Mulcaire's prodigious workload could provide the wherewithal for a lot of criminal prosecutions and civil suits. Companies can be found guilty under Britain's Regulation of Investigatory Powers Act if it is proved that criminal behaviour like phone-hacking took place with managers' “consent or connivance”.

American politicians, aggrieved at claims that victims of terrorism were targeted, are calling for investigations. Some have asked the Department of Justice to consider a probe under the Foreign Corrupt Practices Act, a broad law that targets bribes paid anywhere in the world. But Danforth Newcomb, a lawyer, points out that the law focuses on bribes paid to “obtain or retain” business: it isn't clear whether paying police officers for information would qualify. Another reason for the Americans to stay their hands is that the British can do a perfectly good job of prosecuting bribery by themselves. A new Bribery Act came into force on July 1st.

A judicial inquiry into phone-hacking could also do a lot of damage. High-profile public inquiries punch far above their legal weight: they often lead to resignations. This one seems likely to show that both News International and News Corporation made a poor fist of investigating the wrongdoing at the News of the World. An internal investigation of e-mails was carried out in 2007, following the convictions of Clive Goodman, the paper's royal editor, and Mr Mulcaire. Executives later told Parliament they had found nothing to suggest phone-hacking had been widespread. The company's e-mails did, however, apparently contain evidence that bribes had been paid to police officers.

The Guardian, another British paper, reported that News International had settled cases brought by several people who had threatened to sue for having their phones hacked. James Murdoch, who had been running BSkyB when the alleged phone-hacking took place but was subsequently put in charge of the newspaper business, approved some payments. He said on July 7th that he was not fully aware of the facts when he did so. That action could be probed by the public inquiry. So could the firm's persistent failure to clean house.

Other newspapers soon alleged that former News of the World reporters had described widespread phone-hacking at the paper. News International reacted angrily. Rebekah Brooks, once editor of the News of the World and by then chief executive of News International, said the Guardian had “substantially and likely deliberately misled the British public”. Bill Akass, the News of the World's managing editor, complained that a New York Times investigation “was motivated, at least in part, by the desire to harm a competitor” (the Wall Street Journal, acquired by News Corporation in 2007, had declared war on the New York Times). None of that looks good now.

Couldn't happen to a nicer company

One of the distinguishing features of News Corporation is aggression. The firm combines the heft of a big company with the scrappiness of a start-up. Even more than at other media firms, executives sometimes seem inspired by Machiavelli—or Richard III. Competitors are to be crushed. Executives in other companies that take an opposite view on strategic questions are idiots. In 2009 the usually cerebral James Murdoch launched a scathing attack on the BBC, whose size and zeal for expansion into new areas he described as “chilling”.

This take-no-prisoners approach makes the company extremely bold. It was News Corporation that broached the possibility of releasing films early on pay-television—a move that still enrages cinema owners. Together with the Financial Times (part-owner of this newspaper) it has led the charge to demand money for newspapers on the web. In America the firm drives a particularly hard bargain over payments from cable and satellite carriers for its broadcast network. BSkyB is a similarly brutal negotiator.

Unfortunately, this attitude earns the company enemies as well as revenues. Over the years News Corporation has offended governments and regulators. Its aggression and sheer size terrify rival media firms. In October 2010 the BBC and the owners of the Daily Mail, the Daily Telegraph, the Daily Mirror and the Guardian newspapers signed a letter opposing its bid to take complete control of BSkyB, in which it now has a 39% stake. Part of the reason News Corporation has handled the phone-hacking crisis so badly is that it tends to view hostile reporting as motivated by rivalry.

As the company braces for further embarrassment and disruption, it will also have to work out a future without BSkyB. Public and political opinion have become so hostile that the government may refuse to sign off on any attempt to renew the bid, even at the risk of a judicial review. This makes the transition News Corporation wants to make to a new, eventually post-Rupert world a lot harder.

The Murdoch discount

Wall Street's News Corp-watchers acknowledge Rupert Murdoch's genius in building an empire from all but scratch. But they have come to view him as a liability. They can cite many missteps. In 2004 Mr Murdoch failed to prevent John Malone, a rival pay-television executive, from building a large stake in his company. Two years later Mr Murdoch had to offer up his stake in DirecTV, an American satellite company he had long pursued, to get rid of the interloper. In 2005 he paid $580m for MySpace; he sold it last month for $35m. In 2007 he bought Dow Jones, owner of the Wall Street Journal, for $5.6 billion; two years later News Corporation wrote down its value by half.

Even investors well-disposed to Mr Murdoch call him a “deal junkie” and speak of a “Murdoch discount” to the share price. Analysts who like the company tend to focus not on Mr Murdoch but on the executives he appoints. Before he left the firm in 2009, the main object of investors' ardour was its president, Peter Chernin. They now point to Chase Carey, a satellite-television veteran. They warm to the company in direct proportion to the rising power of such men, and in inverse proportion to the amount of cash Mr Murdoch has at his disposal to pursue deals.

In a sense there are two overlapping News Corporations. The first, better-known, one is swashbuckling, acquisitive and politically connected; its figurehead is Mr Murdoch. Newspapers belong to this part of the company, which is why their losses are indulged. The second News Corporation is strategic and hard-nosed, bordering on stingy. In Hollywood, for example, the firm is legendary (and resented) for driving down actors' prices and for pioneering a rigorous, marketing-led approach to film-making.

James Murdoch, until recently the most plausible heir, belongs to the second News Corporation. Although he likes newspapers, he likes a good business more—and pay-television is a good business, as he demonstrated during a successful spell running BSkyB. He tends to think of newspapers as akin to pay-television outfits. Get the pricing right; increase revenues by selling other products to readers; in future, perhaps, bundle newspapers like pay-TV channels. Their reach and their influence are less important.

A twist on the old model

The BSkyB deal was crucial to News Corporation not just because it would make the company far more profitable. It would have allowed the firm to create a kind of European Sky, with BSkyB, Sky Deutschland and Sky Italia sharing set-top box technology and bidding collectively for sport and movies. Most important, it would have confirmed that the second, less inky, version of News Corporation was here to stay, the culture change accomplished by a young Murdoch who would thereby have proved his ability to lead. The Murdoch discount might, in time, even have turned into a Murdoch premium.

Now News Corporation has become stuck mid-metamorphosis. The old, newspaper-oriented company has stymied the new one. The young man who was attempting to lead the company's transformation has been tarnished. Where does the firm go from here?

Its first priority will be to shore up its share price, which has taken a battering over the past week. News Corporation has already announced it will accelerate a buy-back of shares, beginning next month. It may devote more money to that. Such a move will probably mollify shareholders who have complained about mismanagement at the company. Few buy shares in News Corporation in the belief they can profoundly steer the company.

The cash pile will quickly build up again. Channels like National Geographic are riding the rising tide of pay-TV adoption in emerging markets. American TV advertising, which has bounced back strongly from the recession, will rise higher as politicians begin to pour money into 30-second spots attacking their opponents. The Fox News Channel, which is already hugely profitable, will draw conservatives eager for more heated predictions of Barack Obama's downfall. Before (if ever) returning to BSkyB, News Corporation could make a run at a cable television network. AMC, best known for “Mad Men”, recently became available, although the bidding for it is likely to be fierce.

One of the great media parlour games consists of trying to predict when Mr Murdoch will step down from running the company he founded. Some thought he was on the verge of leaving 20 years ago. The media industry's last true mogul has been wounded by the News of the World scandal, and News Corporation has been thrown off course. But, oddly, it has become even harder to imagine the company carrying on without him.

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