Taylor: Murdoch scandal could spill over to sports broadcasting

July 21, 2011, 1:46 a.m.

The phone hacking scandal that did away with one of Rupert Murdoch’s most successful newspapers in the U.K., the News of the World, officially crossed the pond a week ago with the announcement of a preliminary investigation by the FBI and calls for further scrutiny elsewhere. Not only does the storm facing News Corporation — perhaps best known through its Fox brand — shows no sign of relenting, but its effects may be widespread and long lasting throughout the news industry. Although the wrongdoing at the News of the World was pretty serious stuff, including hacking into and deleting messages from the cell phone of a child who was abducted and murdered, it has been a little surprising how far and how quickly this wildfire has spread. Not even Murdoch or his closest advisors seem safe anymore, and if even they can’t be protected, could the impact of the scandal spread to apparently unconnected divisions of the company such as Fox Sports?

Within the U.S., Fox has a very important share of the sports broadcasting market. While ESPN is probably the market leader and the network most identifiably associated with sports, the same could have been said about CNN and news just a few short years ago. Fox has worked hard to carve out a big slice of athletic territory, showing this year’s Super Bowl, holding the exclusive broadcast rights to the World Series and recently taking joint share, with ESPN, of the new Pac-12 football TV contract. But the corporate world is a fickle place. If other companies begin to fear that the Fox brand has been damaged by its association with this scandal, they may wish to withdraw their ads from Fox’s programming, creating a funding shortfall that could lead to a much more serious problem than News Corporation’s current drop in share value.

In 2001, the U.K. channel ITV Digital bought the rights to show games from the Football League — the three English professional football divisions below the Premier League — for £315 million (over $500 million) but spectacularly failed to meet these costs and imploded in 2002. The Football League, and especially smaller clubs who had committed to large budgets in anticipation of the money from this contract, was left with severe financial problems, eventually receiving just a paltry £4 — yes, just $6.50! — in legal compensation.

Though the sports industry generates a phenomenal amount of money, both teams and TV companies often push themselves to the financial limit in pursuit of glory. It’s a dangerous game of Russian roulette that has a lot in common with the risks taken by bankers and economists in the run-up to our recent financial crisis. The biggest teams have managed to convince themselves that they can spend more and more each year on players and other expenses, disregarding the huge debts they are accruing and the effects of ticket price hikes on fans.

And it is not just the phone-tapping crisis that could put this painfully into perspective. Elsewhere, a Portsmouth landlady named Karen Murphy is fighting both BSkyB (in which Murdoch holds a significant share and which, until recently, he planned to buy outright) and ESPN over the right to show Premier League soccer matches in her pub. Instead of screening games through the satellite or cable systems offered in the U.K., she subscribed to a Greek satellite provider that offered games for around one tenth of the cost. Technically, this was in breach of U.K. copyright law, but by arguing that the rules break the European Union’s agreements on free trade, she has taken the case all the way to the European Court of Justice. A final ruling is still pending, but earlier this year, an advocate at the court came out in support of her stance.

If her case is upheld, it would be a major blow for BSkyB, ESPN and the English Premier League. BSkyB alone paid £1.6 billion ($2.6 billion) for TV rights for the 2010-13 period, and a significant slice of this money filters down to the teams, funding big-money player transfers and new stadiums while allowing clubs with huge debts to somehow survive. Without the exclusive right to screen these games in the U.K., the number of subscriptions and amount of advertising revenue would plummet. Even assuming BSkyB had the spare cash to still pay off this fee, it likely wouldn’t want to, leaving an inconceivable hole in budgets across the board.

Most people probably assume that, as always, Murdoch will win out in the end, but suddenly he doesn’t quite seem so invincible. The economic crisis was triggered by some seemingly (at the time) insignificant events that quickly spiraled out of control. Could illegal phone tapping and a pub landlady be the pins that burst the sports bubble?

Tom Taylor hopes to sue ESPN for monopolizing his television screen. Refer your top lawyers to him at tom.taylor “at” stanford.edu.

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