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

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

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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
Scott Gries

Les Hinton

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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.”

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