While News Corp. (Nasdaq: NWS) investors eagerly await Wednesday's release of the company's latest earnings, they have some time to catch up on its history.
I already told you about some of the Australian Skeletons in America's Closet. The next episode of the epic drama/comedy Citizen Rupert Takes America begins some years later, on May 23, 1994, when David Honig, a lawyer working on behalf of the New York branch of the NAACP, filed a petition
to deny license renewal for New York City's Channel Five (WNYW). The
petition argued that Murdoch and his News Corp. had committed fraud in
obtaining the license for the TV station, one of six Murdoch acquired in
1985 through the purchase of Metromedia Group from John Kluge.
Honig challenged the license because the Communications Act of 1934
specifically prohibited issuing licenses to foreign entities (News Corp.
was an Australian company then) and aliens (Murdoch).
This was serious business. Stripping the New York station of its
license would make the five remaining ex-Metromedia stations vulnerable.
As New York went, so likely would go Los Angeles, Chicago, Washington,
Dallas, and Houston. Its foundation undermined, the whole Fox
entertainment network might crumble. And, in a demonstration of the Law
of Unintended Consequences, Fox News might have remained a figment of
Citizen Rupert's imagination.
Honig argued before the Federal Communications Commission that
Murdoch's license application was "deliberately opaque," that News Corp.
had hidden its foreign ownership, and, moreover, that the Channel Five
license should have gone to American minorities, since FCC policy at the
time encouraged minority ownership.
And the agency didn't mean Australian-Americans, mates.
Rubbish, Sir Rupert said, in effect. It was hard to know exactly what
he was saying, though, because his application was incomprehensible.
The FCC either didn't read or didn't understand the 3,000 pages.
It took Honig's staff of legal beagles three days to crack the
mystery of who owned what by plotting the organizational chart --
something the FCC wasn't able to do for nine years. "It was almost impossible to follow," Honig said of the four tiers of wholly owned subsidiaries organized by News Corp. lawyers.
It was easy to see how the FCC got confused when it initially granted
the license in 1985. A decade later, when it got around to re-examining
the petition, two crack FCC regulators closely involved in the original
license issuance -- Roy Stewart and Stephen Sewell -- reread all the
documentation. In formal affidavits,
the examiners admitted that, when they reread the documents, they
realized they had been unclear about the exact ownership structure of
News Corp. In fact, they said, they were "shocked and stunned" by what
Honig seemed confident, even suggesting that it would be impossible
for him to lose. But he did. The FCC voted 5-0 to let Murdoch keep his
If nothing else, Citizen Rupert, who didn't become an American
citizen until 118 days after violating the law, and News Corp. had
displayed "lack of candor" in applying for a license they were not
entitled to obtain. "Lack of candor," or lying, is a serious crime in
the FCC rulebook, and the usual punishment is severe.
In 1980, the FCC had concluded that RKO-General Tire,
the owner of six TV and 11 radio licenses, had been less than candid in
explaining its bribery of foreign governments and its overcharges for
commercials. RKO-General Tire "lacked the requisite character to be a
station licensee," the FCC administrative judge ruled, stripping the
conglomerate of all its lucrative licenses -- the beginning of the end
of the company's media business.
And it seems like history repeats itself. Character issues were the
subtext of the grilling News Corp. executives received from members of a
parliamentary select committee in London this summer. The committee was
investigating News Corp.'s illegal/unethical practices in the UK.
The character of our licensees would be the methane gas bursting into
flame in the vast wasteland that is American TV should Congress ever
get around to looking into the qualifications for owning our TV
licenses, which Lord Thomson once called "a license to print money." What political theater such hearings would create. We could call it Licensegate.
Illegally awarding licenses to Citizen Rupert will go down in history
as one of the all-time gaffes by the FCC, reshaping the way investors,
journalists, politicians, and the regular folks at home think. We'll
explore how the FCC got away with it in the next thrilling episode of Citizen Rupert Takes America.