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Murdoch’s Media Mafia

Posted on Tuesday, 20th September 2011 @ 07:13 AM by Text Size A | A | A

Troubles That Money Can’t
Dispel

By

“Bury your mistakes,” Rupert
Murdoch
is fond of saying. But some mistakes don’t stay buried, no
matter how much money you throw at them.

Time and again in the United States and elsewhere, Mr. Murdoch’s News
Corporation
has used blunt force spending to skate past judgment,
agreeing to payments to settle legal cases and, undoubtedly more
important, silence its critics. In the case of News America Marketing,
its obscure but profitable in-store and newspaper insert marketing
business, the News Corporation has paid out about $655 million to make
embarrassing charges of corporate espionage and anticompetitive behavior
go away.

That kind of strategy provides a useful window into the larger corporate
culture at a company that is now engulfed by a wildfire burning out of
control in London, sparked by the hacking of a murdered young girl’s
phone and fed by a steady stream of revelations about seedy, unethical
and sometimes criminal behavior at the company’s newspapers.

So far, 10 people have been arrested, including,
on Sunday, Rebekah Brooks,
the head of News International. Les
Hinton, who ran News International before her and most recently was the
head of Dow Jones, resigned on Friday. Now we are left to wonder whether
Mr. Murdoch will be forced to make an Abraham-like sacrifice and
abandon his son James, the former heir apparent.

The News Corporation may be hoping that it can get back to business now
that some of the responsible parties have been held to account — and
that people will see the incident as an aberrant byproduct of the world
of British tabloids. But that seems like a stretch. The damage is likely
to continue to mount, perhaps because the underlying pathology is
hardly restricted to those who have taken the fall.

As Mark Lewis, the lawyer for the family of the murdered girl, Milly
Dowler, said after Ms. Brooks resigned, “This is not just about one
individual but about the culture of an organization.”

Well put. That organization has used strategic acumen to assemble a vast
and lucrative string of media properties, but there is also a long
history of rounded-off corners. It has skated on regulatory issues,
treated an editorial oversight committee as if it were a potted plant
(at The Wall Street Journal), and made common cause with restrictive
governments (China) and suspect businesses — all in the relentless
pursuit of More. In the process, Mr. Murdoch has always been frank in
his impatience with the rules of others.

According to The Guardian, whose bulldog reporting pulled back the
curtain on the phone-hacking scandal, the News Corporation paid out $1.6
million in 2009 to settle claims related to the scandal. While
expedient, and inexpensive — the company still has gobs of money on hand
— it was probably not a good strategy in the long run. If some of those
cases had gone to trial, it would have had the effect of lancing the
wound.

Litigation can have an annealing effect on companies, forcing them to
re-examine the way they do business. But as it was, the full extent and
villainy of the hacking was never known because the News Corporation
paid serious money to make sure it stayed that way.

And the money the company reportedly paid out to hacking victims is
chicken feed compared with what it has spent trying to paper over the
tactics of News America in a series of lawsuits filed by smaller
competitors in the United States.

In 2006 the state of Minnesota accused News America of engaging in
unfair trade practices, and the company settled by agreeing to pay costs
and not to falsely disparage its competitors.

In 2009, a federal case in New Jersey brought by a company called
Floorgraphics went to trial, accusing News America of, wait for it,
hacking its way into Floorgraphics’s password protected computer system.
The complaint summed up the ethos of News America nicely, saying it had
“illegally accessed plaintiff’s computer system and obtained proprietary
information” and “disseminated false, misleading and malicious
information about the plaintiff.”

The complaint stated that the breach was traced to an I.P. address
registered to News America and that after the break-in, Floorgraphics
lost contracts from Safeway, Winn-Dixie and Piggly Wiggly.

Much of the lawsuit was based on the testimony of Robert Emmel, a former
News America executive who had become a whistle-blower. After a few
days of testimony, the News Corporation had heard enough. It settled
with Floorgraphics for $29.5 million and then, days later, bought it,
even though it reportedly had sales of less than $1 million.

But the problems continued, and keeping a lid on News America turned out
to be a busy and expensive exercise. At the beginning of this year, it
paid out $125 million to Insignia Systems to settle allegations of
anticompetitive behavior and violations of antitrust laws. And in the
most costly payout, it spent half a billion dollars in 2010 on another
settlement, just days before the case was scheduled to go to trial. The
plaintiff, Valassis Communications, had already won a $300 million
verdict in Michigan, but dropped the lawsuit in exchange for $500
million and an agreement to cooperate on certain ventures going forward.
The News Corporation is a very large, well-capitalized company, but that
single payout to Valassis represented one-fifth of the company’s net
income in 2010 and matched the earnings of the entire newspaper and
information division that News America was a part of.

Because consumers (and journalists) don’t much care who owns the coupon
machine in the snack aisle, the cases have not received much attention.
But that doesn’t mean that they aren’t a useful window into the broader
culture at the News Corporation.

News America was led by Paul V. Carlucci, who, according
to Forbes
, used to show the sales staff the scene in “The
Untouchables” in which Al Capone beats a man to death with a baseball
bat. Mr. Emmel testified that Mr. Carlucci was clear about the guiding
corporate philosophy.

According to Mr. Emmel’s testimony, Mr. Carlucci said that if there were
employees uncomfortable with the company’s philosophy — “bed-wetting
liberals in particular was the description he used” Mr. Emmel testified —
then he could arrange to have those employees “outplaced from the
company.”

Clearly, given the size of the payouts, along with the evidence and
testimony in the lawsuits, the News Corporation must have known it had
another rogue on its hands, one who needed to be dealt with. After all,
Mr. Carlucci, who became chairman and chief executive of News America in
1997, had overseen a division that had drawn the scrutiny of government
investigators and set off lawsuits that chipped away at the bottom
line.

And while Mr. Murdoch might reasonably maintain that he did not have
knowledge of the culture of permission created by Mr. Hinton and Ms.
Brooks, by now he has 655 million reasons to know that Mr. Carlucci
colored outside the lines.

So what became of him? Mr. Carlucci, as it happens, became the publisher
of The New York Post in 2005 and continues to serve as head of News
America, which doesn’t exactly square with Mr. Murdoch’s recently stated
desire to “absolutely establish our integrity in the eyes of the
public.”

A representative for the News Corporation did not respond to a request
for comment.

Even as the flames of the scandal begin to edge closer to Mr. Murdoch’s
door, anybody betting against his business survival will most likely
come away disappointed. He has been in deep trouble before and not only
survived, but prospered. The News Corporation’s reputation may be under
water, but the company itself is very liquid, with $11.8 billion in cash
on hand and more than $2.5 billion of annual free cash flow.

Still, money will fix a lot of things, but not everything. When you
throw money onto a burning fire, it becomes fuel and nothing more.

 

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