Hacking Scandal Will Cost News Corporation $1 Billion Dollars

Take a look at this doozy from the John Burns piece in the NY Times tonight about the fall-out from the arrests of eight former Murdoch employees in the hacking scandal today and tell me it isn't going to give Klein and Murdoch problems as they pursue their for-profit education company fantasies:

The indictments did not surprise executives at News Corporation, the New York media conglomerate that owns the British papers, who are readying the split of the company’s newspapers from its more lucrative entertainment assets. The charges, in part, played into the timing of Mr. Murdoch’s finally agreeing to the split, which his top lieutenants had proposed for years, a person familiar with the thinking at the company said.

“You don’t get an indictment like this without a lot of preliminary discussions,” said this person, who could not comment on the record about private discussions. “They knew exactly, exactly what was coming and how bad it would look.”

...

Besides shaking Mr. Murdoch’s global empire to its core, the British scandal has forced News Corporation to pay hundreds of millions of dollars in legal costs, out-of-court settlements and payoffs to employees who have been laid off, Mr. Murdoch testified this year at a judicial inquiry into the scandal.

And that price, analysts say, is likely to exceed a billion dollars as lawsuits and settlements proliferate. Alison Levitt, chief legal adviser at the Crown Prosecution Service, the government department, traced the scope of what lies ahead when she gave a broad account on Tuesday of the number of people — more than 600, by the prosecutors’ count — who are confirmed victims of the phone hacking.

Sue Akers, the senior Scotland Yard officer overseeing the police investigations, told the Leveson inquiry on Monday that the police had notified 2,615 people that they may have been targets of the voice-mail interceptions. So far, only about 40 of those known to have been victims of the practice have settled their lawsuits against the Murdoch papers, with at least one of the settlements exceeding $1-million.

Joel Klein's new for-profit education division has been partnered with the old News Corporation newspapers while the much more profitable entertainment division will be split off on its own.

That means the costs of the lawsuits, the legal fees, the out-of-court settlements, and the fines will all come from the publishing/education division, not the entertainment division.

Since many of the Murdoch papers lose money (with the Big Three - the Times of London, the NY Post, and the Wall Street Journal reported to lose $250 million a year alone) and since the one paper that was profitable has been closed (The News of the World), the new publishing/education division is starting out behind the eight ball.

Couple that with the continued financial fall-out from the hacking scandal and you are looking at a very challenging task for our former chancellor to handle.

Can he make the education division lucrative enough so that it can survive even as the unprofitable newspapers and hacking scandal costs threaten to sink it?

Will any district or state buy education products from a company still dealing with the aftermath of scandal where its employees hacked into a dead teen's phone?

Will Klein and Company make anything anybody will want to buy in the first place?

It's going to be a competitive market, that's for sure.

And then there are all those other problems the division will face.

Klein will start by cutting costs at the newspapers, which means either selling papers or closing them outright.

"The Daily," the online news app that was supposed to "revolutionize" news on Apple platforms, is already on life support and probably won't survive the year.

Expect the Times of London to go up for sale soon after.

They'll try and sell the Post, which reportedly loses $110 million a year, but if they can't find any takers, they might have to close it.

And they'll circle the wagons around the Journal, partner that with the education products, and try and expand the business that way.

All of that is arguably do-able, except for one unknown - the cost of the financial fall-out from the hacking scandal and the bribery and corruption investigations.

While eight former Murdoch employees were arrested today, including the entire brain trust of Murdoch's now-defunct News of the World, some of these same people face bribery and corruption charges in a related criminal investigation.

So do at least 20 employees at another Murdoch paper, The Sun.

This scandal is far from over and it still has the chance to leap the ocean to these shores as well.

The lawyer who brought the civil suits against News Corporation in the U.K. over the hacking is bringing at least four lawsuits here against News Corporation for allegedly hacking people on U.S. soil.

Those suits threaten the firewall Murdoch and his American News Corp. brain trust have counted on to keep them from facing criminal investigations here (as well as from having to pay hefty fines for breaking the Foreign Corrupt Practices Act.)

Klein will have to deal with all of this as he maneuvers to make his education division successful.

But even if successfully navigates all of that, if the hacking costs total $1 billion, that could sink the division no matter what.

I do not underestimate Rupert Murdoch or Joel Klein in successfully pulling this off.

But they've got their work cut out for them.

It is challenging enough to take on Apple, Pearson, McGraw-Hill, et al. in selling education products to districts and states.

It is even more challenging when you also have to deal with criminal investigations, court cases, civil trials, out-of-court settlements and potential fines from the Corrupt Foreign Practices Act.