Murdoch's Next Move
Why Chernin's much-hyped deal isn't really all that.
UPDATE: As expected, Wall Street did not react happily to Peter Chernin’s departure from News Corp. yesterday. A day after the company announced that its president and CFO of 12 years was fleeing the coop, influential entertainment-industry analyst Richard Greenfield fired out an email noting that until the company replaces its number-two man, Rupert Murdoch will have no fewer than 16 executives reporting directly to him.
Isn’t it odd that while Sumner Redstone can’t push his children out of his company fast enough, Murdoch seems to have trouble drawing his in?
Though the 78-year-old Murdoch is already hands-on and intends to be even more so in the future, it seems clear that situation cannot stand. Anticipating nervousness from its investors, News Corp. has said that it will “streamline” management. What that means hasn't been spelled out but it might involve creating an "office-of-the-chairman" committee that would includes Murdoch’s youngest son James as well News Corp. powerhouse Roger Ailes, who currently oversees the news operations and television stations. Film studio co-chairmen Jim Gianopulos and Tom Rothman would round out the high-powered quartet. (Apart from conferring power, it seems that Office of the Chairman posts at News Corp. come with a lavish lifetime financial benefit that is coveted within the company.) News Corp. is sticking to the position—at least for now—that there will be no number-two person.
But for Greenfield, whose early warning of Chernin's departure may have helped propel the company's stock sharply downward, rule by committee won’t do the trick. But if there is to be another number-two person, the question is whether there's a desirable candidate who would take a position reporting to a cranky mogul, knowing that Murdoch has no intention of turning over the keys. Some have bandied about the name of former Viacom executive Tom Freston, who is used to working with a grumpy old man. Others say his experiences with Viacom chairman Sumner Redstone make that unlikely. Another name that has floated: Jonathan Dolgen, the tough-minded businessman who ran Viacom's film studio. (His resume includes an earlier stint working for Murdoch at Fox.) He has the requisite hearty appetite for controlling costs.
Speculation also continues to be focused on the Murdoch family. Fortune.com reported Tuesday that while Murdoch was negotiating fruitlessly with Chernin, he also failed to persuade his daughter Elisabeth to join the News Corp. board because it would have created conflicts for her in relation to her British production company, Shine. (Isn’t it odd that while Sumner Redstone can’t push his children out of his company fast enough, Murdoch seems to have trouble drawing his children in?) Elisabeth sat in as an “observer” Tuesday at the News Corp. board meeting in New York. Her presence hardly went unremarked on in Hollywood.
Meanwhile, what will become of Chernin? It was widely reported that his exit package includes a rich production deal that gives him “puts” in films and television—industry talk for the right to make a certain number of movies or shows at a studio without the need to seek approval from executives in charge.
While that sounds good, that deal has been greeted with much skepticism in Hollywood. An executive who was offered a similar deal on his way out of a high-level job says they don’t usually amount into anything. "Puts are meaningless because he won't exercise them because he won't want his movies killed," this person says. And a reluctant studio can find many ways to do movies in—by scheduling a film on a terrible release date, for example, or simply by failing to put together an effective marketing campaign.
These days, says another former top studio executive, puts are an anachronism. “Studios hate them,” the executive says. “You go to Tom Rothman and Jim Gianopulos and you say, ‘Now you’ve lost X amount from your budget because Peter Chernin has puts.’ It drives them crazy. So in public everyone’s nice, nice, nice… But Peter Chernin knows he’ll be fought on every step." Besides, he adds, “If Tom and Jim are in a new reporting structure with more power, they’re not going to want the guy who had the job before them hanging around.”
Another source close to the studio concurs. "Chernin squeezed them on every fucking thing they did, budget-wise," he says.
No doubt Gianopulos and Rothman would be shocked—shocked—by the suggestion that they would do anything other than greet Chernin with open arms. As for Chernin, he has said that in addition to starting his production company, he’ll be working to eradicate malaria (he's the co-founder of Malaria No More) and pursuing other entrepreneurial interests. Perhaps those endeavors will bear more fruit than those notorious puts.
ORIGINAL POST: Monday’s bombshell announcement that News Corp. head honcho Peter Chernin was stepping down sent shocked ripples through Hollywood and Wall Street. But inside the troubled empire that Rupert Murdoch built, his departure didn’t cause as much of a stir. Indeed speculation about Chernin’s future had been brewing—inside and outside the company—for weeks, heating up ever since Murdoch has returned from Australia, where he celebrated his mother's 100th birthday, earlier this month.
The contract for Chernin, Murdoch's chief lieutenant, was set to expire on June 30, and the two executives had been locked in intense negotiations for months. Their failure to close a deal worried investors, which has long been concerned about the lack of a successor to the 78-year-old mogul. Entertainment industry analyst Rich Greenfield had recently downgraded the stock to a sell, citing the possibility that Chernin would depart.
After failing to come up with a mutually acceptable deal, the two agreed to reveal Chernin's departure at a board meeting later this week. That plan was upended Monday morning, when news of imminent Chernin's departure was inconveniently leaked by industry website Deadline Hollywood Daily. The news flew through Hollywood hours later.
Despite the speculation, in an industry that tears through executives like Kleenex Chernin’s continued presence at the helm of Fox seemed all but guaranteed. After all, Chernin has been known to take previous negotiations down to the wire. The 57-year-old executive has worked for Murdoch for 20 years—the last 12 as his number-two man, helping to build Fox into a corporate behemoth that raked in $33 billion in revenue last year. Murdoch gave Chernin remarkable control over the TV and film businesses that account for the largest part of the company's operating income. Chernin, in contrast to his tough-talking boss, was a smooth and well-liked ambassador to Wall Street and Hollywood. But his affable personality belied his skills as a shrewd political infighter.
Outwardly, at least, Chernin seemed to understand the limitations of his job. “He’s a very good guy for Rupert,” says a Fox veteran. “He doesn’t get out in front of him. He understands the idea that it’s a family-owned business and he only works there. He figured out how to do that and get paid really well.” Chernin got a $29 million pay package last year, earning even more than Murdoch. He was also paid better than any other executive in the movie business. But he got more in cash and less in stock than some of his peers, underscoring the point that he was an employee, not an owner. Chernin seemed to accept his role. "I'm just warming the seat for a Murdoch," Chernin used to say.
But in private, it's not clear that the ambitious Chernin was quite so accepting as he appeared. In fact, he had played a central role in the 2005 ouster of Murdoch’s 33-year-old son Lachlan from the company, setting the stage for a growing estrangement from his boss.. In the late nineties, Murdoch’s middle son had worked for Fox as Chernin’s deputy, but the two were said to clash repeatedly. Finally fed up, Chernin reportedly teamed up with Fox News Chairman Roger Ailes, another Lachlan antagonist, and told Murdoch that his son had to go. (He still remains on News Corp.’s board.) Though he eventually relented, the family-minded Murdoch was said to be deeply conflicted about his decision. At this point his youngest son James, who is currently chief executive of News Crop., Europe and Asia, is the favorite to succeed him. But it’s not clear that James is up to the job. Indeed some sources say that he’s said he doesn’t yet want it.
Much remains mysterious about the rupture between Murdoch and Chernin. Chernin is known for keeping his cards close to the vest (one associate describes him as “a Cheshire cat”). Murdoch has been mum. But as the Lachlin episode illustrates, there clearly are conflicts between the two that go beyond the fact that Chernin is a staunch Democrat and Murdoch is not.
According to some reports, Chernin wanted it in his contract that he would become chief executive if Murdoch were to depart the company for any reason over the next four years. Murdoch insisted on leaving the door open for one of his children, presumably James. Another area of dissent was Murdoch's antipathy for the film and television business—the divisions that have been Chernin's responsibility. The technology focused executive doesn’t share his boss's longstanding passion for newspapers . Murdoch’s decision to support the money-losing New York Post has cost the company to bleed many millions of dollars over the years, so last year, when the mogul announced his intent to buy the money losing Wall Street Journal, for billions more, Chernin was said to be apoplectic. Growing tensions between the two men were exacerbated by the company’s faltering fortunes. One News Corp. insider says they had reached a point of such mutual dislike that some months ago Murdoch had Chernin’s New York offices moved without bothering to inform him. (While Chernin obviously spends lots of time in New York, his base is in Los Angeles.)
Though Wall Street promises to react negatively to Chernin’s departure—the company’s stocks tumbled 4.3 percent yesterday—the real impact of his exit is still unclear. “Peter is a great executive,” says Jon Landau, who is a partner in James Cameron’s Lightstorm Entertainment. “That balance of his business acumen and creativity—I don’t know that I could name a glaring weakness.” No one describes Chernin as a visionary—that’s Murdoch’s job—but he is generally seen as exceedingly competent. Still, Landau says his primary relationship now is with studio co-chairmen Jim Gianopulos and Tom Rothman; he says he has the "utmost confidence" in them.
Some expect Gianopulos and Rothman to advance now that Chernin is leaving; they might be among a number of senior executives who are not looking forward to dealing directly with the cantankerous Murdoch. In the past, studio veterans say, Chernin has often shielded underlings from the boss’s often quixotic decisions. Chernin “stood between Rupert and everyone else,” says Tom Sherak, who spent 17 years at the Fox studio. “Murdoch has got rigid points of view about stuff,” says another veteran. “He expresses them in a very argumentative way. He doesn’t always mean it. So if Murdoch had a bad idea, Peter would say, `We don’t want to do that.’ That’s an important skill around here.”
But Chernin has at least one outspoken detractor—the former head of the Fox studio, Bill Mechanic. “Peter’s in the Peter business,” says Mechanic, now a producer of movies like Coraline. “That’s his job. Every day is focused on, `How do I do something for myself?’ . . . Certainly when I was there, he was not a popular guy.” Chernin hired Mechanic to run the Fox studio after Chernin was promoted to Murdoch’s number-two. At the time, Titanic was a work in progress. Mechanic found that he was left to wage war with Jim Cameron, who was running over-budget and behind schedule. As he tried to prevent the film from spinning out of control, Mechanic tried to ascertain whether Chernin had made certain promises to the filmmaker while he was still running the studio. “I couldn’t get him on the phone,” he says.
Given Murdoch's distaste for the entertainment business, many speculate he might have kept Chernin on if his deputy hadn’t pressed for an even sweeter deal. But as NewCorp’s shares plummeted by 67% over the past year, insiders say Murdoch balked at giving Chernin another rich contract. “We didn’t have a great year,” says one Fox executive. “How do you justify rewarding this guy? I think he priced himself out of a job.”
Chernin is expected to stay at his job until June, when his current five-year contract expires. And he won’t be leaving empty-handed. He had previously negotiated a deal that provides him with the chance to make movie and television programming and even use the corporate jet. (Ironically, it’s a deal that the thrifty executives who run the Fox studio would not have made but now must live with.) Whether Chernin jumped or was pushed, most observers agree this is a good time for him to step away. His Teflon reputation kept him unscathed even as News Corp.'s fortunes tumbled. But it's unclear how long that would have continued. "It’s very difficult to say you’re going to take the company to great heights in the next two or three years,” says a top studio executive. “Why not take some time, wait until the world recovers?"
Chernin has said he’s going to set up his production company, spend time working to eradicate malaria and perhaps pursue some entrepreneurial interests. Many observers expect his emphasis to fall on that last area of interest. CNN is reporting that there is talk of him working with Providence Capital, the media-focusedbuyout firm. Others speculate that, Chernin might want to be part of a group that would buy NBC Universal from General Electric. And some reports even have him pondering a run for Governor of California.
Sherak points out that Chernin, at 57, is still a relatively young man with the freedom to pursue interests outside of News Corp. “There are other things to do in life,” he says. “You might say, `Is this a good time to do them?’ With the deal that he has, it is.”
Kim Masters covers the business of entertainment for NPR News. She is also the author of The Keys to the Kingdom: The Rise of Michael Eisner and the Fall of Everybody Else.