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NY Official Cites Hacking In Rejection Of News Corp. Education Contract

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Losing a $27 million contract won’t hit the News Corp. (NSDQ: NWS) bottom line but the New York state comptroller’s rejection of a contract with a small subsidiary is a blow to Rupert Murdoch’s nascent education plans and a sign of the way the News of the World hacking scandal can affect — or be used to affect — unrelated businesses.

Almost lost in the intense coverage of Hurricane Irene and its aftermath, the New York Daily News reported over the weekend that New York State Comptroller Thomas DiNapoli rejected a contract that would have paid Wireless Generation $27 million to help develop software to track test scores. News Corp. paid $360 million for 90 percent of the Brooklyn-based education tech company last November.

According to the Daily News, DiNapoli told the state education department:

“In light of the significant ongoing investigations and continuing revelations with respect to News Corp., we are returning the contract with Wireless Generation unapproved.”

In addition to the UK efforts that have resulted in numerous arrests of News International and NOTW execs, those “ongoing investigations” include the FBI’s ongoing look at allegations that the now-defunct tabloid tried to hack the voice mail of 9/11 victims and their families. DiNapoli also cited an “incomplete record” of News Corp.’s education qualifications, which seems murky given that the company was qualified for education contracts across the U.S., including the New York city schools, before it was acquired by News Corp. as a cornerstone for its education initiatives.

Critics say DiNapoli is using hacking as an excuse to avoid signing a contract for tracking software that the powerful teachers unions oppose. If he is, News Corp. has handed him the excuse on a silver platter. The potential test of Rupert Murdoch and News Corp. He won’t be the last to use it. Watchdog groups are clamoring to make hacking part of any license renewals and approvals in the U.S. and others may well see an opportunity to use the scandal and the uncertainty over U.S. investigations as a way of blocking other News Corp. moves.

Murdoch’s education plans already have taken a hit from the hacking scandal in a different way. Joel Klein, the former New York City Schools chancellor, joined News Corp. and its board last fall to head up the education business. As a former deputy U.S. attorney general, he was quickly pressed into duty as a Murdoch advisor when reports that the tabloid had hacked the phone of a yourg murder victim cascaded into a crisis for the company. His appointment to head the internal investigation into what happened at News Intl. and NOTW has drawn harsh criticism and may make it difficult for him to lead education efforts effectively.