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QUEST MEANS BUSINESS
Hacking Scandal; Future Cities: Valencia
Aired July 18, 2011 - 14:00:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
JOHN DEFTERIOS, HOST, QUEST MEANS BUSINESS: The News Corp. affect, a second top British police officer quits over the phone hacking scandal.
Debt fears grip the markets sparking a sell off on both sides of the Atlantic.
And a virtual currency with real life appeal. We look at the growing popularity if bitcoin.
I'm John Defterios in for Richard Quest. And this, is QUEST MEANS BUSINESS.
From Murdoch's closest allies right up to senior law enforcers, the U.K.'s phone hacking scandal is claiming an ever growing string of names in the space of just dramatic days. Britain's top two police officers have both resigned in the past 24 hours, both tainted with allegations they were too close to the very journalists they are now investigating.
Scotland Yard's Assistant Commissioner John Yates is stepping down after hearing he would be suspended. He follows his superior Paul Stevenson out the door, but insisted he had acted with complete integrity.
(BEGIN VIDEO CLIP)
JOHN YATES, FORMER ASSISTANT COMMISSIONER, METROPOLITAN POLICE: Sadly, there continues to be a huge amount of inaccurate, ill-informed, and on occasions downright malicious gossip being published about me, personally.
This has the potential to be a significant distraction from current role as the national lead for counter-terrorism. I see no prospect of this improving in the coming weeks and months as we approach one of the most important events in the history of the Metropolitan Police Service, the 2012 Olympic Games.
(END VIDEO CLIP)
DEFTERIOS: Parliament has delayed its summer recess for a special session on Wednesday. Prime Minister David Cameron is cutting short a trip to Africa and will make a statement after Rupert and James Murdoch face questions from a parliamentary committee on tomorrow. Also facing questions in parliament, Rebekah Brooks, she was arrested on Sunday and questioned for a full 12 hours. Her predecessor at News International, the Dow Jones CEO, Les Hinton fell on his sword late Friday, after the markets closed.
Well, as you can see the scandal is working its way farther and farther up the chain and tomorrow the biggest players of all will face the music. Rupert Murdoch will be testifying along with his son, James, and Rebekah Brooks. As Dan Rivers reports, it is a moment that could define the future of News Corp.
DAN RIVERS, CNN SENIOR INTERNATIONAL CORRESPONDENT (voice over): When Big Ben strikes 2:30 in London, the bell will be tolling for Rupert Murdoch, his son, James, and former Chief Executive Rebekah Brooks. Their appearance before a British parliamentary committee may be the most important hour of their entire careers.
And the big political beasts in this building are smelling blood, even if Rebekah Brooks arrest may mean she is unable to shed light on what really happened.
Hacking victims like former Deputy Prime Minister John Prescott, think Rupert Murdoch has got a lot to answer for.
JOHN PRESCOTT, FORMER DEPUTY PRIME MINISTER, BRITAIN: Every I knew is scared to death to do anything that he doesn't like. So he is the spider in the middle of this web. And it is about time we took him on.
RIVERS: The chairman who will be in charge of the grilling is keen to hear why the company previous told him phone hacking was just the work of rogue reporter, then later admitted that wasn't true.
JOHN WHITTINGDALE, CHAIRMAN, COMMONS CULTURE COMMITTEE: We took evidence from senior executives at News International, and James Murdoch has now publicly stated that parliament was mislead. Now parliament takes that very seriously and so we want to ask him why he has discovered that we have been mislead, who mislead us, and how long he has known about that?
RIVERS: For Rupert Murdoch this isn't a court appearance, but it may feel like he his on trail.
(On camera): For years Rupert Murdoch has been behind numerous cruel tabloid headlines Now suddenly he is on the front page himself. And that is a pretty awkward place for a press baron to be. Suddenly the target of what they call in Britain the gutter press. Dan Rivers, CNN, London.
DEFTERIOS: News Corp. shareholders have every reason to be concerned. Share prices sank yet again today, in Sydney, even falling to a two-year low. The A Class shares in New York are currently off more than 5 percent in less than two weeks. They have fallen around 17 percent. Altogether more than $7 billion has been wiped off the company's value. Well, News Corp. announced today it is setting up a new independent body to toughen up its ethical standards, but it will take more than that to convince British lawmakers to give Rupert Murdoch and easy ride tomorrow.
Jim Boulden takes a look at how the media magnate has handled, or rather should we say, mishandled things so far.
JIM BOULDEN, CNN FINANCIAL CORRESPONDENT (voice over): An apology in person on Friday to the family of the murdered teenager whose phone was allegedly hacked in 2002 by those working for his "News Of The World". And in a full-blown apology in many of Britain's papers on Saturday Rupert Murdoch wrote: "We are sorry for the serious wrongdoing that occurred. We regret not acting faster to sort things out."
Part of "sorting things out", Murdoch's News Corp. has hired PR firm, Edelman. The editor of "The Guardian", the London-based newspaper which has broke many of the hacking stories, has some sympathy.
ALAN RUSBRIDGER, EDITOR, THE GUARDIAN: It has felt a bit out of control for the past 10 days, but I'm not surprised because the story was- they were having so much thrown at them, the story was changing so much from day to day, I think it would test any organization. So, I think there are signs now that they are beginning to get a grip.
BOULDEN: Max Clifford, himself an expert on crisis management, alleged his phone was hacked. He sued the "News Of The World". A settlement was reached last year. And in the past he has given a bit of advice to the former News International Executive Rebekah Brooks. Though she denied any wrongdoing Clifford says if she had had any knowledge of who was hacked, she should reveal it before someone else does.
MAX CLIFFORD, PR EXPERT: Bring it out yourself. It will be damaging. But nothing like as damaging if someone else brings it up. But I think the feeling was, I can only assume, the feeling at News International was this is not going anywhere, it has gone away, it is dead and buried.
BOULDEN: One big PR SNAFU, experts say, was saying no when asked to appear before parliament before doing a 180 and saying yes.
I guess what happened was that one camp said tell them to go to hell, and the other camp said that that is not going to look so good.
BOULDEN: The bottom line for the Murdoch camp, according to Max Clifford:
CLIFFORD: If it has got to come out, bring it out, control it yourself. And they missed a golden opportunity. And they are paying for it now.
BOULDEN (On camera): With the Murdoch empire under ever more scrutiny, what could repair, or indeed further damage the reputation of Rupert Murdoch and James Murdoch, the chairman of News International, will be how they answer questions before lawmakers here, on Tuesday. Jim Boulden, CNN, London.
DEFTERIOS: With the Murdochs looking more and more exposed analysts are saying one News Corp. executive from outside the family could take the company forward, and that is Chase Carey. He is News Corp.'s president, deputy chairman and chief operating officer. He has move into a troubleshooting role since the scandal broke. For example, he announced the withdrawal of the bid to take over BSkyB. He's been a close ally of Rupert Murdoch's over the years since he enjoyed success with the Direct TV model, that network in the United States. Analysts are all now calling News Corp. prince regent, that is for Chase Carey, ready to step in to lead the Murdoch family through this entire scandal. Chase Carey may end up as the only News Corp. executive with a better reputation than before. Believe that, or not.
Let's go to New York and check in with Felicia Taylor who is going to give us-tell us the tale of Chase Carey. It is not an easy job, as you know, Felicia, to be in a family empire, even though it is a publicly traded company. To stick around and not get bounced out and still have a reputation, yeah?
FELICIA TAYLOR, CNN FINANCIAL CORRESPONDENT: Yes, there is no question about it. And as you well know, Rupert Murdoch places a lot of prestige on loyalty and Chase Carey certainly falls into that camp. Murdoch has also said, though, you have to bury your mistakes. It is getting tougher and tougher to do that.
There are really two camps when it comes to Chase Carey. And that is what is interesting about the story. I spoke with Porter Bibb, who is with Media Tech Capital, and he says, in his opinion, that it is "inconceivable" that Chase Carey didn't know about what was going on. He also believes that there is no question that News Corp is going to have to divest its newspaper division. It will have to sell it off. That is responsible for about 20 percent of its revenue. He is not so sure that Chase Carey is going to be left standing and be that so-called prince regent.
But then there are other people out there that are very pro-Chase Carey. Namely, Jason Subotky, at Yacktman, which is the portfolio manager for one of News Corps.' eighth largest investors. And he has said that he would be very much in favor if the succession plan doesn't plan out the way it is right now. In other words, that Jamie wouldn't take over as the CEO. He would be quite happy to see Chase Carey go into that position.
And why would that be? He has a great track record. He has done a fantastic job. You mentioned DirecTV. That is where he earned his sort of stripes, so to speak. And did a terrific job there. He was CEO of DirecTV for six years. He is very focused on media broadcast content. That is the other part of the story. He has never been involved in the newspaper division. He has always been involved on the television side.
And if you take this into context, people aren't going to stop watching, let's just take an example, FOX News Cable, or FOX Sports, because of what is going on in the newspaper division. So in his opinion, it is just a matter of time before all of this goes away. And Chase Carey is really the person that has been able to steer things through. He is also the one that was responsible for those retransmission fees. Those are fees that they charge now, for distributors, to have some of the cable networks actually broadcast. It was a brilliant move and certainly responsible for a lot of revenue.
And when it comes to the advertisers, advertisers look for placement because the cable division reaches such a wide audience, so does the newspapers. If that readership was to being to diminish then, of course, the advertising situation would also begin to change. But so far, we haven't seen anything like that yet, John.
DEFTERIOS: OK, Felicia Taylor in New York. That cable network division bringing in $2.5 billion in 2010 alone. We'll have more on that in the second half of the program. CNN will have live coverage of the testimony before the British parliament tomorrow, by Rupert Murdoch and his son, James, as well as the former News International Chief Executive Rebekah Brooks. Plus expert analysis, Richard Quest is back in London for that. That is going to take place Tuesday at 14:30 in London, 15:30 in Berlin, right here, of course, on CNN.
Well, if both sides of the Atlantic investors are on edge. Next, we'll look at two fast-approaching problems in Europe and in the U.S. And what is being done to fix them, or at least try to fix them. When we come back.
DEFTERIOS: Investors here in Europe have had their first chance to react to the results of Friday's banking stress tests. The European Banking Authority says all but eight of the 90 banks tested passed the test. It sounds like good news, but investors really don't agree with that. Let's go over to the library, as Mr. Quest often talks about, to take a look at what we're talking about here.
It is quite interesting. European stock markets plunged Monday. Investors are not assured about the banking sector overall. The tests did not include the impact of a Greek default in the criterion. The general consensus is that Greece, in fact, will default. This is why the banking sector lead the way down; 1.5 percent in London, the Xetra DAX down 1.5 percent, the CAC Currant, down better than 2 percent, the Milan FTSE MIB, down better than 3 percent. This carried over to the euro today, as well, the euro also suffering. It is down around a third of 1 percent against the dollar, at 1,4078. It lost more than 3 percent in the past 7 days. Ironically, the correction of the euro is probably a good thing for European growth, to help out the exporters. But people are worried about the debt crisis going over to the banks. That is the result there. And this is spilling over to the euro. We peaked about 2 weeks ago, at 1.44 against the dollar.
And not surprisingly, gold is off to another record high, $1,602.40 per ounce. This is not a huge surprise. We have seen a run up in gold. You don't see a lot of confidence in the U.S. market, because the U.S. debt talks and raising the debt ceiling of course. We have the banks under pressure here, the euro under pressure. Naturally, investors would like to kind of hedge their bets and go into gold.
Well, Europe maybe more at ease after an emergency meeting of European leaders on Thursday. Officials are gathering in Brussels to try to resolve the next phase of the debt crisis. Let's bring in Jan Randolph. He is the director of sovereign risk at IHS Global Insight.
You know, it is very interesting, Jan, as we get started here. We have now moved from market that was going to give the European Central Bank and EU leaders the benefit of the doubt. Now they are looking for trouble. So, you have the bank stress tests on Friday. You have cross the hurdle, not good enough, is what the market is saying.
JAN RANDOLPH, DIR. OF SOVEREIGN RISK, IHS GLOBAL INSIGHT: Yes, we have had an across the board flight to safety. Gold has gone up. Triple A sovereign debt has gone up, but all the rest has fallen. And equities fell led by the banking sector. The banking sector holds a lot of this sovereign debt, particularly in Europe. And it is still the biggest story, sovereign debt. And how to resolve the debts of the peripheral countries, and whether they will be contagion onto the larger members, which could actually be a little bit more critical for the euro itself.
DEFTERIOS: You see it is interesting, what Jean-Claude Trichet said today. "Governments need to improve their verbal discipline." And I have had private conversations when I was on coverage in Brussels, with different finance ministers saying, they are very, very nervous about how many people are talking in Germany, for example, for political reasons. And they seem to think it is isolated to a national market. And it spills all over the place and this is horribly mismanaged from that standpoint.
RANDOLPH: Well, we've got some-a situation that is coming to a head on Thursday. The two most powerful institutions in Europe is the ECB, on the one hand, the European Central Bank, and Berlin representing the taxpayers and the net creditor countries, on the other. There is a fundamental disagreement about how to resolve this debt issue. The ECB doesn't want to deal with a financial sector crisis, which might involve bond holders with losses. And Berlin saying it is not fair that the taxpayers should always carry the can in the situation. And these bond holders did make their investments with open eyes. And they should stick along with the governments, keeping Greece afloat, while Greece undertakes some very difficult surgeries in the next-
DEFTERIOS: You make a very interesting point. Wolfgang Franz, who is basically the head of the Council of Economic Advisors to Mrs. Merkel, said today, it is unavoidable that the private bond holders will not loose money. They will have to loose money in this process. And this is at the heart of a solution. What are the terms of a default, really? Is that what we are talking about?
RANDOLPH: Well, they are talking of in terms, at the moment, we're have a situation where the Germans (UNINTELLIGIBLE) in government wants the private sector to maintain its exposure to Greece rather than bailout, bungee jump out, and leave the problems carry the risk can, as it were, with the taxpayer all the time. So they are saying, you know, these bond holders made their investments with open eyes. They should stick with Greece along with the governments while the difficult surgery is being done. I mean, that is-in some sense that is a fair proposition. But it is really spooked the markets. Because if this is going to be the new template for a bailout then investors will charge and additional risk premium, in terms of interest rates, for these other governments. And that is why we see bond yields rising in Italian and Spanish markets.
DEFTERIOS: In 10 seconds, because we're tight on time, would you say this is the biggest test of the euro, right now, this week?
RANDOLPH: I think we're in the most important week of the euro since its birth.
DEFTERIOS: OK, very good. Nice to see you, Jan Randolph of IHS Global Insight.
And this just in to CNN: British media reporting that a former "News Of The World" reporter, credited as being the first named journalist to expose phone hacking at the newspaper, has been found dead. Police say the body of Sean Hoare was discovered at his home and that the death is not being treated as, quote/unquote, "suspicious".
Back in September Hoare alleged that phone hacking was not only a common practice at the paper but that it had been encourage by Andy Coulson when he was the editor of "News Of The World" back then. Coulson went on to become the spokesman for British Prime Minister David Cameron, but the reassigned in January amid growing coverage of the scandal. Coulson himself was arrested earlier this month, then released.
Again, British media are reporting that the former "News Of The World" reporter credited as being the first named journalist to expose phone hacking at the newspaper, has been found dead.
Of course, we will keep you up to date with the story throughout the hour.
Well, as U.S. lawmakers try to hammer out a plan to raise the debt ceiling before the August 2 deadline, the rating agency, Fitch, has repeated its warning that it will cut the outlook on American's Triple A rating, if an agreement still isn't reached.
Moody's is suggesting that the U.S. scrap the limit altogether. It says the ceiling has done little to curb spending. White House Press Secretary Jay Carney says the president is working to make sure there is a back up mechanism, in place, to make sure the U.S. doesn't default on its debt.
(BEGIN VIDEO CLIP)
JAY CARNEY, WHITE HOUSE PRESS SECRETARY: He continues to push for the biggest possible deal, if you will. Mindful of the fact that we are now less than two weeks away from the deadline, regarding the need to raise the debt ceiling. So, also, having these conversations to make sure there is a back up measure, a failsafe measure, which as you know Senator McConnell has been working on.
(END VIDEO CLIP)
DEFTERIOS: Jay Carney at the White House. Let's got to Alison Kosik, who is standing by at the New York Stock Exchange with the market reaction.
You know it is fascinating to watch this because on certain days the market takes it in stride. And then you have a weekend to think about it, the stress tests over here, negotiations don't proceed, and then all of a sudden there is a crisis again.
ALISON KOSIK, CNN FINANCIAL CORRESPONDENT: Exactly. You know, last week we were talking about, you know, how traders weren't letting the debt ceiling stalemate in Washington have much of an impact on the trade. That is because they were confident that a deal would get done.
But today, very different; investors are clearly getting nervous. You can see that in how the market is reacting today, the Dow down 119 points. You can see them rush to buy gold. You can see it in the VIX, that is the fear index, it is jumping 10 percent. So the reality is setting in, John, that time is starting to run short. August 2 is just a little over two weeks away. And President Obama says the deal has to be agreed to by this Friday in order to get it through Congress in time.
You know, also weighing on the markets here, the debt problems in Greece, and Ireland, and Italy. There again, weighing on sentiment here on Wall Street. And it is a day that doesn't have much economic news or earnings, so really, the focus really is all about the world's debt problems, John.
DEFTERIOS: A news vacuum indeed, which does not help the investment climate. Thank you very much, Alison Kosik at the New York Stock Exchange.
Well, the bright future of bright oranges in Spain, how traditional industries are changing with the times to become more sustainable. This week's "Future Cities" from Valencia in Spain, next
DEFTERIOS: At QUEST MEANS BUSINESS we are interested always, of course, in how innovative minds are finding ways to make traditional industries more sustainable. Tonight on "Future Cities" Richard heads to Valencia, Spain, where the most iconic exports are no longer the most important when it comes to economic value. Cars and ceramics have overtaken agriculture. But some businesses are breathing new life into Valencia's oldest lines of commerce
RICHARD QUEST, CNN ANCHOR, QUEST MEANS BUSINESS (voice over): Valencia is a feat for the eyes, music to the ears, tickle to the nose, and behind all these delights, two the city's most famous products: Valencia oranges, Spain's favorite rice dish.
(On camera): Gourmets from around the world come here for the authentic taste of Paella.
UNIDENTIFIED MALE: Very good.
QUEST: The rice has been cultivated for centuries to soak up the flavors and then draw in the tourists.
(Voice over): Rice and oranges farming, two of the oldest industries. The city has a sense of pride of these institutions.
(On camera): They are so proud of the rice industry here they turned this old factory into a delightful museum. Unfortunately the rice and oranges industry today isn't what it was, a bit like this machinery. It is not economically important and all a bit antiquated.
(voice over): Half a century ago oranges and rice were amongst Valencia's main exports. Today these fruit and foods are no longer the economic pillars they were.
JUAN DELGADO, VALENCIA PORT AUTHORITY: Valencia and the Valencia region has been traditionally an agricultural area, since back in the Middle Ages, no. But in the `60s, it started industrialization process. It was no more an agricultural port, exporting agricultural goods, and now we export cars, tile and other kinds of products.
QUEST: For the farmers here in the Albufera Nature Reserve, where the rice and oranges are grown, it is all a worrying reality. They have been left behind. And now the farming industry finds itself trying to catch up.
JAVIER JIMENEZ, BIOLOGIST, CITY OF VALENCIA: Well, the City of Valencia has made a big step forward to the future in the last 15 years. And this means that also traditions must make this step forward, must advance, innovate and adapt to this new situation.
QUEST: The old industries have been told they must wake up and rethink the way they deal with the product. ITENE is a technology institute looking for solutions. Here the motto could well be waste not, want not. Researchers are turning the waste rice straw left over from the harvest into paper and food packaging. Creating new business potential.
MIRIAM GALLUR, ITENE: We are looking for a lot of innovative process, innovative new materials, innovative technologies, and products to make our city and our market more, more competitive with the European market.
QUEST: The orange industry is doing some waste management of its own. Figuring how to squeeze the most out its tangy leftovers. South of the city sits the world's first plant capable of turning orange peel into biofuel. The plant is called CitroTecno.
EMILIO CANAVATE MARTI, CITROTECNO: CitroTecno is the future because years ago we sell all of our oranges abroad. But right now the industry is decreasing a little bit. We use the waste and we can get output from the citrus waste. This is an economic solution and an environmental solution.
QUEST: During the high season the local juice factories deliver truckloads of orange waste to CitroTecno. Once dumped any remaining juice is separated from the solids. And that liquid is channeled to the main hall.
MARTI: This is the jewel of our factory, because we produce here our most important product that is the bio-ethanol.
QUEST: After 70 hours of fermentation, bio-ethanol is obtained. A clean, renewable fuel suitable for gasoline engines. CitroTecno hopes that in the future more cars like this prototype will be juiced up by bio- ethanol from orange waste.
MARTI: With this kind of bio-ethanol we can use it four our cars, for our trucks, all our stuff is even better because we get this bio-ethanol from the waste.
QUEST: Valencia is a city partly built on rice and orange farming. Traditional industries that now understand that to compete in today's market, they must change and be more resourceful. A reflection of this thinking are new ventures receiving support from the EU. If Valencia continues to develop innovative solutions then the future for agriculture here is bright-bright orange.
DEFTERIOS: Next, as the future of News Corp's U.K. newspaper business is in doubt, we'll look at the other ways the media empire brings in the money -- a lot of money.
DEFTERIOS: Welcome back.
I'm John Defterios sitting in for Richard Quest.
You're, of course, watching QUEST MEANS BUSINESS.
Our top story for the hour, British media say a reporter who blew the whistle on phone hacking at the "News of the World" has been found dead. Police say the death is not being treated as suspicious.
Matthew Chance joins me now in the studio here to -- to break down what we know and what we don't know right now.
Watford is a satellite city of London. He was found dead at the home. The call came in mid-morning today.
What else can we inform everybody about?
MATTHEW CHANCE, CNN SENIOR INTERNATIONAL CORRESPONDENT: Well -- well, first of all, the police aren't naming him, but this is -- this is Sean Hoare, according to media reports that are being carried now by all the British media. He's the former show biz correspondent for the "News of the World," who is a close friend of Andy Coulson, the former press secretary to the British prime minister, the former editor of the "News of the World".
But the reason he's important, this figure, Sean Hoare, is that he was the person who first linked or first accused Andy Coulson of knowing about this phone hacking scandal, of knowing that phone hacking went on at the "News of the World" and actually of approving of that phone hacking method of gathering information, as well.
So he was very much the whistleblower in all of this. He made those allegations, first of all, about a year ago. He's recently been in the news, as well, telling "The New York Times," I think, that the "News of the World" journalists were also able to use police technology, a method called pinging, to try and locate certain people that they were trying to get hold of. And so they were using this police technology in exchange for payments to the police.
And the police haven't commented on this so far, as far as I'm aware.
Andy Coulson has always denied that he acknowledged or knew anything about the phone hacking that went on when he was editor of the "News of the World".
DEFTERIOS: Very quickly, because we're out of time, Sean Hoare.
Are we going to get a name attached to this officially by the police later, do we know?
DEFTERIOS: We don't have it yet.
CHANCE: We don't have it yet. I'm sure we will get this later. It's -- as I say, it's being quoted by all the media in Britain now. It's these photographs of him being put out all over the Internet, as well. And so it looks like it is this guy.
DEFTERIOS: OK. Thanks very much.
Matthew Chance updating us on the death of the journalist here in the UK.
Well, News Corp is being shaken by the hacking scandal at the U.K. newspaper division. Of course, that's only a fraction of Rupert Murdoch's media empire overall.
Let's come on over and take a look. We've broken it down for you because we think that as this story has progressed, in fact, we haven't gotten a clear picture of what Rupert Murdoch has really built over the last two decades.
This is according to Lazard Capital Markets.
Let's take a look at it. This is from operating income for 2010. So it gives you a 12 month snapshot into what they have actually built and what's feeding the bottom line.
You can see, 55 percent of this is from the cable networks. So we're talking about the Fox News Channel, the whole slew of sports channels. They've really brought in incredibly good revenue, $2.54 billion, as a matter of fact, in 2010.
Let's take a look at the second division, film and TV production. That was -- we were talking about this in the editorial meeting. You have Fox Searchlight, Twentieth Century Fox, TV production within that division, as well. That represents 24 percent of the bottom line, or $1.1 million. That's not going to go away any time soon.
Then if we work down the list here, this is the newspaper division, which should tune into what we were about to say. It's nearly a billion dollars. You can see, that has $97 billion. We have the front page of "The Wall Street Journal" -- we'll find this out during our interview -- that's not feeding a lot into the bottom line. Of that 22 percent for the parent company, about 20 percent of that comes from the U.K. publishing. So you'd say about $200 million.
How is that going to be, you know, replaced in the future?
Not billion, of course. That would be one heck of a company. $997 million, 22 percent of the bottom line.
Let's take a look at the broadcast networks. It's interesting, they have 37 percent of the eyeballs throughout the United States, Fox does. It's -- it's phenomenal in terms of what it contributes to the bottom line, nearly 10 percent, 9 percent, $409 million. They have broadcasters, I believe it is, in 17 of the different markets.
And then you work your way down to the number five position. And this is Sky Italia. Now, we wanted to bring this up, because it represents 4 percent, when is not insignificant, $202 million. This is the group that Tom Mockridge launched at Sky Italia and the accompanying news service, VentiQuattro. It had a great deal of success, very good to the bottom line. The group also had -- because if you did the math on a little notepad, 114 percent. Those numbers added up to minus 14 percent, $636 million of losses and overhead. MySpace, for example, dot-com, that was the first venture by News Corp to go into the Internet space. It lost money and they sold 10 percent of the value of that -- 10 percent of it in the end of the day. So they took the loss last year.
Let's come on over to the wall and welcome in one analyst who's followed News Corp for years, one of the most respected analysts on Wall Street, Barton Crockett, of Lazard Capital Markets.
I'm glad that brought a smile to your face.
It's interesting, Barton, if you broke through these numbers here, a cynical person who wants to tune out of what's taking place over here, if I was a shareholder I'd say 80 percent of the total business has nothing to do with the U.K. and the newspaper business. But it's very toxic.
So what's the counter-argument, that this is so toxic as a News Corp shareholder, I need to get out at this stage?
BARTON CROCKETT, SENIOR ANALYST, LAZARD CAPITAL MARKETS: No, I don't think you need to get out. I mean we're recommending News Corp shares. You know, we think the news in the U.K., it's terrible, but this is not asbestos. This is not tobacco litigation. This is not something that is so toxic that it's going to take down the rest of the business.
When you look at everything that News Corp does, the thing that's most exciting right now is their TV networks. They're a great television programmer in the U.S. and around the world, principally outside of the UK.
This is completely unaffected, we think, by what's happening in the UK. So, you know, we think you really shouldn't worry much about that and you should focus on what's good at the company. And I think that will be more apparent when the headlines die here, which is probably a bit of time. But when the news flow, you know, calms down, I think people understand News Corp is a very successful, very profitable business that's actually growing very nicely right now.
DEFTERIOS: OK. I'm going to play the heavy here, so get -- get ready for the -- the -- the skeptical view of all this.
Does Rupert Murdoch survive?
Eighty years old. James has been tarnished by the BSkyB scandal. Lockman (ph) left and has moved to Australia. Elizabeth is not, day to day, very active with the company.
Should it be Chase Carey or does Rupert Murdoch have a few years and the confidence of institutional investors?
CROCKETT: You know, I'm not -- I'm not going to go down and speculate how much longer Rupert Murdoch is going to run News Corp. I mean we know his age. We know that he's reasonably healthy. We know that there's a lot of, you know, terrible news events here that really don't reflect on the rest of the business, which is very healthy.
You know what I would say is that I think News Corp as -- as an institution -- is larger than Murdoch. You know, I think if the Murdochs left, you'd still have a very good business. You'd have, you know, a large universe of very qualified executives currently in the company or people who would be happy to run it.
You know, Chase Carey is someone that investors know they like and, you know, so I -- I think that this is bigger than Murdoch. It's bigger than the news headlines in the UK.
DEFTERIOS: OK, we'll have to leave it there due to time.
But I appreciate your analysis and the set up analysis for this segment to break down what the empire really looks like today.
Barton Crockett is with Lazard Capital Markets, joining us from New York.
Well, the quarterly reports are out, the judgments have been made. It's time for the Q25. We'll have that next.
DEFTERIOS: The U.S. jobs market is sluggish. GDP growth is slowing. But there is only bright spot for Wall Street investors right now and that's corporate profits. This earnings season investors hope to see the overall earnings growth of about 12 percent. The company is disappointed. It could spell big trouble, of course, for the stock market. So the next few days of earnings from major U.S. firms will be crucial. This quarter, as in every quarter, we bring you now the Q25. It's our exclusive index to help you make sense of earnings season.
We given green chips to companies that meet or beat our tough criteria and the red chips to companies, of course, that fall short. If a company puts in a mixed performance, we open it up for debate.
As usual, I'm going to be joined by Maggie Lake.
Let's take a look at the cre -- key criteria if this is the first time that you decided to join us for the Q25 -- profit growth of at least 12 percent; revenue growth of 5 percent; quarterly earnings growth; earnings expectations, plus 5 cents a share or more; and positive about the future.
It's interesting whether the guidance from the CEO really plays out or not.
OK, let's bring in Maggie Lake.
We've got a number of different companies to look at, five companies.
We're going to start with the banks. We have these earnings reports out, but they're such heavyweights, we thought it was a good idea, Maggie, to take a look back.
Citigroup coming in with very good revolutions. Vikram Pandit working on this overhaul of Citigroup overall and JPMorgan Chase.
Let's start with Citi and your views of Citi.
MAGGIE LAKE, CNN BUSINESS CORRESPONDENT: Yes, this was a tough one, wasn't it, John. The financials are under so much pressure right now. And they -- they did have some positives going for them, if we look at the criteria. And there was some initial enthusiasm when they came out. They beat expectations. Profits were up, so they were making progress.
But -- and this is a very big but -- in the case of Citi, revenue was down. And a lot of that profit growth that they're seeing is actually because they're moving money over from the pot they had reserved for bad loans over to the profit column.
And when you look at that, analysts don't really think that that's sort of core growth. Still, when we took that into consideration, we had to go with a red for Citi, even though they did get three out of five. So they're moving in the right direction, but there are still challenges.
DEFTERIOS: Yes, we -- we agreed with that, because it was -- the income growth of $3.3 billion. Vikram Pandit has been trying to shake things up and turn the bank around, but it's got a lot of weight, Maggie.
And the other thing I wanted to talk to you about, because it has this exposure to the consumer lending. We know that the U.S. housing market is not bouncing back and that's a sore spot for Citi, is it not it?
LAKE: It is. And it's a big part -- you know, they have a big retail banking division, which, if you're talking about a Goldman Sachs, they don't. And -- and you've got to think about that with all the talk of the slowing economy. They did investment banking. That part did better. But there are still concerns about that exposure to the retail side.
So that, again, is -- is something that, when they had a little time to sleep on it, investors are a little bit concerned about that.
DEFTERIOS: Yes, we're a little bit tight on time, but JPMorgan Chase, Jamie Dimon, the CEO, went on a shopping spree during the worst of the Lehman crisis. Still, the market not impressed. You're going to give them a red again.
Wasn't reason why?
LAKE: You know, a...
DEFTERIOS: Even though it's Jamie Dimon?
LAKE: Yes, that -- and that's the thing, I do want to say, people like Jamie Dimon. They like this company longer-term, but short-term, Dimon himself said, listen, half of the profits coming from those loan reserves, that is not what we consider quality earnings.
So if he's saying that, we've got to take that into consideration.
DEFTERIOS: So that is the fifth criteria, not so positive about the future.
Google -- revenues up a third, the biggest one day gain last week, up 13 percent, nearly trading at $600 a share. It's pretty hard to argue against a green. I'll put the vote in. We both agree on this one...
LAKE: Yes, it certainly is.
DEFTERIOS: -- quite easily.
LAKE: Yes, it did. And the other thing I just want to point out here is that what was considered Google's weak spot was social. They -- they didn't get social. That's what everybody said. They were very upbeat and spent a lot of time talking about Google Plus, their attempt to take on Facebook, saying this got 10 million users already, getting great reviews. So they were really touting that.
And that is the area that was considered weak. So people really happy with Google.
DEFTERIOS: Yes, interesting. Ad revenues up 36 percent, which is phenomenal.
Halliburton, we had a bit of a debate before the program. The numbers look really good from your side of the Atlantic. They're getting into the shale markets on the continent there. Canada remains very, very strong.
Do you feel positive about Halliburton?
LAKE: Yes. In fact, we can't even debate this one, because they got five out of five. So they get an automatic green. And they're saying with oil price up, exploration, the fact that you've got to dig deeper into these harder places is good for profit for Halliburton.
But you brought up an interesting point about international.
DEFTERIOS: Yes, in fact, David Lesar, who's the CEO, made this decision to move their headquarters, at least visually, over to Dubai, to be able to tap into the $100 oil that's come out of the Gulf States. To lean over to reach into Russia, into China, into production.
DEFTERIOS: I noticed the overall numbers look very positive, up 18 percent, because of the shale gas. But the international numbers are up only 8 percent. But he remains positive...
LAKE: Yes, and...
DEFTERIOS: -- on the future.
LAKE: One thing to watch, too, John, of course, oil was going up during this quarter. We're going to have to see if we see a sharp reversal, whether this changes. We didn't get any guidance on that. But right now, this is a good-looking quarter for Halliburton.
DEFTERIOS: OK. The other one I wanted to talk to you about is Philips. It's not very close to your heart, but it's something you can't, in a sense, avoid if you're living in Europe because of the health care products, consumer electronics -- there's some talk about them getting out of the television business overall.
But you know one of the things that's very alarming about Philips right now -- because you an see it as a bellwether for European consumer spending.
So if you look at it, they missed all, basically, the criteria of profit growth was down, revenue growth was down, earnings growth was down, the expectations they had to mark down for future EBITDA growth.
And positive about the future?
Yes, if you're looking to 2013-14. But that's not -- that's a little bit too further -- too far down the pipeline, you'd say, right?
LAKE: It certainly is. And, John, we also talked about the fact that they -- this is quarter upon quarter that they're struggling. It's been a while since we've had something positive to say about Philips.
So in terms of making a correction and readjusting, they don't seem to be doing that.
DEFTERIOS: OK. So we're going to give Philips a red, even though the CEO was talking about this whole concept, Maggie, of accelerated. So if you look at the overall, the criteria, two greens. We gave those to Google and Halliburton, because the numbers were so stunning. We -- we took a punt, kind of on the fence position, but leaned toward red with the banks because of the uncertainty of the talks that are going on in Washington. So two for the banks.
And the final one wasn't a huge debate, because of the numbers that Philips put out. Well, as we mentioned, the Philips' second quarter results made for some grim reading, at $1.9 billion. The loss means the company is going to cut costs by some $700 million going forward.
I asked the CEO, Frans van Houten, how it is going to turn itself around and if it could be the consumer that's going to lead the way back.
FRANS VAN HOUTEN, CEO, PHILIPS: We do that by stepping up investments in innovation, bringing products to market faster and putting a more entrepreneurial and accountable spirit throughout Philips.
At the same time, we will take complexity away by reducing overhead costs by $500 million. This will put us -- this will put Philips on an accelerated path of growth, as well as profitability.
DEFTERIOS: I would be quite concerned if I was an investor in Philips, and in this space overall, that consumers are retrenching, particularly in the developed world.
That's what we're seeing right now.
VAN HOUTEN: Well, actually, let's have a look at the Philips portfolio. You know, we are active in health care, lighting and lifestyle. In health care, we have a very strong portfolio. We have recast our entire medical diagnostics range. And we see, on the back of that strong product range that we are gaining market share. We should -- we have good traction in the United States. We're doing very well in the emerging markets. And that compensates some of the weaker parts of, for example, Southern Europe and the United Kingdom.
But overall, health care grew 8 percent in the second quarter and recorded 13 percent EBITDA, which is -- is a good performance. And going forward, we expect that to expand to 15 to 17 percent by 2013.
DEFTERIOS: It looks like you're playing catch-up, if I can say this candidly, in the consumer lifestyle market. It's a very competitive market. And I know you want to concentrate on that area, but you're saying that the investment hasn't paid off for Philips just yet.
When we will see the payoff?
VAN HOUTEN: In the consumer lifestyle, we are focusing on personal care and health and well being, domestic appliances. We see opportunities, given the strong Philips brand, to expand our global leadership in these categories.
In that context, we have just acquired a company in China and a couple of months ago also in India, to strengthen our regional products presence.
Overall, we are optimistic that we can improve profitability to 8 to 10 percent. In the second quarter, results were not strong enough yet, yet the underlying performance of personal care and health and well being actually showed a growth of double digits.
DEFTERIOS: Is this response, to have a share buy back of this magnitude, two billion euros, trying to appease shareholders for your management style to kick in, so they can see a payback in the second half of 2012?
Is that the reality?
VAN HOUTEN: No, no, no. Not at all. I would like to see this quite differently. We are focused on accelerating organic growth, augmented by, you know, some bold-on acquisitions overall that has a portfolio with strong cash flow generation.
And then looking at our balance sheet and all the cash that we have, we'll consider buying back our own shares at this moment to be a very good investment and also making our balance sheet more efficient.
(END VIDEO TAPE)
DEFTERIOS: Once again, Frans van Houten, the chief executive of Philips. A turnaround story there going forward, joining us a little bit earlier from Amsterdam.
Coming up, the online currency that keeps growing.
But can it work in the real world?
We'll take a look at the pros and cons over virtual cash when QUEST MEANS BUSINESS continues.
DEFTERIOS: Welcome back.
Imagine being able to pay for something without having to use cash or cards, without having to hand over any personal information, even without having to adhere to the rules of a bank or -- how about this -- even a government?
Well, there is a way you can do just that. It's called Bitcoin, an online currency that's taking the world by storm.
Let's see if we can explain this here before we see a full report.
Just look at the rapid growth of the company. It's got more than $100 million within its coffers. Bitcoin is the only -- just coming to the attention of the wider public. But it's had massive growth since it was launched -- look at that, reserves of -- since 2009, the estimates put that value already, as I noted, at $100 million.
There are no central banks and no governments involved here. Anyone who wants to trade in bit coins has to mine them using highly complicated computer software that carries out issue calculations.
But the currency is very vulnerable, as you can see here -- two hacking attacks in June alone. This is the vulnerability. And it's not registered by a central bank, so it's raising a lot of questions.
But despite all that and the problems, Bitcoin seems to be taking off.
But can this virtual currency really become real world tender?
Felicia Taylor has that story.
FELICIA TAYLOR, CNN CORRESPONDENT (voice-over): It's the middle of the lunch rush at Meze Grill in midtown Manhattan. Cold, hard cash is being exchanged.
UNIDENTIFIED MALE: There you go. Eighty cents is your change.
TAYLOR: But so is a virtual kind of currency called bitcoin. The payment takes place entirely over the Internet via anonymous encrypted code, this one being made with a mobile device.
UNIDENTIFIED MALE: 7035 bitcoins.
TAYLOR: There are more than six-and-a-half million bitcoins in circulation right now. Users can purchase everything from clothing to professional services to tech gadgets.
Meze Grill is one of the few brick and mortar businesses accepting bitcoins.
Owner Marwan Salem says he began taking them in April and gets a handful of customers paying with them each day.
MARWAN SALEM, OWNER, MEZE GRILL: We've had a lot of customers who have come through just for that reason, because they've said, you know, they've heard through the grapevine or through the Internet that we take bitcoins.
TAYLOR: Salem starting accepting bitcoins after learning about them from customer Bruce Wagner, an IT expert.
BRUCE WAGNER, BITCOIN USER: I use it as much as I can. A lot of people are just getting into it to invest. But I use it, obviously, I have lunch with it here. We plan to support all the merchants who accept bitcoins.
TAYLOR: Bitcoin is peer to peer. Money passes directly from user to user without any bank or government involvement. "Wired" magazine's Jason Tanz says that absence of regulation is one of the reasons why Bitcoin is so attractive to some.
JASON TANZ, "WIRED" MAGAZINE: Some of the -- the libertarian arguments that are coming out these days are about, you know, worried about the fact that the Fed has so much control over monetary policy. And at any moment, the Fed can decide to print a ton of money and all of a sudden, then you've got inflation.
Other people just, it's less of an economic argument, it's more of an ideological argument that, you know, the federal government should not have that kind of control over my assets.
TAYLOR: And for others, it's an investment opportunity or simply something cool they want to try out.
Here's how it works. Users download Bitcoin software, which acts as a wallet. They then fill the virtual wallet with virtual bitcoins, acquiring them through a process called mining -- a series of complex mathematical calculations. Or they get them from the bitcoin currency exchange, which is the more popular method.
The way bitcoins get their value is similar to the way stocks get their value. Bitcoin buyers drive the value up, sellers drive it down.
TANZ: Recent history is rife with examples of people who have tried to build alternative currencies. Frankly, they never end well. Bitcoin is different in that it really is a separate, parallel currency that was created out of nothing. I mean, you know, there was -- it arose to something like $180 million worth of value that they created out of -- out of thin air.
TAYLOR: Critics have said because transactions are, for the most part, anonymous, Bitcoin makes it easy to sell illegal drugs or launder money over the Internet. And some people say it amounts to a Ponzi scheme.
But others say Bitcoin is legit and could pave the way for future digital currencies, one click at a time.
Felicia Taylor, CNN, New York.
(END VIDEO TAPE)
DEFTERIOS: Our new virtual world.
And that's QUEST MEANS BUSINESS.
I'm John Defterios sitting in for Richard.
"PIERS MORGAN TONIGHT" is just ahead.
But first, a check of your headlines.