Murdoch's crumbling print pillars
As the mushroom cloud from the News of the World scandal continues to swell, News Corp's executives are seriously contemplating selling or spinning off the group's troublesome and threatening newspaper operations.
News' deputy chairman and chief operating officer, Chase Carey, speaking at an investor conference in the US yesterday, confirmed that the group had discussed selling or distancing its publishing operations from its far more profitable film and television businesses, saying that there was an awareness that News would trade on the sharemarket at higher multiples if it didn't own newspapers.
The financial costs of the News of the World scandal and closure are mounting, with News including a $US87 million charge against its second quarter earnings earlier this month and continuing to write a seemingly endless series of big cheques to the hundreds of phone hacking victims lodging claims against it.
The affair has also done enormous reputational damage to the group and that appears to be intensifying with each day's incendiary testimony to the Leveson inquiry investigating the scandal.
Earlier this week a senior UK Metropolitan police official referred to a "culture of illegal payments" at News' UK flagship masthead The Sun and "a network of corrupted officials".
That would have triggered alarm bells at News, which would be acutely conscious of the fact that under US law it is a criminal offence for US companies to make corrupt payments to foreign government officials. The after-shocks of the UK scandal are now threatening the US heart of News.
Carey, and the other News executives who manage the more than 80 per cent of News that is unrelated to its publishing businesses have never been as committed to newspapers as Rupert Murdoch, who has ink in his veins.
Murdoch was very excited about last weekend's launch of the Sun on Sunday, tweeting "amazing" in response to the 3.3 million copies of the launch paper that were sold. One doubts whether the non-Murdoch executives in the company are quite as excited about the notion of increasing their exposure to newspapers, particularly in the UK.
Even without the costs and risks, financial and otherwise, being generated by the UK disclosures if it weren't for Rupert it is unlikely the newspapers would still be in the News portfolio. They have been steadily declining in relevance for a long time as News' global film and TV operations have grown and are in an industry that faces severe cyclical and, more significantly, structural issues.
Had it not been for Rupert's love of newspapers and the prestige and power they have traditionally conferred it is doubtful that News would have bought Dow Jones and the Wall Street Journal in 2007. News paid about $US5.6 billion for the company – and wrote $US2.8 billion of it off two years later.
When News reported its first quarter earnings earlier this month publishing revenues represented less than 15 per cent of the group's $US1.5 billion revenues. For the December half they were only about 11 per cent of the group's revenues. On both a quarterly and half-year basis they were down more than 40 per cent and Carey said at the time that he expected them to contribute $US350 million less revenue to the group for the full year.
So, even without the destabilising and expensive News of the World affair, there would be a growing question mark over the continuing existence of the newspapers within the group, were it not for Rupert's passion for them.
If the fallout from the UK does reach the US headquarters, or appears likely to, the pressure to distance the newspapers from the rest of the group will only intensify, even if that wouldn't truncate the potential liabilities and damage to key News executives, and perhaps shareholders, from the revelations in the UK.
The obvious approach to putting some daylight between the newspapers and the rest while appeasing Rupert would be to spin them out to existing News shareholders.
That would give Rupert and his family (who are less enthusiastic about newspapers than him) the opportunity to retain their control and influence over that part of the business while releasing value within the rest of the company that has been suppressed by the scandal, the poor performance of the publishing businesses and the question mark over the future of newspapers generally.
It is improbable that anybody would want to buy the UK newspapers at this point, making a spin-off of the entire publishing business the most realistic option.
There was a conviction within the market that as long as Rupert was alive newspapers would remain within the News Corp portfolio, to be disposed of the moment someone succeeded him, whether from within the family or without.
The gravity of what has emerged from the UK, and its implications for the wider group, however, suggest that moment might come sooner than expected and under quite different and unexpected circumstances.