Why the next News Corp. scandal may be harder to understand and much more important

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The Murdochs testify in Parliament on phone hacking. ()
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What if that last Murdoch scandal turns out to have been the little one, in business terms?

You've read, or heard, about the phone-hacking scandal in Great Britain involving newspapers owned by Rupert Murdoch's News Corp. That was the one in which reporters at those papers broke into people's voicemail and listened to their messages. It was illegal, but it got The News of the World, Murdoch's now-shuttered British tabloid, scoops about celebrities, royals, and other people in the news.

The somewhat obscure practice was catapulted to the forefront of British media when it was revealed that one of the victims of the phone hacking was 13-year-old Milly Dowler, a girl who had gone missing and for whom a massive search was underway. The tampering gave the victim's family false hope that she was alive and materially affected the police's investigation into her whereabouts.

At the time there were many strands of the story to follow, between the political implications, the payoffs, the sleazy hackers, the subsequent cover-ups and the parliamentary inquiry into all the above. But it was all water under the bridge, Murdoch and his deputies argued. None of these employees were around anymore; we were diagnosing a culture that had already expired years before. 

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But there was another strand, occasioned largely by the shocking decision by News International to actually shut down moneymaking tabloid The News of the World, as if to amputate something gangrenous. 

It became worth asking whether any of Rupert Murdoch's newspaper properties could be saved, and indeed whether News Corp. itself could be in danger from the scandal.

At the time, many insiders dismissed the idea. The British newspaper operations are only, after all, a shopfront for a massive international media conglomerate with much more profitable and significant lines of business. It was a sort of short-hand, I'm not sure how accurate, to say that newspapers were maybe five percent of the News Corp. operation.

Now, it seems, Murdoch's competitors have come for the other 95 percent, as this week, a new set of allegations, about hacking of a very different sort, are beginning to cloud the horizon for News Corp.

Reports from the PBS program "Frontline," the BBC's "Panorama" and in a Murdoch-competitor Australian newspaper, The Australian Financial Review, charge that an internal unit commissioned with protecting the security of News Corp. satellite television subsidiaries' "smart cards" was actually working to further piracy and stealing of proprietary information allowing hackers to make fake cards for rival satellite companies.

This hasn't become a bigger deal yet, I'm guessing, because it's a slightly harder story to tell; there's no Milly Dowler here.

But the report in AFR does a fairly good job of breaking it down what exactly the "piracy" link is.

Here's an explanation of smart cards, and of the world of smart-card hacking:

[Broadcasters issue] paying customers with a smartcard that is inserted into the set-top box to decrypt the satellite or cable signal fed into the customer’s home. The system also manages the entire customer record base. It’s the nerve centre for the business –but if the encryption is broken and the smartcard is hacked, the pay TV operator is wide open to piracy. It can no longer control who watches its broadcasts and loses its revenue stream.

And later:

Pay TV piracy is a murky world of hackers, hobbyists, dealers chasing millions of dollars from selling pirate cards and the growing incursion of organised crime.

Inside News Corp., security for its own smart-card encryption was the province of a subsidiary called NDS, an Israeli security company that numbered many former Israeli intelligence operatives, and that, ultimately, also hired several veterans of Britain's Metropolitan police.

And inside NDS, there was yet another concentric circle, according to the AFR report:

Operational Security was set up as a secret unit within NDS with the active involvement of the Office of the Chairman at News. Initially when Reuven Hasak was hired in 1995, the goal was to help News sue Michael Clinger, a former NDS chief executive who had defrauded the company.

The target then became pay TV pirates and hackers—and Operational Security proved ruthless at prosecuting pirates attacking News Corp systems.

By the mid-1990s, NDS had become the glue holding Rupert Murdoch’s global pay TV empire together providing conditional access services to Foxtel, BSkyB and STAR (in Asia). It also had big contracts with other broadcasters such as GM’s DirecTV in the US. But the NDS conditional access system was also the most widely pirated and was in danger of being driven out of business.

That's where this story really begins. In some 14,400 internal NDS emails provided to AFR, conversations appear to suggest that the operation was linked to websites trading hacked smart-card code. One such website, the report and others that have aired on the BBC suggest, was directly funded by NDS.

Specifically, it is charged that NDS was materially involved in the hacking of British pay-TV broadcaster ITV. Experts seem to suggest that millions of dollars were lost, though the problems that led to ITV's collapse and restructuring as a free cable network resulted from a number of problems at the company.

In a certain respect none of this is new, as Murdoch and his deputies are quick to point out. And it can be argued that, strictly in terms of illegality, none of it is very interesting.

The law takes a while to catch up in these technical areas, and at the time the emails AFR has published online were written, none of the hacking activities described were illegal (though some now are).

What's more, several competitors of News Corp. television properties have made similar hacking claims against NDS over the last eight years, and either been thrown out of court or withdrawn as the complaining company prepared to make a deal with a Murdoch unit to be partly or fully acquired by them.

The new reports, however, contain newly discovered emails (some 14,400 of them), and interviews with hackers who have gone on the record to say that they were aided by NDS in hacking rival companies' smart-card code.

You may remember that the phone-hacking allegations alone were enough to prompt News Corp. to withdraw a multibillion-dollar bid to take over British broadcaster BSkyB.

What these far more relevant revelations will mean to the future of News Corp.'s broadcasting business—which, again, is infinitely more important than its newspaper business—remains to be seen. But historically, it has relied heavily on gentle, if not favorable, treatment of News Corp. and its management by government regulators. Cultivating friends among the ranks of government is, for Murdoch, getting harder by the day.

As the Sydney Morning Herald puts it today, "Whatever the truth in the claims and counter-claims, the problem eating away at the Murdoch empire is its potential impact on a British regulator's investigation into whether News should continue to own its £4.5 billion ($6.9 billion) stake in its pay TV arm BSkyB."

Murdoch and News Corp. have been vigorous (and in the case of Murdoch himself, who has taken to Twitter of late, a little crazed) in their repudiations of all three reports.

They essentially lodge three kinds of arguments, which are everywhere and expressed in a style that is not meant, I think, to be precisely understood.

The first is an ad hominem attack: Bitter, angry competitors looking for reasons to explain how they lost out to News Corp. are either deluding themselves into lodging frivolous claims or intentionally seeking revenge against Murdoch. That is: Don't believe any of it because, look who is saying it.

The second is an "old news" attack: Rival companies have brought these kinds of claims forth before, and failed in the courts. That is: Don't believe any of it, because it's already been investigated and there is nothing at the end of the road here.

The third is just bluster: We've got a lot of dirt on other broadcasters, too, so watch out; we'll be out with it soon. That is: Don't believe it because soon many of these claims will be withdrawn under pressure.

All three are familiar to anyone who was obsessed enough with the hacking scandal to have been following it years ago when it began, and before it blew up in Murdoch's face. It's a cycle. An accusation meets with a denial, followed by litigation and/or investigation, followed by acquittal, followed by litigation and/or investigation into corruption, cover-ups or payoffs in the original litigation and/or investigation, followed by denial, followed by a confession on the matter of that initial accusation. As soon as that point is reached, it's nothing but investigation, confession, investigation, confession for the rest of the seemingly limitless ride.

There is one very big point to remember in all this, legal matters aside: The British agency that regulates licensing of broadcast can apply a loosely defined principle in the granting of those licenses, which is whether the broadcaster is "fit and proper" to hold the license. No serious wrongdoing nor any illegality is necessary for a company that seeks to operate in Britain to be deemed unfit or unproper. So if the allegations prove true, even if nothing illegal was done, a perception of anticompetitive practice is, presumably, a reason to refuse licenses to News Corp. subsidiaries.

In Australia, the "fit and proper" wording was active for years but has since changed, only slightly. There is still wide discretion in the granting of these broadcast licenses in the hands of the government and regulatory agencies.

But British and Australian authorities are no longer what they were in respect to the Murdoch empire. They are emboldened, and the public has become engaged. There are popular and unpopular positions now to take on Murdoch, where there used to be only popular ones (mostly positive). And they are wary of getting caught in the spin cycle again, where the collateral damage to officials, investigators, and operatives is enormous.