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Benador Associates Public Relations

MURDOCH GETS A JEWEL. WHO'LL GET HIS CROWN?
by David A. Kirkpatrick
New York Times
December 28, 2003

RUPERT MURDOCH, the chairman of the News Corporation, has been trying to buy or build an American satellite television business for 20 years, a campaign that sometimes appeared to be his life's work.

Last week, he finally succeeded, buying control of Hughes Electronics and its DirecTV satellite service for $6.6 billion. But his hard-won victory now raises questions for Mr. Murdoch, who is 72, and for the company.


Associated Press

Rupert Murdoch

Mr. Murdoch now needs to make DirecTV justify the years and billions spent in its pursuit. With the last piece in place, Mr. Murdoch needs to prove that the vast contraption of Hollywood studios, broadcast and cable channels, satellite systems and newspapers that he has assembled will run smoothly and profitably, even after he is no longer behind the wheel.

He has made it no secret that he would like to pass the company's top job to one of his children who have worked for the company: Lachlan, 32, James, 30, or, as he volunteered in an interview 10 days ago, perhaps Elisabeth, 35. To outsiders, the succession question has the makings of captivating corporate soap opera. And, in November, the plot took an unforeseen twist when James Murdoch was named the chief executive of British Sky Broadcasting, of which the News Corporation owns a 0ne-third stake. To many investors and Murdoch watchers, that suggested that James Murdoch might have overtaken his older brother, Lachlan, as the Murdoch heir to watch.

The senior Mr. Murdoch says he prefers not to talk about succession. "The reason I want to avoid it altogether, it is very simple," he said. "The more people write about it and the more people in the company read about it, it just breeds politics. People say, 'I want to be on the James wagon' or 'the Lachlan wagon,' and it is just terribly self-destructive, even of their relationship, if that happens."

But relaxing in his Los Angeles office - with seven televisions tuned to the company's channels, including Fox and Fox News, and even more photographs of his family around him - Mr. Murdoch was expansive, savoring the impending acquisition of DirecTV. He is also a proud father. In a two-hour conversation that covered many subjects, including the problems of the Fox network and his satellite plans in Europe and Asia, he could not resist discussing his children's progress in the business.

As he talked, the Federal Communications Commission was completing its decision that approved his deal for control of DirecTV. The acquisition may be a watershed moment for the American television industry. With 11 million subscribers paying $35 to $90 a month for different levels of service, DirecTV is the second-largest cable or satellite service, after Comcast Cable.

Mr. Murdoch has pledged to use the News Corporation's vast resources and satellite experience to redouble DirecTV's threat to cable companies. And the major cable companies are already fighting to keep their customers by adding features like telephone service, video on demand or TiVo-style digital video recorders.

In the interview, Mr. Murdoch sketched a series of expensive early steps in his attack on the cable companies. He promised to strengthen DirecTV's call centers, for better customer service. He said he would virtually eliminate DirecTV's substantial problem with piracy of its signal by using new set-top technology from the News Corporation's NDS subsidiary. He said he planned to offer interactive programming on the company's Fox news and sports channels that would let viewers choose among various screens and camera angles. He also said he plans to push set-top boxes with built-in digital recorders like TiVo at little or no extra charge.

MR. MURDOCH acknowledged that that move was "not good news for broadcasters by any means" because the devices let viewers skip commercials. "Let's just say I am being discouraged by the Fox people," he said, referring to the executives at the company's Fox broadcast network. But he vowed to push the devices "very hard" nonetheless, to win and keep customers for DirecTV.

All the moves come from a playbook that British Sky Broadcasting used to dominate the British pay television market, sustaining heavy losses to conquer it before other cable or satellite rivals could establish themselves. Mr. Murdoch missed that chance in the United States, where more than 80 percent of households already subscribe to cable or satellite service. Still, he said he saw room to expand beyond DirecTV's subscribers. "I am confident we can get to 15 million subscribers," he said. "What do I dream of? Twenty million." That would pull DirecTV nearly even with Comcast.

Mr. Murdoch has long championed his vision of a satellite television service around the globe, in part because it would bolster the power of his company's film and cable channels. Controlling DirecTV, he said, would add to the company's leverage in negotiating with cable companies like Comcast, Time Warner and Cox Communications, which also have major investments in channels. "It gives us a degree of leverage," he said. "There is a certain amount of saying, 'We will carry you if you will carry us.' "

But owning DirecTV will not address what may be the News Corporation's most pressing problem, the slump in ratings at its Fox broadcasting network. "Our new shows haven't done well enough," Mr. Murdoch acknowledged. He said he hoped to address the problem by introducing more new shows throughout the year, rather than waiting until the competitive fall season.

"The broadcast division stumbled badly," he said, when it tried to recreate its hit reality series, "Joe Millionaire," in which several unsuspecting women vied for the attentions of a millionaire, only to learn that he was a pauper in disguise.

"That was a mistake," he said. "We should have just said, there was no way you could do it again, because it was a bit of a trick." Still, Mr. Murdoch said that Fox could wring still more years of ratings out of its biggest hit, the three-year-old "American Idol" talent contest. After Fox's teenage edition of "American Idol" this year and the recent "American Idol" holiday special, some critics have suggested that Fox risks exhausting the show's novelty as ABC did with "Who Wants to Be a Millionaire." But Mr. Murdoch promised self-discipline. " 'American Idol,' I think, is the perfect young show," he said. "If we restrain ourselves to just once a year, then it won't wear out for a long time," he said.

How long Mr. Murdoch himself can last is a more delicate question. Even at 72, he says he has no plans to slow down or go anywhere for several years to come. But that does not entirely ease investors' concerns.

"I worry tremendously about the succession," said Uri D. Landesman, a portfolio manager for Federated Investors, a major investor in the News Corporation. "Either he is going to slow down or he is going to meet his maker at some point, and I think it is going to be an enormous issue."

More than any other major media company, the News Corporation reflects the work of one man. Mr. Murdoch single-handedly conceived and built its vast empire from the ruins of his own father's failing Australian newspaper business. He controls a dominant portion of its voting shares. His distinctive instincts have led the company to bet on satellite television far ahead of its time, to defy the television industry by starting Fox as a fourth broadcast network and then to confound most people in the business again by betting on the audience for a 24-hour-news network to the political right of CNN. As a result, analysts and investors say, it is difficult to foresee how it might look without him.

Mr. Landesman said he believed that Mr. Murdoch would not hand control to an heir whom he deemed unqualified but added that a father's criteria might differ from Wall Street's. Investors would be happier, Mr. Landesman said, if Mr. Murdoch turned over the company to a strong, young media executive outside the family, perhaps Peter Chernin, the president and chief operating officer of the News Corporation and Mr. Murdoch's second in command. "Look, the easiest way for a company to handle family is just say 'no family,' " Mr. Landesman said. "That way you don't have to make decisions about whether the kid is ready or not. But that is obviously not going to happen here." He added, "I think that the stock trades at something of a discount because of that."

But Mr. Murdoch has never hidden his aspirations for his heirs. "I think it is a very, very human motive to see your work carried forward by one of your own," Mr. Murdoch said.

STILL, he said he would never sacrifice the interests of his shareholders to his own ambitions for his children. "If it was to turn out that they were not good enough, we'd have to face that. That is what you have a majority of independent directors for, although I hope I would be smart enough to see it myself."

Mr. Murdoch remains very close to all six of his children, including the three who have worked at the company - Lachlan, James, and Elisabeth. Friends and colleagues say the three call their father "Pop" and often close phone calls to their father with expressions of love or affection. All three remain close to one another as well, two friends of the family said. And the News Corporation is woven into the family fabric, often dominating conversation when the family gathers.

But each of the three differs notably from Mr. Murdoch, an outspoken political conservative who grew up in the sensational world of Australian newspapers.

The eldest of the three, Elisabeth, has led a decidedly cosmopolitan life. She graduated from the Brearley School in Manhattan and Vassar and married Elkin Pianim, the son of a Ghanian politician. After the marriage ended, she settled in London. There, she entered a highly visible relationship with Matthew Freud, founder of a public relations firm sometimes associated with the Labor Party and the grandson of Sigmund Freud.

Of the three potential successors in the family, Elisabeth may have the best record of success outside her father's company. She and her first husband bought a television station in California, improved its performance and sold it at a substantial profit. After working for the News Corporation in television, she started Shine, now a three-year-old London television production company, which has scored some successes.

She has also done some valuable scouting for the News Corporation's Fox network on the side. It was Elisabeth, Mr. Murdoch said, who spotted the potential in a British television talent contest that became the basis for "American Idol" on Fox. "I might have been saying, 'what is hot over there?' or something," Mr. Murdoch recalled. "We were gossiping, and she said this is."

After learning about its ratings and consulting with an editor at one of his British newspapers, Mr. Murdoch said, he called a top executive at the Fox broadcast network in the United States: "I said, 'You have got to buy it.' They said, 'Oh, well, we are looking at it,' and I said, 'Don't look, buy.' They said, 'We will think about it,' but the next day they bought it." He added with a laugh, "She has her uses."

"She is a very, very hard-working and intelligent person, and she just loves the business," Mr. Murdoch said. But he said she was unlikely to rejoin the News Corporation, at least for the next few years. "She is very settled into the London scene and what she is doing," he said. "I don't think she wants to, at least for a few years. She wants to be sure she has been successful in her own right. She will probably sell it for a bloody fortune to someone. And then she will come knocking on the door, and she will be very welcome."

Until this fall, most investors and Murdoch watchers had assumed that the leading candidate to succeed Mr. Murdoch was his eldest son, Lachlan, deputy chief operating officer of the News Corporation, in charge of its Australian operations, its television stations in the United States, and The New York Post, among other things. All three Murdoch heirs were educated mainly in the United States and speak without an Australian accent, but Lachlan Murdoch sometimes plays up his heritage, sprinkling his speech with Australian expressions like "no worries, mate."

Colleagues say Lachlan, a Princeton graduate, is, if anything, more consistently conservative than his father, who can be a political maverick. His colleagues say The Post's staunchly conservative editorials roughly match his views. They describe him as less verbally polished than his father. As deputy chief operating officer of the News Corporation, he joins his father and the company's other top executives in quarterly conference calls with investors, but he has not yet learned to eliminate the halting "ahs" and "ums" from his speech.

The senior Mr. Murdoch's antagonists, especially in the British and Australian press, often relish his children's failures; in one favorite example, Lachlan helped arrange a major News Corporation investment in an Australian telephone company that collapsed a few years ago.

But his father said the fault was just as much his own. "Lachlan is accused in this telephone venture," the elder Mr. Murdoch said. "But I did that. We all did that. The whole board of News Corp. approved that deal."

Mr. Murdoch said, "Lachlan is responsible right now for 60 percent of the cash flow of News Corp. and we are doing very well." As Lachlan rose through the company, James Murdoch was considered the dark horse. Where Lachlan is stout and athletic, James is more slender and cerebral, although in recent years he has taken up karate. James dropped out of Harvard to start his own, short-lived hip-hop record label, Rawkus Records, in New York. And, unlike his father or Lachlan, James is steadfastly liberal. He has supported Bill Clinton and Al Gore, whose daughter he befriended at Harvard. In the interview, the elder Mr. Murdoch suggested that their views have "converged over time" as James has learned more about the burden of taxes on business, but friends of James who are familiar with his political views strenuously dispute that assertion.

The question mark on James Murdoch's résumé is a stint in his 20's when he was in charge of the News Corporation's Internet investments. Under his direction, the company invested in a handful of Internet ventures that never took off.

But the senior Mr. Murdoch defended James's judgment, too. "He saved me a lot of money," Mr. Murdoch said. "He said, 'Here is this company Juno, why don't we take about 5 percent of it?' I said, 'That sounds interesting, why don't we buy the whole bloody thing.' He said, 'No, no, no.' He held me back."

While Lachlan was based in New York, James spent the last few years in Hong Kong, where he led Star, the News Corporation's Asian subsidiary. Star has accounted for only a small portion of corporate revenue, but during James's tenure it has also turned its first profit.

This fall, however, he became the lightning rod for investors' anxieties about succession because of his appointment as chief executive of British Sky Broadcasting, in which the News Corporation owns roughly a one-third stake. Other shareholders contended that James, at 30 and with only a few years of experience in television, was unqualified to lead the dominant television service in Britain.

But Mr. Murdoch said the scuffle with shareholders who opposed the appointment had not changed his views. "He just had the misfortune of having my name," Mr. Murdoch said. "I understand it might be seen as nepotism or something like that. But the fact was, I know everybody in this business, and who could do better?" The only one or two candidates who might be more qualified, he said, already had jobs they were unlikely to leave.

What's more, Mr. Murdoch said, British Sky Broadcasting's board had vetted his son with more diligence than usual, not less. The executive recruiter Spencer Stuart conducted an extensive search, and the board considered three internal candidates and three outside contenders as well as his son, he said. "They put him through psychometric tests and pretty exhaustive interviews by members of the committee," Mr. Murdoch said, "He aced it."

Among analysts and investors handicapping the succession, James Murdoch's ascension to the top job at one of the company's biggest businesses has made him the odds-on favorite. But the elder Mr. Murdoch discounted those theories. "I think you are jumping to conclusions," he said, praising Lachlan's performance as well.

Outsiders familiar with the dynamics of other families often assume that the potential competition for the father's job must create awkwardness among the Murdoch siblings. Mr. Murdoch's former wife Anna Murdoch She wrote a novel, "Family Business," about a female media entrepreneur with a certain resemblance to her husband Rupert. In its purple denouement, one of the protagonist's two sons happily starts his own firm, but the other enters the family business and ultimately drives his mother's lover to a heart attack in an argument over succession.

Mr. Murdoch said that was not the case. "They are very, very close," he said.

AS an example of sibling harmony, he pointed to the Newhouse family - a privately owned media dynasty now led by the brothers S. I. and Donald Newhouse. "Look at the Newhouse brothers," he said. "One is senior to the other, but they basically divide responsibilities."

He declined to rule out a similar power-sharing arrangement among his heirs. And, for now, Mr. Murdoch said such considerations were premature. "We are going to see," he said. "If I go under a bus or my health fails, that is something that the board is going to want to talk about. But I look after my health pretty well, and I intend to be the active driver of the company for a long time yet, probably to the frustration of all my relatives."

 

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