News Corp.’s News of the World debacle will have big aftershocks

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With advertisers fleeing fast in the wake of scandal and a deal to acquire control of a huge media property on the line, News Corp. made the decision that it was better to quit than fight.

By pulling the plug on its News of the World newspaper, Rupert Murdoch’s media conglomerate hopes that it will buy some good will from the British government with regards to its desire to buy the 60% of British Sky Broadcasting (BSkyB) it doesn’t already own.

But it may be too little too late. The revelations that News of the World, part of News Corp.’ s News International unit, was engaged in hacking the voicemail accounts of not only celebrities and members of the Royal Family but also victims of crime and terrorism, has shocked even the United Kingdom, where there has long been a high tolerance for tabloid shenanigans.

“There is a large groundswell of public opposition to this deal, which has only grown in recent days,” said Panmure Gordon & Co. analyst Alex DeGroote.

Even if the scandal doesn’t kill the BSkyB deal, odds are any agreement will be slow in coming and given intense scrutiny, which will make it even costlier for News Corp. The company had already endured a lengthy review of its intentions to shell out roughly $13 billion for total control of BSkyB. Collins Stewart analyst Thomas Eagan said News Corp. may have to bid another $1.3 billion.

Closing News of the World won’t even be a blip on the bottom line of News Corp. and its $30 billion in annual revenue. The paper, according to industry analysts, was marginally profitable. However, its value to the company cannot be measured in just dollars and cents.

“Here in the U.K., News of the World has an iconic value way beyond its profits,” DeGroote said.

By shutting down News of the World, Murdoch is also trying to protect two of his top lieutenants -- Rebekah Brooks, the current head of News International, and Les Hinton, the former chief of that unit who is now based in the United States as publisher of The Wall Street Journal.

Brooks, who rose up the ranks at News Corp.’s Sun tabloid before heading News International, is close not only to Murdoch, but also his older kids, particularly Elisabeth and James. It was not uncommon to see Brooks dining with Liz Murdoch at Notting Hill’s trendy pan-Asian restaurant E & O.

“She’s like an adopted daughter; he’ll do everything he can to save her,” said a former News Corp. executive who is close to both the Murdoch family and Brooks.

Of course, even Murdoch will ultimately favor the bottom line over loyalty, and if the News of the World debacle doesn’t fade away, Brooks and possibly Hinton could be on borrowed time.

‘Does he have real attachments to people or is everything just a business transaction?’ wondered one longtime Murdoch observer.

For Murdoch and his family, the scandal that brought down what was a cornerstone of the media conglomerate for more than 40 years is a tremendous blow to their already controversial legacy. Murdoch, whose far-flung empire includes movie studios, television networks and satellite operations, has always prided himself as being a newspaper man first, much to the chagrin of Wall Street, which has a dim view of the future prospects for the industry.

The decision also puts a dark cloud over Murdoch’s son James, who earlier this year was named a deputy chief operating officer of News Corp. and is now considered by many to be the heir apparent to succeed his father as head of the company. The abruptness of that move was seen by many who follow the company and family as part of an effort to put some distance between the younger Murdoch and the growing scandal.

It was James Murdoch who issued a lengthy statement acknowledging the missteps of both the paper and himself.

‘Wrongdoers turned a good newsroom bad and this was not fully understood or adequately pursued,’ he said.

Just how much was fully understood and by whom will be crucial to the future of News Corp. and the already controversial Murdoch legacy.

‘The reason Rupert Murdoch went to the extreme of shutting the paper down is because it has the potential to get very ugly,’ said Alex Jones, the Laurence M. Lombard Lecturer in the Press and Public Policy at the Harvard Kennedy School. ‘This is an institution that has very senior executives who may not have authorized it, but may have known about it and didn’t stop it and didn’t disclose it.’

The rapidness with which the News of the World scandal went from minor brush fire to an inferno came at a time when the company is running short on lawyers. Last month, the company’s longtime general counsel, Lon Jacobs, abruptly resigned. He has not been replaced. Joel Klein, a former Justice Department attorney and head of the New York City school system who joined News Corp. to oversee the company’s expansion into the education business, was called in to try to clean up the News of the World mess.

It is unlikely that the events in England will have any financial effect on News Corp.’s vast U.S. operations, which include the Fox television network, Fox News, the movie studio 20th Century Fox and numerous other entertainment and news operations.

But the circumstances surrounding the demise of News of the World will give Murdoch critics and his media empire even more ammunition to use against the mogul, who is often seen as having far too great an influence on politics and media.

-- Joe Flint

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Upper photo: A security guard stands at the entrance to News International offices in Wapping, London, July 7, 2011. Credit: Paul Hackett / Reuters

Top right photo: Rupert Murdoch. Credit: Anthony Bolante/Reuters. Bottom left photo: James Murdoch. Credit: Peter Macdiarmid/Getty Images