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The Murdochs Head To Parliament As Scandal Shakes News Corp. Empire (VIDEO)

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RUPERT MURDOCH
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NEW YORK -- On the afternoon of July 15, Rupert Murdoch did something unusual in his legendary, six-decade career as one of the world's most powerful and feared moguls: he apologised.

The 80-year-old billionaire held his head in his hands before the family of Milly Dowler, a murdered teenage girl whose phone messages were intercepted by journalists at Murdoch's now-shuttered News of the World during her 2002 abduction -- a July 4 revelation that transformed the five-year-long phone hacking saga into a full-blown scandal that now threatens the foundations of his media empire. Mark Lewis, the family's lawyer, described Murdoch afterward to reporters as "very humbled and very shaken and very sincere."

Humbled. Shaken. These aren't words normally used to describe a ruthless and innovative tycoon who's spent a lifetime crushing competitors, unions and political adversaries and played a seminal role in the evolution of the media business. But, of course, these aren't normal days for Murdoch's empire, the News Corporation, which has owned a flotilla of media enterprises and newspapers, including News of the World.

On the same day that Murdoch was apologising to the Dowlers, Rebekah Brooks -- the News of the World's editor during the hacking episode and someone Murdoch considers family -- resigned from her position as chief executive of News Corp.'s British newspaper arm, News International. Later, Les Hinton -- a top Murdoch lieutenant for over 50 years and most recently chief executive of another Murdoch property, the Wall Street Journal-parent Dow Jones -- also resigned.

By Sunday, Brooks became the 10th person arrested in the unfolding scandal, a growing list that includes Andy Coulson, her News of the World successor and former media chief to Prime Minister David Cameron. Later that night, Britain's Metropolitan Police Commissioner Sir Paul Stephenson - the city's highest-ranking officer under the spotlight for the revelation the department hired Coulson's former deputy Neil Wallis to a PR position -- resigned as well. Wallis has been arrested. The fallout continued Monday with Assistant Police Commissioner John Yates also resigning. (Both Stephenson and Yates face questions from the Home Affairs Committee on Tuesday).

Now speculation centers around the roles of Hinton and Murdoch's 38-year-old son, James, who analysts also consider to be Murdoch's heir apparent. Hinton oversaw the British papers at the time of the hacking; James Murdoch succeeded him and has only recently admitted to signing off on hefty out-of-court payments to phone hacking victims years ago. (News Corp. did not respond to questions for comment on Murdoch's admission about previously providing information to Parliament "without full possession of the facts.")

Given the extent of phone hacking, with most of the 4,000 victims still unconfirmed, the scandal will likely ensnare other high-profile members of Britain's cosy triumvirate of politics, police and the press. It could also signal the end of News Corp. as we know it.

Alastair Campbell, the former communications chief to ex-Prime Minister Tony Blair, argued in an interview with HuffPost that Murdoch's "political power was something of a mirage," evident in how quickly it has evaporated in the heat of increasing public outrage.

Still, whether Murdoch's endorsements truly tipped elections or not, it's unlikely that the newspapers he coveted and often wielded as political cudgels will endure into the next generation.

"The papers are what allowed him to create the mirage. It has gone," Campbell said. "I think it's fairly likely he will divest himself of the papers and focus overseas and in particular on TV and film. James is hugely damaged by this, Lachlan and Elisabeth less so, but I cannot see a Murdoch of the future getting the kind of clout Rupert did."

On Tuesday, members of Parliament will grill Rupert, James, and Rebekah, marking a precipitous fall for a mogul, and his inner circle, all of whom had only recently reached new heights of global power just before the current scandal enveloped them.

BETTER TO BE FEARED THAN LIKED?

Rupert Murdoch briefly ruled the world in the summer of 2006, as several hundred News Corp. executives and A-list guests from the upper echelons of politics, media and entertainment flocked to an exclusive Pebble Beach resort for a corporate retreat.

Former British Prime Minister Tony Blair, who swept into power with the endorsement of Murdoch's Sun tabloid a decade earlier, kicked off the five-day retreat by telling attendees how he once feared the Australian-born mogul. "Now that my days of fighting elections are over," Blair said to Murdoch, "I don't actually fear you, but I do like you."

Blair wasn't the only political leader kissing Murdoch's ring that week. Former Vice President Al Gore, Israeli President Shimon Peres, Sen. John McCain, former House Speaker Newt Gingrich and then California Gov. Arnold Schwarzenegger were among the high-profile speakers, according to an article in the New Yorker. U2 frontman Bono and actress Nicole Kidman added star wattage, while Kidman's husband, country singer Keith Urban, rocked the house.

Murdoch's empire was well represented, with Brooks, Hinton and Coulson all making the trip across the Atlantic, according to an attendee and contemporaneous reports. The patriarch's sons, James and Lachlan were there, as well as daughter Elisabeth and her husband, PR guru Matthew Freud. Fox News chief Roger Ailes and New York Post editor Col Allan were there, too. Robert Thomson, then Times (of London) editor and who is now editor-in-chief of the Wall Street Journal also attended. (Despite rumors he'll succeed Hinton at Dow Jones, sources tell The Huffington Post that Thomson expressed his desire to remain the paper's top editor in recent conversations with staff. A Journal spokesperson declined to comment).

On Aug. 2, Bill Clinton arrived. The former president dined with Murdoch and wife Wendi that evening before giving the retreat's closing speech the following day.

But just five days later, and over 5,000 miles away, British police and anti-terrorist squads arrested News of the World royal editor Clive Goodman and private investigator Glenn Mulcaire in London's suburbs, thus setting in motion the scandal which -- despite several stops and starts over the past five years -- has now exploded in a steady stream of investigations, resignations, arrests, and apologies.

DARK ARTS

In Nov. 2005, staff in Prince Charles' Clarence House noticed that strange happenings were afoot, according to author Peter Burden, in his book "News of the World?: Fake Sheikhs & Royal Trappings." Voice mail messages never listened to now appeared as saved. Meanwhile, a few fairly banal scoops started popping up in the News of the World about which only a select circle of royal aides would know.

Clive Goodman had once been one of Fleet Street's top royal reporters, but in recent years had lost his edge, Burden wrote. By 2005, he began working with Mulcaire, a private investigator on retainer with News International for 2,000 pounds a week; Goodman paid him an additional 500 pounds a week that he covered in his expense report that was signed off by the paper's management.

The News of the World, like other rough-and-tumble British tabloids, was a hyper-competitive newsroom. But former staffers told Reuters that under Brooks and Coulson, staffers were under more than the usual deadline pressure. Reuters described the newsroom as an "industrialised operation of dubious information-gathering" in which management verbally abused staff, boasted about destroying people's lives, relied heavily on private investigators, and encouraged a macho culture that bred competition to see who could find the most violent career criminals to use as sources."

While British tabloids have long practiced the "dark arts" -- from donning disguises to hiring private investigators to dig up personal information -- most papers deploying cloak and dagger reporting methods toed the right side of the law. But phone hacking -- the practice of breaking into a voice mail system and listening to someone else's messages -- isn't legal. And that's just what Goodman and Mulcaire started doing for scoops, including a Nov. 6, 2005, item detailing how Prince William's minor leg injury on the soccer field would keep him from attending an upcoming mountain rescue course.

Clearly, it wasn't Watergate. But the scoop, attributed to a "pal," set off warning bells in Clarence House. Goodman later wrote about Prince Harry's visit to a strip club that even quoted one voice mail verbatim. The Metropolitan Police, commonly known as Scotland Yard, began conducting surveillance on the suspects for several months before making arrests and confiscating over 11,000 documents from Mulcaire's home detailing widespread hacking -- evidence Scotland Yard effectively sat on for years, according to a devastating New York Times report published Sunday.

Following Goodman's arrest in Aug. 2006, the News of the World issued a statement that set the stage for a litany of denials in the years to follow: The reporter and investigator acted alone. Initially, it looked like then-editor Coulson, a rising star in the Murdoch universe, would weather the storm, as James Robinson noted in The Observer shortly after the arrests.

"Coulson has recently returned from Rupert Murdoch's annual gathering of key News Corp. executives in America and Murdoch rates him highly," Robinson wrote. "He is regularly touted as Rebekah Wade [Brooks'] successor at the Sun, but one former News International employee says Coulson and Wade, along with News International chairman Les Hinton, 'are joined at the hip. The only way there will be blood on the walls is if all three of them go. But it would take an extraordinary turn of events for that to happen.'"

But as the list of hacking victims grew beyond the royal family to sports stars and political figures, rival British newspapers, most notably the Guardian, followed up aggressively on the story. In January 2007, News International chief Les Hinton announced that Coulson had resigned, breaking the news on the same day that Goodman and Mulcaire were sentenced to prison terms of four months and six months, respectively.

It wouldn't be Coulson's last high-profile resignation over phone hacking.

An investigation followed. In March 2007, members of a Parliament committee asked Hinton if News International "carried out a full, rigorous internal inquiry" and whether he was "absolutely convinced" that only Goodman was to blame. Hinton answered in the affirmative, while adding that an internal investigation would continue under the paper's new editor, Colin Myler. (Hinton reiterated the claim that Goodman was solely at fault two-and-half years later during a video conference with a Parliamentary committee).

WATCH previous testimony from Hinton, Brooks and Coulson, via the Guardian:

By the end of 2007, Hinton left his job running News International in London and headed to New York full-time to oversee Rupert Murdoch's greatest acquisition yet, Dow Jones. Brooks would later take Hinton's role overseeing Murdoch's British papers, which include the News of the World, Sun, Times (of London) and Sunday Times.

Despite Hinton's talk of an internal investigation, News International never volunteered any of what it may have discovered about the extent of phone hacking and bribes to police. That task would be left to other news organisations in the years that followed.

"NOBODY WAS BITING"

Alan Rusbridger, the editor-in-chief of the Guardian, said Sunday on CNN that "nobody was biting" on the phone hacking scandal in 2009 -- not the police, the country's press regulator, nor other newspapers in the face of a powerful media company's repeated denials. Rusbridger said "it was looking as though it was only us, but Nick Davies, our reporter, was very determined and I knew he was never going to give up."

He didn't. On July 8, 2009, Davies revealed that Murdoch's company paid over 1 million pounds to "settle legal cases that threatened to reveal evidence of his journalists' repeated involvement in the use of criminal methods to get stories." In other words: hush money. And the police, he reported, failed to follow up on evidence they had in their possession.

Davies noted that Coulson -- then director of communications for future Prime Minister David Cameron -- had overseen journalists "engaging in hundreds of apparently illegal acts." He also revealed that illegal activities took place under Coulson's predecessor, Brooks.

News Corp., in a statement, shot down the Guardian's "irresponsible and unsubstantiated allegations." Yates. who resigned from the police department Monday, said at the time there was no new evidence and refused to reopen the case. And the next month, Myler said that internal inquiries showed that Goodman acted alone.

Case apparently closed. Yet the Guardian kept on the story, as Cameron came to power in May 2010. The new prime minister brought Coulson along with him to office. A week later, Murdoch -- whose papers backed the conservative candidate -- visited the new British leader at 10 Downing Street.

Four months later, The New York Times jumped into the fray with a blockbuster magazine cover story shedding new light on Scotland Yard's mishandling of the investigation, noting that "Britain's revered police agency failed to pursue leads suggesting that one of the country's most powerful newspapers was routinely listening in on its citizens." The Times also reported that hacking was widespread in the tabloid's newsroom and, like Davies, suggested Coulson was aware of what was going on.

Despite mounting evidence to the contrary, Murdoch officials remained in denial mode. Bill Akass, then-managing editor of the tabloid, similarly dismissed the "unsubstantiated claims." He also suggested that the Times was simply trying to undermine a competitor.

Scotland Yard would later reopen its investigation, and Coulson found himself answering police and press questions yet again in the ensuing months. Actress Sienna Miller, one of the many celebrity hacking victims, filed a civil suit that generated more scrutiny on the hacking evidence Scotland Yard seized when it arrested Mulcaire. Yet Cameron continued defending Coulson into the next year, praising the "very good job" he was doing in government. The prime minster's support notwithstanding, Coulson resigned four days later amid questions about what he knew and when he knew it.

While the following months brought more arrests and revelations, it wasn't until the Guardian reported earlier this month about journalists breaking into Dowler's voice mail that the story exploded. The public demanded accountability. Politicians reacted. The scandal snowballed.

Since that July 4 scoop, News Corp. has closed News of the World -- the paper Murdoch bought in 1969 to gain his first foothold in the British market - and dropped its $12 billion takeover bid for British Sky Broadcasting. The Metropolitan Police faces increasing scrutiny for failing to investigate the illegal hacking of celebrities, politicians and average citizens targeted because they (or their families) were killed in Britain's 7/7 terrorist attack. In the U.S., the FBI is investigating whether News of the World journalists also targeted 9/11 victims, and members of Congress have raised the possibility that News Corp. ran afoul of the Foreign Corrupt Practices Act and could be in legal trouble on this side of the Atlantic, too. (Check out HuffPost's comprehensive phone hacking coverage here).

For his part, Murdoch has remained indefatigable in his public appearances, smiling alongside Brooks for waiting photographers at the same time that a scandal rocks his creation, News Corp. He recently called the London bureau chief at one of his newspapers, the Wall Street Journal, to assert that News Corp. executives handled the crisis "extremely well in every way possible."

Perhaps no one besides Murdoch believes that.

Although executive departures, diminished public perceptions and a shuttered tabloid are bad news for the Murdoch empire, News Corp. is in fine shape financially. Operating income for the News Corp.'s cable network division -- the company's most profitable arm -- has continued to increase reliably in recent years. Profits jumped 37 percent between 2009 and 2010 and increased 25 percent between March 2010 and March 2011. Analysts have generally concurred that while the $32 billion News Corp. can weather the current storm, Murdoch's swashbuckling ways may be curtailed.

WHAT'S NEXT FOR NEWS CORP.

One could be forgiven for not knowing that News Corp. even had non-Murdochs on the board of directors, given how the family appears to call all the shots. But now venture capitalist Tom Perkins and law professor Viet Dinh, each independent board members, have begun questioning the family's handling of this crisis, according to Bloomberg News.

There has even been speculation that Murdoch -- who holds the titles of chairman and CEO -- could lose the latter amid the phone hacking fallout. "He's not going to go willingly," Murdoch biographer Michael Wolff told Bloomberg News Monday. "He's going to go because there is no other alternative."

Murdoch built his empire on the backs of newspapers, and although his broadsheets and tabloids no longer support the company -- and in several cases drain it -- they remain his great love. It clearly wasn't in the interest of shareholders to drop over $5 billion for Dow Jones in 2007, a deal resulting in a write-down of billions the following year.

A post-scandal News Corp., analysts say, is much more likely to shed newspaper assets rather than accumulate them.

"Murdoch has collected newspapers the way some people collect stamps or fishing lures," said Alan Mutter, a new media consultant and former newspaper editor who is an adjunct professor at the University of California-Berkeley's journalism school. "It is a passion that goes beyond strictly dollars-and-cents business, because it gives him influence, and it also gives him inside information into what the rich and the powerful people around the world are doing."

The newspapers that captivated Murdoch and built the News Corp. of today are now a declining fraction of the media conglomerate's profits and its future pivots around franchises like cable television and film production.

In 2010, the company's cable network programming division, which includes Fox News Channel and FX, was responsible for nearly 60 percent of News Corp.'s operating income, while its Twentieth Century Fox unit has produced blockbusters like "Avatar."

By contrast, newspapers now represent less than 15 percent of the company's operating income. Analysts estimate that News International's U.K. newspapers alone amount to only about 3 percent of the company's overall profits.

Despite a nearly 15 percent drop in News Corp.'s share prices since the scandal erupted earlier this month, analysts still tip their hats to its handsome array of assets and strong foundation in television broadcasting. In the quarter-century that News Corp. has been listed on the stock market in the U.S., shares have grown steadily, particularly in the late 1990s. Over the past decade, shares have remained relatively strong until the financial crisis in 2008. Despite the major swing in prices over the past month, shares are still trading above where they were throughout the latter half of 2008 and much of 2009.

But the scandal has reignited shareholders' suspicions about Murdoch's long-held affinity for print newspapers.

"Newspapers clearly are a declining business, and a small piece of the company that's getting smaller," said Jessica Reif Cohen, a media analyst with Bank of America-Merrill Lynch who has long followed News Corp. "It would be phenomenal at the end of the day if they just said the newspapers really should be separate. Investors would love it if they spun it off. But I would be surprised if Rupert agreed to that."

Cohen added that closing or divesting all of the U.K. newspapers would amount to "a rounding error" for the company.

Although the finances of News Corp.'s U.K. newspapers may not figure heavily into company profits, there is a question of whether the scandal can be contained to just the British operations. Hinton, the ousted chief executive of Dow Jones, resigned because of his connection to the U.K.'s News International, not because of issues in the U.S.

Hinton and Brooks' departures, plus Brooks' arrest on Sunday, has intensified the focus on James Murdoch. Long thought to be the natural successor to his father, the head of News Corp.'s European and Asian operations faces questions about providing misleading information to Parliament about the phone hacking scandal and for approving hundreds of thousands of dollars in out-of-court settlements for hacking victims.

Any taint on James Murdoch, as deputy chief operating officer at News Corp.'s corporate level, could raise major leadership questions for the company. Since the BSkyB deal collapsed, there's speculation James could lose his position as the satellite company's chairman. Wolff was blunt when asked by Bloomberg News about James' future: "I think he's finished, cooked, over, toast," he said.

Still, analysts say the rot would have to extend high into the company's central governance in order to have a profound effect on the rest of News Corp.'s holdings.

"For this to expand beyond the British newspapers, you'd really have to have corporate officers of News Corp., as opposed to News International, in the executive suite, tainted and guilty of a crime," said David Bank, a global media analyst with RBC Capital Markets. "I think there's a tremendous amount of noise and uncertainty and fear, and it's driving stock volatility. But I'm not quite sure how much it bleeds into the rest of the business."

Bank said the easiest way to erase lingering questions for the rest of the company would be to simply remove the U.K. newspapers. But inside News Corp., at least before the scandal, the power to push for such a dramatic shift sits almost entirely with Rupert Murdoch.

As with many publicly traded media companies, shareholders of News Corp. have relatively little control over strategic decisions made by the board and its 80-year-old chairman, Murdoch. The chairman himself controls 39 percent of the voting shares of News Corp., by virtue of his own holdings and holdings of the Murdoch Family Trust, according to a proxy statement filed with the Securities and Exchange Commission last year.

Saudi Arabia Prince Alwaleed bin Talal is the only other individual to have more than 5 percent of controlling shares in News Corp. Bin Talal has signaled his support for the Murdoch family, but last week he said Brooks needed to resign. She was gone the next day.

"From a practical level, I don't think Rupert's going to want to break up the company, and he's really the only guy who can do it," Bank said.

Other analysts say that News Corp.'s British scandal will simply accelerate what had already been a major shift away from the traditional newspaper holdings that fueled the rise of Murdoch's empire. By dropping the bid for BSkyB, the company lost another potential foothold in the U.K., but now has money potentially freed up for other acquisitions or stock buybacks to reward and entice investors. (A $5 billion stock buyback announced last week slowed what had been a constant drop in the share price.)

"In a sense, you could say 'Well, the game is over for now in the U.K.,'" said Ken Doctor, an author and news industry analyst for Outsell, a global research firm. "What we may be seeing now is really an American strategy. The Murdochs are American citizens. The biggest assets are really film, which is Hollywood, and cable TV in the U.S."

Even so, a retreat from the U.K. will come at a price for Murdoch, who takes great personal pride in being an Australian emigre who successfully and boldly crashed through long-established barriers of privilege in British media and politics.

"In the entire history of Murdoch, there's a lot of ups and downs," Doctor said. "He just really underestimated this one. He's not a superhero; he just seems like a superhero."

-- HuffPost Emily Katz contributed research assistance.

WATCH Murdoch's apology:

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