Does James Murdoch face a headache as bad as the Guinness affair?

After last week's tumult, the City believes things may never be the same for News Corp
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In the City the big question being asked is whether the scandal now unravelling at Rupert Murdoch's News Corporation will turn out to be as devastating as the Guinness affair.

As one investor said yesterday: "The real danger for Murdoch now is that the phone-hacking scandal at the News of the World will unleash questions throughout the empire. No one's scared of him anymore. Until now Murdoch has always been untouchable but, like in the Guinness or Robert Maxwell affairs, everything will come tumbling out. Don't forget, Murdoch nearly went bust in the 1990s and memories are long."

Investors have already been dumping BSkyB shares (of which Murdoch controls 40 per cent), as any hopes of a full bid for the broadcaster from NewsCorp have been dashed. It now looks inconceivable that the Government will permit a Murdoch bid for the broadcaster, which means that almost a year of delicate negotiations have all been for naught.

With each new allegation of hacking and bribery of police officers, it's looking less likely that even Murdoch's son, James, who runs News International which owns the NOTW, can survive. Another investor added: "The greatest fear for the group now is that US investors will start selling because of the uncertainty that this scandal spreads to the US and that legal action will be taken against top Murdoch management – even James."

News Int also faces more potential lawsuits from another 4,000 people who are alleged to have had their phones hacked. Ex-staff and present executives may face criminal charges over the phone-hacking but also over payments alleged to have been made to police officers.

Until last week it looked as though James had pulled off a blinder by getting Jeremy Hunt, the Culture Secretary, close to giving a green light. By the end of the week, more than 200,000 new complaints had been lodged and the deadline for approval has been pushed into the long autumn grass.

James has not had the happiest of times since joining News Corp 15 years ago in New York. There he created the digital media division and then ran television operations in Asia, India, Turkey, Germany and the Middle East. In 2007, he became executive chairman of News Int, the UK subsidiary that owns the NOTW plus The Sun, The Times and The Sunday Times. But it was James who spent almost £1bn on an 18 per cent stake in ITV to block a bid by Sir Richard Branson: News Corp paid 135p a share but was forced by regulators to sell them for less than 50p.

The latest revelations have cost the News Corp empire some more and caused BSkyB shares to slide as the likelihood of a deal diminished. If the BSkyB takeover does not proceed within five months of receiving clearance, News Corp must pay a £38.5m break fee. That is smaller than the loss just realised on buying MySpace, however. The digital media division paid $580m for the social networking site in 2005 but sold it last month for $35m and annual losses have been running at about $240m.

James Murdoch's handling of the phone-hacking scandal could be expensive too. Ford, Sainsbury's, Boots, Halifax, Asda, O2 and many others had refused to take space, threatening to dent seriously the NOTW's £35m advertising revenue. The fear was that the advertisers' boycott could extend to other titles unless action was taken – and possibly to Sky, which is 39 per cent owned by the group.

Now News Int faces closure costs estimated to be about £40m for the NOTW and start-up costs if it launches a new Sun on Sunday. Insiders say James Murdoch and Rebekah Brooks had been planning a seven-day operation for some time and that this latest crisis merely played to their hand. (see panel). But even with The Sun's reputation, it will take time for a new paper to build sales and convince advertisers to take space again.

But the NOTW's problems do not end with today's final edition. Police say up to 4,000 phones could have been hacked. When the company was still blaming one rogue reporter and investigator, James Murdoch agreed compensation payments that included £1m to publicist Max Clifford and £700,000 to Gordon Taylor, the chief executive of the Professional Footballers Association.

James admitted his mistake when he announced the paper's closure on Thursday: "The company paid out-of-court settlements approved by me. I now know that I did not have a complete picture when I did so. This was wrong and a matter of serious regret."

The 38-year-old wasn't a natural contender to succeed his father although he was born in Wimbledon in 1972 shortly after Murdoch's acquisition of the NOTW and The Sun.

He was educated in New York and then Harvard and there was time in Rome when he considered a career in archaeology. But he dropped out of Harvard to launch a hip-hop record label after months spent following the Grateful Dead around.

In contrast to today's army style crew-cut, he used to have a beard, an eyebrow stud and two tattoos, including one of a lightbulb on his arm. It's not known whether it's still there but the publishing blood got to him and his father bought his son's label, Rawkus Records, and put him in charge of leading the media giant's music and internet strategy during the first tech boom.

He's one of three Murdoch children in the media group and said to be the most ruthless, driven and money-orientated. He now sits on the boards of drugs giant GSK and Sotheby's.

Apart from his father, James's brother Lachlan is a director and their sister Elisabeth is due to rejoin shortly: and their grip is tight as the various family trusts own 40 per cent of the voting shares.

But there are many independent members too who will now be asking tough questions of the board. They include the former Spanish prime minister, José Maria Aznar, and the former BA chief executive, Rod Eddington and ex-Goldman Sachs banker John Thornton, also sits on the board of Ford, the company that led the NOTW advertising boycott.

Two of the directors, Joel Klein and Viet Dinh, respectively law officers to presidents Bill Clinton and George W Bush, are overseeing the internal investigation of the phone hacking. They have compared the behaviour with the company's code of ethics which states: "The chief executive officer and each senior financial officer shall, at all times, conduct himself or herself in an honest and ethical manner."

Olswang, the London law firm, has been asked to see what lessons can be learned from the Sunday paper's behaviour. A High Court judge, Sir Charles Gray, is acting as an independent adjudicator of the compensation scheme.

A management and standards committee has also been formed comprising the former Daily Telegraph editor, Will Lewis, now News Int's general manager, with company spokesman, Simon Greenberg, and its general counsel, Jeff Palker. And the chief financial officer, Susan Panuccio, has been asked to devise a new governance and compliance structure for News Int, which it hopes will in time become the standard for the whole sector.

It's important to put the NOTW closure in context; the newspaper and publishing business which includes the UK papers are just 15 per cent of total profits. News Corp – with a market cap last Friday night of $45bn (£28bn) – has a balance sheet that boasts $60bn of assets of which $14bn is goodwill.

In the past year to June 2010 NewsCorp had revenues of $32.8bn, of which $25bn came from screen-based media rather than print, and operating profits of $3.9bn.

The film business, which includes 20th Century Fox, makers of Avatar and Black Swan, had revenues of $7.6bn and income of $1.3bn while TV, which includes Fox Broadcasting, enjoyed revenues of $4.2bn and income of $220m.

Even bigger is the cable network, including Fox News and National Geographic, which saw revenues of $7bn and income of $2.3bn while direct broadcast satellite TV (Sky Italia and Sky Deutschland) made revenues of $3.8bn and income of $230m.

Publishing, which includes Harpers Collins based in New York, had revenues of $1.2bn and income of $88m. By contrast, newspapers and information services had revenues of $6bn and income of $530m.

The company, which was founded on The Adelaide News, now has 100 titles in Australia. And besides the British papers, Murdoch owns the New York Post and Wall Street Journal, plus the Dow Jones newswire. And this year News Corp paid £415m to buy Shine, a UK television production company run by Murdoch's daughter, Elisabeth,

But in closing the paper James Murdoch hopes the sacrifice can save the more valuable prospect of taking over BSkyB, whose directors are now wondering whether the safeguards proposed by the Government to distance Sky News from the Murdoch newspapers are enough.

Even if Hunt, still approves a deal, the independent BSkyB directors could refuse to back a deal unless News Corp further reduces its involvement with the news channel. They do not want the service to be contaminated by the unethical practices exposed at the company's best-selling newspaper or by the commercial consequences that saw major companies cancelling their advertising last week.

In spring 2010, News Corp proposed a 700p a share offer for BSkyB, valuing the 60.1 per cent it does not own at £7.4bn. James Murdoch's co-directors said they wanted more than 800p, however, and the shares were 849p before last week's bombshells, as investors anticipated an even better offer.

But as the Culture Secretary seeks a delay – and reviewing the pile of protests received in the latest consultation gives him the perfect excuse – the shares have eased. Even if the takeover is cleared, Rupert Murdoch may feel that the atmosphere is too hostile to raise his profile with a controversial bid, and BSkyB's board may consider him too controversial to recommend an offer without extra safeguards.

BSkyB's board, led during James Murdoch's enforced exclusion by an investment expert Nicholas Ferguson, must decide whether it wants to be part of a company facing a police investigation, political opprobrium and a commercial boycott.

James Murdoch admitted last week that the NOTW closure may seem a price loyal staff have to pay for the transgressions of others. Shareholders in both BSkyB and News Corporation may be worrying that they too are paying the price of others' errors.

Board members

News Corporation's non-executive directors

Viet Dinh

He joined NewsCorp in 2004 aged just 36. At the time he was professor of law at Georgetown University. He was also an assistant attorney general in the Department of Justice, having arrived from Saigon as a refugee in 1978.

Thomas James Perkins

A leading US businessmen and one of the founders of venture capital firm Kleiner Perkins Caufield & Byers. He has also been on the boards of Compaq. Applied Materials, Genentech and Philips Electronics.

John Thornton

A co-chief executive of Goldman Sachs International in London from 1995 to 1996 and chairman of Goldman Sachs Asia from 1996 to 1998. He is also a director of Ford Motor Company, China Netcom and HSBC Holdings.

Rod Eddington

The Australian is best known for his time at British Airways, where he was chief executive during the September 11 terrorist attacks on the World Trade Center in New York.