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News Corp Strategy: Forsake the UK and Become Strong U.S. Entertainment Company

|Includes: News Corporation (NWS)

We'd all be ready to shell out pay-per-view prices (those for boxing, not a simple movie) to peek in on the House of Commons' questioning of Rupert Murdoch, James Murdoch and Rebekah Brooks Tuesday. As the Murdochs first demurred in accepting Parliament's Culture, Media and Sport committee invitation -- we're so busy in July, how about we meet for lunch in August or send you an e-mail? -- some reports noted that the Murdochs were, after all, U.S. citizens, while Brooks is a citizen of the UK, indicating her greater need to appear. Of course, the Murdochs, aided in the next efforts at damage control by p.r. specialist recently hired Edelman, quickly decided that appearing was better than the alternative.

That American context is a revealing. As the British investigation deepens and widens --  Scotland Yard scorned is not an enemy anyone wants to have (as its chief resigns due his own footsie playing) and politicians of all stripes rush out into the light of the streets to cry freedom from fear of tyrannical tabs -- look for News Corp to become an even greater American company than it is today. It is, of course, based in New York already, and, yes, it's CEO and Chairman is a naturalized American. The numbers, though, scream "American" even louder. Fifty-four percent of News Corp's overall revenues are generated in the U.S. and Canada; only 29% in Europe and 16% in Australia. Further, "U.S. customers" generated $17.3 billion for News Corp in 2010, while UK customers provided a relatively paltry $2.7 billion; the split between U.S. and UK spend has widened each of the last three years.

Yet, NewsCorp has had a split multinational identity, one that has served it well in business and in influence, of course as those two virtues reinforced each other. That was then, this is NoW (News of the World) core meltdown time.

Now, the company needs to build as much of a firewall between the tawdry events in the UK .... and the rest of its story, worldwide, especially in the U.S. and Australia.

News Corp can try to make itself over, as completely and quickly as it can, as an American entertainment company, with global investments (Britain, Italy, Germany, India, the Middle East). That initiative -- we may presume a new CEO some time in the not-too-distant future -- will focus on non-newspaper assets, and try to divorce itself from the London-based mess. Of course, that strategy has its own issues, as the U.S., too, is dragged into the inquiry, due to alleged 9/11 wiretapping and more insistent calls for investigation here; Sunday headline on

News Corp. Scrambles to Contain Damage in U.S.

(Even Australia, Murdoch's home base and where he controls two-thirds of the press -- excellent BBC/The World report on that --  is no safer a haven, as calls for inquiry have been heard there as well.)

Should the U.S. become even more News Corp's identity, we'll have to see how America reacts, and that will be a fascinating second act to the thunderous opening of this affair.

Let's consider, top-line for now, how the company's further Americanization may play. First, it will emphasize its entertainment and distribution assets. Those, in fact, are the core of the company's revenues and profits.

The two biggest revenue sources for News Corp are its filmed entertainment (read Hollywood) and cable TV (Fox News, Fox Sports) businesses. Those are the businesses that are throwing off the profit. I've pointed to the great advantage News Corp's newspaper holdings have, being less than a fifth of the company's overall revenue and being able to be subsidized, as needed, by the likes of Twentieth Century Fox's Avatar, with more than two billion dollars in worldwide sales.

In 2010, the company Cable TV division operating income (profit after operating costs) increased 37%, led by Fox News and Fox Sports, to $2.3 billion. Movies added another $1.3 billion. Newspapers, at $530 million, made up only about one-eighth of the company's operating income, and this year that contribution will be even smaller.

Many investors and even News Corp execs had argued against the 2007 acquisition of Dow Jones, and the continuing subsidizing of the New York Post, but they have been drowned out by the all-powerful CEO, Rupert Murdoch. With its news operations strongly tainted in the UK, it only makes sense that the company will tout itself as the company of Avatar, Glee and football.

If, and as, it pursues that strategy, we've got to wonder how much of the UK scandal will play here. How far will a U.S. investigation go? If it only involves "rogue" British tabloid journalists, it could be dismissed a somebody else's problem. Inevitably, questions are being raised about the Wall Street Journal and the New York Post. The Post is a tabloid, right, so what's the difference, which journalists, like Time Magazine's "Tabloid Bits Man", are scurrying to explain to the American public. The Journal's oversight board, which had itself appeared to be an oversight of the 2007 purchase, made its public presence suddenly known Saturday, saying that though it conducted no inquiry and planned none, it knew of no related-to-London-scandal issues at the Journal.

My sense is that the Journal, and the Post, should do more. The Journal is a hugely important American institution, staffed by some of the top editors and reporters in the country. The savvy it brings, and exercises, in business news reporting is an important check and balance in the Republic. Many of us have noticed tilts and tweaks in the Journal's coverage, headlining and play since the News Corp purchase. Yet it has maintained its respectability, untainted -- so far -- by its Fox News cousin's advocacy, though it shares New York City quarters. It's essential that it remain respected, and respectable, into the future. (Update: Today, it published a defensive editorial blaming others for magnifying News International's wrongdoing, taking a tack that will take it nowhere.)

To that end, I believe it needs a clean bill of health from an independent inquiry. After all, its publisher Les Hinton -- with 12 years of potentialconnections to the UK wrongdoing -- made a speedy exit Friday, and its well-regarded editor, Robert Thomson, comes out of News International as well, though from the Times of London, so far not caught in the crossfire. For the Journal's sake, as well as for the journalists who work there, it's best to strongly advise the public that it has never practiced what News International did in the UK, and won't.

Beyond the Journal, might the focus on News Corp's unorthodox approach to news -- tabloid partisan on cable -- get a closer look? Jon Stewart has been leading the charge, and while there is no allegation of any illegality, the practice of using "the news" to support friends and punish enemies is practiced daily by Fox News. That approach is now being pilloried by everyone from Prime Minister James Cameron on down. Who will pick up that torch in the states?

When the FCC hearings on cross-ownership begin anew, look for News Corp's New York holdings to again come up.

When the subject of political donations comes up, look for renewed controversy. In the last election cycle, News Corp stepped up its donations to Republicans, causing a minor firestorm.

News Corp itself isn't a well-known brand in the U.S. We know the Journal, the Post, Fox News, Fox Sports and Fox Searchlight, for movies. Will Americans make the Rupert connection and how much will it bother them? If you are running News Corp, or as Edelman may well advise, expect the Americans to be far kindlier than the Brits. Complete the Americanization now.

That would argue for selling off the damaged News International, the holding company for its UK newspaper assets, recently headed by Brooks and by Hinton.

That makes sense for several reasons. One, Rupert Murdoch's own powerful political influence in the UK is forever diminished. The investigation itself will take at least a couple of years to wind through. Yes, Rupert has been the comeback kid, but this kid is now 80, and this scandal is his last act in the nation that created his mythic power, most notably in making or breaking elections, especially Tony Blair's.

Second, the UK newspaper operations are a minor part of the News Corp business. The Times of London and the Sunday Times both lose money, as do all their quality paper brethren in London, save the Telegraph. Murdoch's tough Times paywall isn't turning things around, as the daily Times leads in daily print decline. Yes, News Corp can add a SunonSunday to replace News of the World, but the Sun itself is now itself embattled in suit (man-undercover Hugh Grants'), and, at the minimum, the appearance of guilt by association.

Guilt. Guilt by association. Taint. T'aint fair, some may say. Public perception of this scandal, and how it traverses the Atlantic, will be as strong an element as the now endless legal proceedings.