News Column

Murdoch's Empire Gets a Scandal of Its Own

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If this didn't involve Rupert Murdoch, his sensationalism-obsessed headline writers likely would be having a field day with the aging media mogul's growing misfortunes.

Murdoch Meltdown!

Sordid Shenanigans!!

Hack Attack Fallout!!!

But what initially began with allegations that Murdoch's British News of the World had illegally hacked scores of Brits' phone messages has widened from a sordid tabloid tale involving a murdered British teen to a burgeoning scandal with broad political, criminal, ethical and business ramifications for Murdoch's far-flung News Corp.

The $33 billion media empire's holdings include U.S.-based Fox TV, film studio 20th Century Fox, publishing giant HarperCollins, The Wall Street Journal and the New York Post.

Murdoch, 80, folded News of the World on Sunday in what trade journals such as Advertising Age said was an effort to placate British regulators and advertisers upset by the hacking incidents. The incidents include accessing phone messages of 13-year-old kipnap and murder victim Milly Dowler, and those of families of 9/11 victims and British soldiers killed in Afghanistan.

Prime Minister David Cameron's former communications chief, Andy Coulson, was arrested last week in connection with alleged payoffs to police when he was editor of News of the World.

Fresh allegations of attempted phone hacking against Britain's royal family (including Prince Charles), paying British police for tips and illegally accessing medical and financial records of former prime minister Gordon Brown and family members by Murdoch's The Sun and The Sunday Times newspapers have caused more damage. That includes the possible unraveling of News Corp.'s planned $12.4 billion acquisition of a 61% stake in British Sky Broadcasting, the United Kingdom's largest pay-TV broadcaster.

News Corp. currently owns a 39% stake in BSkyB and already was running into political opposition in Britain's Parliament over the News of the World scandal. A regulatory review could take six months and allow the scandal to fade, but Deputy Prime Minister Nick Clegg has asked Murdoch to reconsider the bid.

Two News Corp. spokespersons didn't return calls Monday. The company said in a statement that it would investigate new allegations that its papers had hacked the medical records of Brown's son, Fraser. In 2006, The Sun revealed that 4-year-old Fraser Brown had cystic fibrosis.

Fraser's mother, Sarah, tweeted her reaction about the revelations Monday: "So sad to learn all I am about my family's privacy it is very personal and really hurtful if all true."

Londoners are accustomed to the sensational headlines of British tabloids, but many are shocked at reports that Fraser Brown's medical records had been hacked.

"It's absolutely appalling," says Tamsin Kemmiss, 52, a secondary school teacher. "The sublime arrogance of Murdoch being able to just fly in here, keep Rebekah Brooks at her post, shut down the paper. It's all just appalling."

Brooks, CEO of U.K. subsidiary News International, edited News of the World when some of the hacking occurred. She has denied knowledge of any wrongdoing, and Murdoch has stood by her.

Other Londoners aren't surprised at the developments, given the salaciousness of the British tabloids.

"They call it the gutter press for a reason," says Nicholas Thompsell, a senior partner at a London law firm. "It was bad, yes, but I think the media attention on it is out of line with its importance. People are starving, being murdered, and all we've read about for (two weeks) is this."

Some believe billionaire Murdoch was due for some comeuppance. "I think Murdoch had it coming," cab driver Jim Roach says. "Working-class people are glad this is happening to him. How can a man who doesn't live in this country own 40% of the media here? It's wrong."

Stock Takes a Dive

Investors aren't liking what they've been reading or hearing.

On Wall Street, News Corp. shares sank 7% to $16.10 Monday and have lost nearly 16% from their 52-week high. Monday's plunge reflects investor concerns that "reputational damage" could spill over to other News Corp. properties, says Standard & Poor's analyst Tuna Amobi.

News of the World accounted for less than 1% of News Corp. revenue and earnings. But Jeffrey Logsdon of BMO Capital markets says investors are worried the allegations could lead to wider questions.

For the stock market, "it's a mystery why this newspaper would go to these lengths to get this story," Logsdon says. "For investors, that makes everything mysterious. Is this localized, regionalized or globalized? No one knows."

Amobi, who rates the News Corp. as a buy, thinks investors are overacting and that the company's global operations are sound. "Right now, the sell-off seems overdone," he says.

Major investors, such as Saudi Prince Al Waleed bin Talal, whose Kingdom Holding's 7% stake is News Corp.'s largest non-family shareholder, told the Financial Times that he still backs Murdoch.

But on Monday, other News Corp. shareholders, including Amalgamated Bank and several municipal and union pension funds, filed an amended claim against News Corp. in Delaware court, accusing the company's board of directors of failing to exercise oversight and take action since news of the hackings surfaced. (An earlier complaint challenged New Corp.'s acquisition of Shine Group Ltd., a film and TV producer that provided a $250 million windfall for Murdoch's daughter, Elizabeth.)

"News Corp.'s behavior has become an egregious collection of nepotism and corporate governance failures, with a board completely unwilling to provide even the slightest level of adult supervision," says co-lead counsel Jay Eisenhofer.

'Tabloids Set the Agenda'

The British scandal has its underpinnings in an ultra-competitive market for readers.

Stephen Ward, director of the Center for Journalism Ethics at the University of Wisconsin-Madison, saw how the British tabloids operate when he spent five years in London as a correspondent for The Canadian Press.

"There are some very good journalists over there, but there's more public tolerance for the British tabloid, anything-goes culture of news," he says. "The tabloids set the agenda."

Nothing in North America compares to British tabloid tactics yet. "Our media, in tone and characteristics, are moving toward a British/Euro model, becoming increasingly competitive and more ideological and partisan" as revenue and resources decline, Ward says.

Phone hacking is illegal in the USA, and goes against journalism ethics. Such an incident occurred in 1998, when The Cincinnati Enquirer which like USA TODAY is owned by Gannett paid a multimillion-dollar settlement and was forced to retract a report on Chiquita Brands International after a reporter hacked into thousands of corporate voice messages.

"This is a classic example of what happens when you do dishonest things and how it can undermine your story," says Kelly McBride, who teaches ethics at the Poynter Institute, a journalism think tank.

"While there are lots of problems in newsrooms, I've never heard of systemic eavesdropping or hacking," McBride says. "We don't have a tabloid or media property that consistently gets scoops on all the big sensational stories. The National Enquirer gets an occasional scoop on a really sensational story, but when they do, it's because they're damn persistent."

Ryan Chittum, a former Wall Street Journal reporter who is deputy editor of the Columbia Journalism Review's online critique of financial journalism, says the scandal will affect Murdoch's reputation and the credibility of other News Corp. properties, including The Wall Street Journal and Fox News.

"When you think of how powerful Murdoch is here and in the UK it's like a Wizard of Oz moment: Pull back the curtain and it's just this pathetic little dude. This is the kind of thing that can take a company down."

Crisis management specialist Robbie Vorhaus says it's too early to determine what impact the scandal will have on Murdoch's U.S. interests, which include TV broadcasting rights to pro football and baseball games.

"When something like this happens, everything is up for observation and conjecture. For now, reputationally, the scandal doesn't touch News Corp. in the U.S. beyond negative association," Vorhaus says.

"However, if like a wildfire, an unlikely spark of any scandal jumps the pond, it could be an unrecoverable crisis."

Contributing: Daniela Deane in London, the Associated Press

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