Peter Chernin and the Empire of the rising son

The departure of Rupert Murdoch's right-hand man has sent tremors through Hollywood and Wall Street. Stephen Foley reports

When Peter Chernin settled into his plush seat at the Kodak Theatre for Sunday night's Oscars to see his company's film Slumdog Millionaire sweep the board, he was holding a secret that would set Hollywood abuzz just as soon as the red carpet had been rolled up for another year. It was a secret he would not let out even as he co-hosted a victory party that would become one of the most talked-about shindigs of the night. It would only be as the hangovers were clearing the next morning that people would hear the news: Mr Chernin will be leaving his job as head of Fox, the film and television goliath owned by Rupert Murdoch, and as the number two at Mr Murdoch's News Corp empire.

Typically, Mr Murdoch had not been quite as discreet. As the Fox Searchlight victory party was in full swing a few doors away, the pathologically gossipy septuagenarian was attending the Vanity Fair party. There, he was telling some of the guests that he was resigned to losing Mr Chernin's services.

When the news broke the next day, it would send Hollywood and Wall Street into a paroxysm of speculation about the leadership of some of Los Angeles' most powerful movie and television studios and about the whole future of the Murdoch empire. The mogul had made a bold new move in his campaign to ensure the family succession, but at a time when the media industry is in a fragile state. By cutting off his right-hand man when investors are already questioning his leadership, Mr Murdoch is exposing himself to great danger. But then, you would never expect the old bird to play it safe.

As well as being one of News Corp's best-respected executives on the West Coast, 57-year-old Mr Chernin had also been chief operating officer of News Corp, on a promise that he would step into the top job should Mr Murdoch finally be beamed up to the great archive in the sky.

It was an arrangement whose dissolution had already been agreed by the time the champagne was flowing on Sunday night. For the best part of the week, since Mr Murdoch jetted into Los Angeles, the two had been working to deal with an issue that had been hanging in the air for the best part of a year, as the end of Mr Chernin's four-year contract loomed. Mr Chernin was demanding a continuation of the status quo; Mr Murdoch, now 77 and with his eye more firmly than ever on handing the chief executive role to his son James, was hoping to put him off with a shorter extension. James is only one year into his job as chief executive of News Corp's European and Asian businesses, which include the stable of UK newspapers.

Mr Murdoch spends most of his time in New York, where News Corp is headquartered and where he is raising two young daughters with his third wife Wendi Deng. However, he keeps an office on the Fox lot in Hollywood, and it was there that it became clear there would be no new deal. Instead, Mr Chernin is to be handed a little consolation prize that will set him up as an independent movie producer, with Fox funding two films a year from him for the next six years.

"I'm rather surprised that Rupert has had the guts to do what he wanted, in the face of terrible market conditions," says Michael Wolff, Mr Murdoch's biographer. "I thought he would bite the bullet, agree to the demands, deciding that he couldn't risk the share price hit. But, Rupert being Rupert, he decided to say no, and shareholders be damned."

The succession is an obsession. The Murdoch children call News Corp "the empire", and the three children from his second marriage – Elisabeth, Lachlan and James – have all done an apprenticeship within the company. Lachlan, previously the heir apparent, found himself hemmed in by Mr Chernin's expanded role and left in 2005 to pursue business ventures in Australia, in part because of a disagreement with his father over the inheritance for Mr Murdoch's two new daughters. Elisabeth has set up Shine, one of the most powerful independent TV producers in the UK, responsible most recently for bringing a version of the US show Law & Order to ITV.

Now it is the clever but volatile James who is shining within News Corp, having made a success of his tenure running BSkyB in the UK. News Corp's spin yesterday was that James has freed up Murdoch père to concentrate on the US. It has long been assumed that James will step into Mr Chernin's shoes in due course, but he said no to a move to the US a year ago and is not expected to do so immediately, even now. His project is to bring a bit of business-school thought to the businesses under his current purview. In particular, he is trying to reduce the company's reliance on advertising and focus on subscription income. "Is he going to be on a plane to LA soon?" says one insider. "A definite no to that."

James himself is interviewed in this week's Intelligent Life magazine, saying he really thought he would strike out on his own – only to find himself "sort of assimilated" into the empire. "Every child lives in their parents' shadow, until they're well into old age in many cases," he said, adding: "I've always said the same thing, which is that I genuinely focus on the task in hand. That's fundamentally the best way to do my job."

So the empire waits. During the interregnum, Mr Murdoch is going to spend a lot more time on a plane, switching between US coasts. He has always expressed disdain for Hollywood, preferring to rub shoulders with politicians and businessmen on the East Coast than stars and producers on the West. Wendi Deng, credited with shaving off some of Mr Murdoch's socially awkward angles, might be more amenable. Mr Wolff calls her "head of the Hollywood wives club".

The other problem is that, even when James Murdoch does fly in to claim his crown, he has little Hollywood expertise. That is why a story was being cooked up by Hollywood gossips yesterday, namely that Elisabeth Murdoch could make a return to News Corp, perhaps via its acquisition of Shine. "She runs one of the largest independent TV companies in the world, so it is a credible plan," says Mr Wolff. "Certainly, Rupert would like Elisabeth to do that, but whether she wants it will no doubt be a subject of close family negotiation."

Mathew Horsman, media strategist and founder of Mediatique in London, suggested she was happy with her autonomy, and News Corp's investors will have to resign themselves not just without Mr Chernin but without any outside check on Mr Murdoch. "The problem is that the top job is going to be closed to anyone whose last name is not Murdoch," he said. "All Rupert Murdoch's lieutenants reach the conclusion that they are not going to be the one to break the mould. Peter Chernin came closer than most, but not quite. Similarly, News Corp is not going to get someone from the outside to come in, simply to keep the seat warm before James comes in."

The share price did indeed tumble yesterday. Why? The reason is that investors have come to see Mr Chernin as a sobering influence on the Murdoch empire. Where Mr Murdoch is the expletive-spewing newshound, Mr Chernin is the quintessential operations man.

He is also the man in charge of the part of the business that Wall Street likes: the entertainment business, media content, digital plans, the future. Mr Murdoch is a newspaperman, like his father from whose Australian publishing business News Corp grew. The $5bn acquisition of his latest toy, The Wall Street Journal, has given him a new lease of life. The attachment to newspapers is only set to grow. All the talk in New York is that Mr Murdoch is positioning himself to pick up the debt-burdened New York Times, should its owners – the Ochs-Sulzberger family – decide to cut their losses or lose control of the company in a bankruptcy.

Wall Street hates newspapers right now, and News Corp's own financial results have been dragged down by the slumping ad revenues. Embarrassingly, News Corp took a $2.8bn loss from writing down the value of the Journal's parent company Dow Jones just this month.

News Corp has $4.5bn in cash on its books, enough to pay off debts coming due for the next seven years, so the Murdochs are not in danger from that angle. However, they control less than 40 per cent of the company, making the succession plan vulnerable to an investor revolt, or a raid by hedge funds who think shifting the business away from newspapers could send the shares higher. It is a possibility that moved up the agenda yesterday as dissent over Mr Chernin's ouster was reflected in another share price tumble.

The Dow Jones acquisition was a deal that Mr Chernin had tried to thwart, during a period of internal turmoil which has left Mr Murdoch making semi-public asides against his chief operating officer ever since. Mr Chernin does not see the big picture, is not a visionary, he has complained. In conversation with Mr Wolff for the biography The Man Who Owns The News, one of the mogul's aides suggested that if Hillary Clinton won the White House then Mr Chernin, one of her largest fundraisers, might have a shot at Treasury or even Secretary of State. "At best," said Mr Murdoch with disdain, "Commerce."

It was only a matter of time until the two men went their separate ways. Mr Murdoch will require all his legendary business skills to shore up confidence in the company, and smooth the way for his son's arrival. It could be a tricky period.

Family business: The Murdoch dynasty

Lachlan Murdoch, 37

Abruptly left the company in 2005 after a reported clash with his father. Gave up his executives roles at News Corp and moved his family to Australia, although he still retains a seat on the board. He was once seen as heir-apparent but Peter Chernin and Roger Ailes, another executive, manoeuvred against him.

James Murdoch, 36

Head of News Corp's operations in Europe and Asia, he was a late arrival in his father's firm but has prospered. Once a bleach-blond rebel, he won public plaudits for making BSkyB a major player in the UK, and private raves for standing up to his father in front of Tony Blair.

Elisabeth Murdoch, 40

Was given a job at BSkyB but also quit the family business. A year later, in 2001, she launched Shine, a TV production company which, thanks to a string of acquisitions, is now one of the UK's biggest. Her first marriage, to fellow Vassar graduate Elkin Kwesi Pianim, ended in 1998. She is now married to the publicist Matthew Freud.

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