Murdoch’s News Corp. Hives Off Its Publishing Firms but the Hacking Scandal Woes Remain

News Corp. confirms that it’s spinning off its less profitable publishing interests, though it will still be as culpable as ever in the legal difficulties those companies face in the phone-hacking scandal, writes Peter Jukes.

06.26.12 7:14 PM ET

In what would be the biggest upheaval in its 30-year history, News Corp. has confirmed that it is planning to hive off its publishing interests–including the troubled U.K. subsidiary News International, which has been beset by phone- hacking and bribery allegations–from its lucrative pay-TV and entertainment business.

Such a split has been rumored for years, even before the phone-hacking scandal erupted in the U.K. last summer, leading to the closure of the 168-year-old News of the World and the arrest of dozens of News International journalists, including the company’s former CEO, Rebekah Brooks. The rumors were given more substance by a Wall Street Journal article this morning and confirmed in an official News Corp. statement later in the day that it was looking into the proposition.

Around the same time, at the Leveson Inquiry into press practices currently taking place in the Royal Courts of Justice in London, a close adviser to Deputy Prime Minister Nick Clegg added to the damaging allegations against News Corp.’s activities in London.  Norman Lamb M.P. produced notes of a meeting with a senior News Corp. lobbyist, which appeared to confirm oral evidence given by the Liberal Democrat business minister, Vince Cable, that Murdoch’s papers would “do over” the Liberal Democrat partners in Britain’s Coalition government if Cable referred News Corp’s $16 billion takeover bid for BSkyB to the competition commission.

Though the timing of both statements is a coincidence–the lawyer representing News Corp. at the inquiry said they didn’t have enough time to respond to this new allegation of back door lobbying–the corporate upheaval at News Corp. cannot be separated from the hacking scandal and its year-long aftermath.

The third-largest media conglomerate in the world, capitalized at a value of over $50 billion, News Corp.’s publishing interests have become a declining fraction of its revenues and profits. For the first nine months of the current fiscal year, pay-TV, cable, and satellite entertainment have provided 90 percent of the corporation’s $4.2 billion profit.

News Corp. shares (NWSA) have risen nearly 9 percent on news of the planned break-up as the publishing division is seen by investors as a drain on the company. However, the hiving off will come as a blow to Rupert Murdoch, whose father was an Australian press baron, and who has maintained a close interest and loyalty towards his British papers ever since he established News International as a dominant force in the British press starting in the 70s. The hundreds of millions of dollars profit he made by moving his papers to a new plant at Wapping in 1986 helped fund the acquisition of the TV stations which eventually became the Fox Network.

A separately listed publishing company would include the book publisher HarperCollins, U.S. papers The Wall Street Journal and New York Post, "British titles such as The Times, The Sun and The Sunday Times, and several Australian newspapers, which dominated the market with nearly 70 percent of the readership. According to Michael Wolff, Rupert Murdoch’s biographer, Lachlan Murdoch is likely to take over the new publishing venture. His younger brother, James, resigned from News International and the chairmanship of BSkyB in the wake of the phone-hacking scandal and allegations of corporate cover-up.

Spinning off the publishing interests would not, however, divest the parent company of its potential legal liabilities either in the U.K. for civil suits for privacy intrusion (which has already costs hundreds of millions of dollars), nor fines in the U.S. for violating the Foreign Corrupt Practices Act, by allegedly bribing police officers and other public officials. Several of the key newspapers in the group–The Times, The Australian, New York Post–show heavy operating losses.

In testimony before the Leveson Inquiry in April, Murdoch admitted there had been a “cover-up” by senior News International executives over the extent of phone hacking, of which he had no knowledge. He also vehemently denied he had used his paper’s political endorsements to further his commercial interests, and declared under oath, “I’ve never asked a prime minister for anything!”

Subsequent testimony by three prime ministers has cast doubt on this assertion. Sir John Major, who succeeded Margaret Thatcher as prime minister in 1990, claimed Murdoch had told him that that News International would only support the Conservative leader if he took a tougher line on the European Union. “It became apparent that Mr. Murdoch didn't like our European policies, and he wished me to change them,” Major told the Inquiry. “If we didn't ... his paper would not and could not support the Conservative government."

Major’s successor, Tony Blair, denied any explicit or implicit deal with the media mogul, but in diaries published last week, Blair’s close adviser and chief press spokesman, Alastair Campbell, described one of Murdoch’s phone calls to the prime minister on the eve of the Iraq invasion in 2003. "Both TB [Tony Blair] and I felt it was prompted by Washington,” Campbell writes in The Burden of Power, “and another example of their over-crude diplomacy.” The next day Campbell added "TB felt the Murdoch call was odd, not very clever."

Former prime minister Gordon Brown also alleged that News International’s support for his premiership was conditional on acquiescing to News Corp.’s commercial interests. He laid out the timing of James Murdoch’s demands for the abolition of the broadcast regulator Ofcom, and a reduction in subsidy towards the BBC, policies which were then adopted by the opposition Conservative party, led by David Cameron. However, there was still no direct evidence that the Conservatives knew about James Murdoch’s plan to takeover BSkyB, as the bid was only launched in June 2010 after the coalition government was in place. Both Prime Minister David Cameron and Chancellor of the Exchequer George Osborne dismissed Brown’s allegations as “fantasy.”

However, the testimony of Deputy Prime Minister Nick Clegg and his cabinet colleague Vince Cable suggested direct pressure was brought to bear on members of the government to let the bid go through, and this has now been backed up by contemporaneous notes of a meeting between Norman Lamb M.P. and the chief European lobbyist for News Corp., Frederic Michel. During that meeting, Lamb alleges that Michel told him that the Lib Dems could expect to receive far less favourable coverage, especially in News International’s bestselling daily tabloid The Sun, if they failed to support the BSkyB bid. “It was brazen” Lamb noted at the time. “VC (Vince Cable) refers case to Ofcom—they turn nasty.” News Corp. has denied that any threats were made.

BSkyB is Britain’s most lucrative broadcaster, with double the revenues of the BBC. James Murdoch’s bid for the remaining 61 percent of shares was seen as his claim to be heir apparent to his father, and to launch a digital hub combining the newspaper and broadcasting businesses. The bid was abandoned last summer.