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Murdoch Says "Bye-Bye, BSkyB" and Builds a News Corp. Firewall

The News of the World phone hacking scandal only gets wider and deeper for News Corp. (NWS) CEO Rupert Murdoch. The company just dropped its bid for the majority share of British satellite broadcaster BSkyB.

It's just the latest step that Murdoch has taken to secure the future of his company and its need -- no matter how much he personally hates the thought -- to transition out of newspapers and further into electronic media. But a $5 billion stock buyback and even possible plans to sell off the U.K. newspaper unit may not be enough to protect News from the long-brewing scandal and its consequences.

Newspapers don't float the profit boat
News needs to change its economic business model. For decades a great source of high margin revenue, newspapers have become a wounded and weakening industry. Traditional publishing makes up the largest single portion of News' revenues, but performs abysmally. Here is the chart I put together from public filings showing the breakout of revenue and income by division for the first nine months of both FY 2010 and 2011 (click to enlarge):

Now here's an additional chart for the same period in 2011 showing net income or loss as a percentage of revenue:

Outside of the "other" category, which is comparatively small, publishing is the second poorest performing division. The only one that does even worse is direct broadcast satellite TV.

But BSkyB is a growing company with far better results -- plus it throws off 12 percent of its revenue as free cash, which would be useful to News and its $15.5 billion in long-term debt. That's exactly the direction Murdoch needs to move toward and why he wanted News to own the entire company.

Pols no longer pals to the kingmaker
The problem Murdoch faces is that generations of politicians have either been beholden to him for election support or have been targeted by his papers. None like being in that position, and the ones with historic ties have felt the need to distances themselves. It explains the flood of pressure from all parts of the political spectrum.

British Prime Minister David Cameron welcomed the end of the BSkyB bid and issued a statement that the "business should focus on clearing up the mess and getting its own house in order." Opposition Labor leader Ed Milibrand called it a "victory for people."

If Murdoch and News could be independent of the political process, that would be fine. But expanding ownership of electronic media generally means getting some government body or other to agree. The fear and animosity that Murdoch has cultivated as a way to power have turned about and become his enemies.

Threats at the door
Worse, they've become an active threat to News itself. Parliament's Commons select committee on culture, media and sport delivered an ultimatum to Rebekah Brooks, chief executive of News' British newspaper division: Show up voluntarily for a hearing or expect a subpoena. Now it looks as though Brooks and both Rupert and James Murdoch will be grilled by Parliament on July 19.

U.S. Senator Jay Rockefeller wants a probe of allegations that News hacked the phones of Americans, including victims of the 9/11 attacks. Cameron also plans an investigation.

Then there's the whole question of potential criminal investigations. The U.S. Department of Justice and SEC have ramped up their investigations into alleged violations of the Foreign Corrupt Practices Act of 1977, which makes bribery of foreign officials a crime. As News officials have admitted paying money to police officers for information, the company -- a U.S. firm, remember -- could easily be a target, an action that former New York Attorney General Elliot Spitzer called for in Slate. And the U.K. has an even stricter and broader anti-bribery statute.

Murdoch not only faces unfriendly forces for future deals, but existing ones might be endangered. As Spitzer points out, relicensing requires the FCC to ensure that a company

has not committed any serious violations of the Communications Act or the FCC's rules; and has not committed other violations which, taken together, would constitute a pattern of abuse.
In theory, at least, News could lose licenses to television stations it owns in the U.S. when renewal time comes around. Apparently, the U.K. government could also revisit whether News is "fit and proper" to own the 41 percent of BSkyB it already holds. One Liberal Democrat politician is calling for regulators to reopen the question, which could potentially lead to a forced sell-off.

How many more revelations would it take for even Conservative and Labor politicians to chime in?


Image: morgueFile user rachjose, site standard license.
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