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Opening RemarksJuly 14, 2011, 12:10 AM EDT

Murdoch's Mess
News Corp.s British newspapers have put the future of Rupert
Murdochs empire in question
By Paul M. Barrett and Felix Gillette

On July 19, Rupert Murdoch is scheduled to sit before a U.K. parliamentary committee
investigating the phone hacking and corruption scandal engulfing his media empire. For
Americans the setting may be exotic, but the structure of the drama will feel familiar. An
executive stares down grandstanding legislators and makes a choice: a tight-lipped
defense of conduct or an apology for prior sins.

Murdochthe Oxford-educated son of an Australian newspaper mandid not forge

himself into the chief executive officer of the 21st centurys dominant global media empire
by issuing apologies. This time he might want to make an exception.

If even a handful of the accusations being leveled against some of News Corp. (NWS)s
journalists turn out to be truehacking a murdered girls voice-mail messages; tampering
with evidence; bribing police; procuring the medical records of a Prime Ministers ill son
News Corp. will have been guilty of, at the very least, abysmal management. Given the
level of scrutiny the company has brought upon itself, its almost certain those
accusations will now, finally, be fully investigated.

But by letting the damage get so severe before conceding there might be something
rotten at News Corp., Murdoch and his management team have allowed the tiny print
newspaper divisionjust 3 percent of overall profit in the most recent quarterto imperil
the broader company. His decision, really a capitulation, to pull its $12.5 billion bid to gain
full control of British Sky Broadcasting, the U.K.s largest pay-television broadcaster, has
effectively cratered the strategy of bolstering News Corp.s digital operations and tapping
into BSkyBs rising cash flow. Members of the House of Commons are now questioning
whether News Corp. is fit to hold on to the 39 percent of the company it already owns. In
Washington, two senators are calling for probes into whether Murdochs reporters tried to
hack into the phones of Sept. 11 victims and their families.

The revealing thing about the News Corp. scandal is not that journalists can be ruthless
in pursuit of a scoop. Its that News Corp.s influence on Western mediaand British

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culture specificallyis so pervasive. Aside from the countless celebrities, public figures,
and victims of tragedy whose privacy News Corp. journalists are reported to have
violated, the trickling revelations have shown that British media and power are
inextricable.

Prior to the scandal, Prime Minister David Cameron was focused on implementing the
U.K.s most austere budget in generations. Now hes scrambling to explain why he hired
Andy Coulson, a former News of the World editor, and cultivated friendships with a circle
of senior Murdoch executives and family members, including Murdochs son James and
Rebekah Brooks, the CEO of News International and another former editor of News of
the World. British politicians had gotten the idea, rightly or wrongly, that they couldnt win
a general election without the endorsement of Murdoch and his newspapers, says Tim
Bale, a professor of politics at the U.K.s University of Sussex. [Camerons] judgment
looks questionable, and it makes him look like hes part of this elite group who felt they
were bulletproof and could do anything, including possibly misleading Parliament and the
police. It is safe to say that no one in British public life has been ennobled by the
scandal.

When allegations first surfaced about sleazy tactics at the 2.8 million circulation News
of the World, Murdoch blamed them on a solitary rogue reporter at the newspaper who
had been fired. In 2007 the episode appeared to be subsiding; the reporter, Clive
Goodman, and an outside private investigator, Glenn Mulcaire, were put behind bars for
tapping the phones of members of the royal family. The British police then closed their
investigation, citing a lack of evidence.

This failure to unearth the alleged journalistic malfeasance within News Corp. may have
stemmed in part from official laziness and corruption, but it also reflected an effective stall
-and-obfuscate strategy employed by the company, according to Peter Clarke, the former
deputy assistant commissioner of the Metropolitan Police. News International blocked
early police inquiries by its complete lack of cooperation and lies, Clarke told
lawmakers on Parliaments Home Affairs Committee on July 12. This is a global
organization with access to the best legal advice in my view deliberately trying to thwart a
criminal investigation, Clarke said as he tried to explain why police had not dug deeper.
I was as certain as I could be that they had something to hide.

Murdoch insisted throughout that the questions about his journalists methods were
baseless. Rival businesses and liberal politicians, he said, were trying to gin up a fake
controversy. Weve challengedand the police have challengedsome of these
allegations, Murdoch said in answer to a shareholder question about the phone-bugging

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issue at News Corp.s annual meeting last Oct. 15. Give us the evidence, he added
defiantly. No one has been able to.

Now that the evidence has arrived, its impact on shareholders has been significant. The
company has lost more than $5 billion in market capitalization since July 4, when the
Guardian in London reported that News of the World journalists had hacked into the cell
phone of murdered schoolgirl Milly Dowler, not the usual cause of a stock rout. Eight
days later, News Corp. scrambled to reverse the slide by announcing that it was almost
tripling its share buyback plan, to $5 billion worth of stock.

The refusal of Murdoch and his executives to apologize or engage earlier in a complete
and open investigation was not a momentary tactical mistake. According to Murdoch
biographer Michael Wolff, author of the 2008 biography The Man Who Owns the News, it
was a practiced corporate strategy. Its part of the News Corp. ethos, says Wolff. If you
are attacked from the outside, you defend. Its always us-vs.-them. Were right, youre
wrong.

News Corp.s belief in its organizational infallibilityor an insufficient appreciation for

transparencyhas played a key role in the phone hacking fiasco. So far, London police
have made at least eight arrests, including that of Coulson. He long denied any
wrongdoing or knowledge of reporters who tapped into phones while he led News of the
World. During hearings in 2007 and 2009, executives including Les Hinton, former
chairman of News International and now CEO of Dow Jones, the News Corp. unit that
owns the Wall Street Journal, said there was no evidence that more than one reporter
had been involved in phone hacking. Yet in his July 7 note to employees announcing the
closure of the tabloid, James Murdoch, 38, a top aide to his father, acknowledged that in
certain past statements company executives had misled the British Parliament.
(Bloomberg LP, the owner of Bloomberg Businessweek, competes with News Corp. units
in providing financial news and information.)

When Rebekah Brooks was asked in 2003 by a parliamentary committee whether her
paper at the time, the Sun, had ever bribed the police, Brooks responded yes. Later she
said she couldnt recall any specific instances of bribery. Politicians and News Corp.
employees in recent weeks have called for Brookss firing. Instead, when Murdoch
arrived in London on July 10 to take charge of the hacking crisis, he strolled with her
through a pack of photographers, grinning and murmuring words of support.

The backtracking and confusion have only empowered News Corp.s criticsamong
them former Prime Minister Gordon Brownwho have alleged that other Murdoch
papers, including the Sun tabloid and the more sober Sunday Times of London, have
used possibly illegal methods for gathering private information about their subjects.
Knowledgeable observers are already suggesting that the Murdochs will have to get out

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