A sting too far for News Corp?

The sheer ugliness of the behaviour of News employees in the UK, now linked to Australia thanks to a cache of emails published by the AFR, could be the final straw for frustrated investors.

News Corp has already been destabilised and distracted by the ongoing and ever-deepening phone-hacking scandal and allegations of corrupt payments to officials in the UK. Will the resurfacing of old allegations of immoral behaviour in its pay television operations be the final straw for investors that forces significant change within the group?

The new allegations, by the BBC’s Panorama program in the UK and, very dramatically, in the Australian Financial Review – which built five pages of coverage around 14,000 emails that it said originated from a former head of operation security for a News’ technology subsidiary – revolve around claims that News’ NDS subsidiary paid hackers to crack the security of smart cards issued by rival pay TV operators in order to promote piracy of their offerings and to destabilise them.

The AFR went to some lengths to make it clear that such activity wouldn’t have been illegal. There have been court actions against News in the past on the basis of similar allegations, which News has won.
The release of the emails – many of which the AFR has posted on its website – however, paints News, or at least NDS, in a very ugly light. The alleged behaviour may not have been illegal but, if it did occur, it was at best amoral and probably would be regarded by most as unacceptable.

Moreover, the renewed scrutiny of events that occurred over a decade ago comes at a very critical time for News which, with a private equity partner, is in the midst of a sale of NDS to Cisco for $US5 billion.

It has already triggered a call from UK Labour MP Tom Watson – the MP who has spearheaded the UK Parliament’s inquiries into the phone-hacking scandal that led to the closure of The News of the World newspaper – for the issues raised by Panorama and the AFR to be included in its inquiry into whether News Corp and its executives were ‘’fit and proper’’ to hold broadcasting licences.

News controls the BSkyB pay television business in the UK and was on the verge of making an offer for the rest before the phone-hacking scandal derailed its plans and forced it to withdraw.

News thought it could contain the damage created by the phone-hacking scandal when it closed The News of the World. Instead the revelations – and charges against a still-lengthening queue of present and former News executives – have continued and the allegations have broadened from phone-hacking to corrupt payments.

The UK developments have upset Rupert Murdoch’s succession plans because of the involvement of his son James, not in the phone hacking, but in News’ response, or lack of it, to the recognition within News that the practice wasn’t an isolated one.

Whether James, who chaired News International, knew how endemic the practice was within the business or not, he should have. It is now generally accepted that he cannot succeed Rupert if Rupert were to relinquish the chief executive role at News any time in the foreseeable future.

The investigation into allegations of large-scale corrupt payments to UK officials, including police, has also raised the spectre of actions against News in the US, where it is an offence to make corrupt payments to public officials.

Throw the revival of the allegations against NDS – and the impact of the 14,000 emails – into the volatile mix of adverse pressures swirling around News and its environment could become highly combustible.

In this country, of course, News has a testy relationship with the Gillard Government which won’t have been helped by Stephen Conroy saying that the allegations were serious and should be investigated by the Australian Federal Police.

News, with Fairfax and other publishers, is fighting back against the recommendations of the Finkelstein inquiry that a new publicly-funded regulator should be established to regulate newspapers and other currently unregulated forms of media. The latest bout of unpleasant publicity won’t help its cause.

So far, perhaps because its non-newspaper businesses have been performing strongly, or perhaps because it has been conducting a share buy-back program, the News share price hasn’t been adversely affected by the revelations in the UK, although there have been increasingly public utterings of dissatisfaction from non-Murdoch News shareholders.

There is no doubt, however, that the sheer ugliness and immorality of the behaviour of News employees in the UK and the apparent lack of oversight and awareness of what was occurring within the group – which is the most generous of interpretations one could put on the roles of senior News executives in the scandals – has stained News’ reputation indelibly and destructively and have created potential threats to careers and to businesses it regards as core.

The latest allegations may not be new, and may not relate to illegal activities, but they will add to the damage already done and to the pressure for real reform of the culture and the management of the group.