News International

Deciphering the madness of the Murdoch method

February 29, 2012: 2:51 PM ET

In the midst of a scandal that reaches new lows every day, Rupert Murdoch's reactions have ranged from the canny and shrewd to the absurd. Given his tight control over News Corp., don't expect any changes soon.

By Geoff Colvin, senior editor-at-large

James and Rupert Murdoch

James and Rupert Murdoch

FORTUNE -- Rupert Murdoch's decision to demote his own son is a perfect example of why he's endlessly interesting. Sometimes he makes business decisions purely with his head, canny and shrewd, occasionally ruthless. That's what he did this time. But sometimes he makes giant decisions with his heart, appearing misguided or just nuts; for example, he runs the New York Post and the Times of London at deep losses that will apparently continue forever, and he just doesn't care.

Overall, the Murdoch method has worked well for him. For investors in his News Corp. (NWS), it has not worked nearly as well as it should have. Recent events show the problem clearly. Amazingly, amid the U.K. phone hacking scandal that led to James Murdoch's downfall -- a mushrooming story that a member of Parliament yesterday called "the single largest corporate corruption case in this country for more than 250 years" -- the Murdoch method is still working, at least for him.

James was, among other things, chief of News International, the News Corp. division that owns the company's British newspapers. When the phone hacking scandal erupted at one of them, the News of the World, Rupert made one of his famously tough-minded decisions, abruptly closing the 168-year-old paper. News Corp.'s value dropped by billions of dollars as investors feared more revelations would follow.

They have followed. An inquiry still underway yields worse disclosures every day. Witnesses have reported that phone hacking was conducted at "industrial scale," that News International employees bribed the police so widely that Scotland Yard became in effect "a subsidiary of News International," that employees destroyed evidence massively, and that all of this was approved at "the highest levels." The highest levels would seem to include James Murdoch. As this mess gets bigger and uglier, Rupert concluded that James had to go. He's out as News International's boss and will work in New York City on the international TV business and other vaguely defined tasks.

Here's the surprise: The stock isn't going down anymore. As the scandal gets worse, the stock rises higher. It fell to $14 last summer; it was over $20 when James got the shove. Investors figure this historic scandal won't hurt profits much; it won't make people stop watching The Simpsons or refuse to go see the next Avatar. More

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