By Kate Holton
LONDON (Reuters) - Having surprised everyone by assuming the mantle of heir apparent to Rupert Murdoch, son James suddenly finds his smooth succession in doubt after mishandling a newspaper scandal that has damned the family name.
Now critics are accusing the clean-cut 38-year-old of being too slow to realize the enormity of the phone-hacking scandal that broke with a vengeance two weeks ago and on Wednesday proved so corrosive that News Corp had to drop plans for its biggest ever acquisition.
James' performance and the spotlight on News Corp as a result of the scandal have reignited the debate about the company's succession plans and Murdoch senior's apparent insistence that whoever replaces him must have the same surname.
Favorite contenders are James, oldest son Lachlan and daughter Elisabeth.
"Every time you see a picture of Rupert Murdoch looking that old, the succession issue comes up," British broadcaster and media consultant Steve Hewlett said.
"Lachlan crashed and burned. Elisabeth is unsullied by any of this but has no management experience at this level, and James has had to declare himself a fool."
James had appeared the Favorite to inherit the media conglomerate after overtaking Lachlan who abruptly resigned his executive positions in 2005 to return to Australia.
Much of James's burgeoning reputation came from his time as chief executive at Britain's BSkyB, where he secured the company's position as the dominant pay-TV operator, while displaying many of the traits associated with his father.
He particularly appeared to enjoy launching blistering attacks on Britain's state-owned BBC broadcaster.
Once settled at News Corp, James -- known to love pay-TV as much as Rupert loves newspapers -- led News Corp's bid to buy the rest of the highly profitable BSkyB it did not own.
That deal appeared close to completion just weeks ago as the final regulatory approval neared. Then the hacking scandal blew up after a report that journalists at Murdoch's British flagship tabloid News of the World had hacked in to the phones of a murdered schoolgirl and Britain's war dead.
"This could have killed off James Murdoch's eligibility to run News Corp at least in a short to medium term because this is going to be hanging over him for years," Australian investigative journalist Neil Chenoweth, who has written two books on the Murdoch empire, told Reuters.
"James will be playing with a much weaker hand and this will change the family dynamics."
Born in 1972, James dropped out of Harvard in 1995 to start a hip-hop record label and once billed himself as a professional cartoonist.
Just 12 years later, he took control of the Asian and European operations of News Corp, which wields influence from Hollywood to Hong Kong and owns not only Britain's biggest-selling paper, the Sun, but also the film studio 20th Century Fox, the U.S. cable network Fox, the television network Star TV, publisher Harper Collins and the Wall Street Journal.
That promotion included taking charge of News International, the British newspaper arm that includes the tabloid at the heart of the scandal, and while the alleged hacking practices were over, the crisis was just beginning.
After News International shut the 168-year-old paper last Sunday, James Murdoch released a statement saying he had approved the payment of out of court settlements when he did not have a complete picture of what had happened and that this was a matter of regret.
"He says he was ill informed," Hewlett said. "So then you think as a shareholder: am I going to trust this bloke with my pension fund? He's spent a million quid (pounds) on a settlement without knowing anything about it. I don't think so."
Despite criticisms about his early handling of the crisis, people who have reported directly to James say he has been decisive and leaves colleagues in no doubt about what he expects from them.
"He is very clear sighted on what he wants," one industry insider who has reported directly to James Murdoch told Reuters. "He is not prone to great outbursts of self doubt."
That confidence inspires fear among many of those who work for him. He keeps a model of the Star Wars villain Darth Vader outside his London office.
"When James was in the building, you could almost hear the Darth Vader music," said a former senior member of News International's staff.
"He came across on (a recent) TV interview as a nice, thoughtful guy. And he may be that. But he's a scary man around the office," said the editor, who declined to be named.
But what if the crisis at News International leaves sidelined James further?
One long-held suggestion, author Chenoweth says, is that James, Elisabeth, who has recently returned to News Corp after the company bought her successful TV production firm Shine, and Lachlan could split the company into three divisions.
Michael Pascoe, a contributing editor at the Sydney Morning Herald and former employee at Australia's Sky TV, which is owned by local TV networks and BSkyB, has also speculated on a three-way split if News Corp's global brand is damaged.
"Australia's News Ltd, Foxtel, Premier Media/Ten for Lachie," Pascoe wrote. "News International for Liz to put a fresh face on the UK mess; Wall Street Journal, New York Post and Fox movies, TV and cable for Jimmy, well away from the scene of the NOTW (News of the World)."
Many investors might prefer Chase Carey, News Corp's deputy chairman with the trademark handlebar mustache, to take the reins.
"I'm a big fan of Chase. He's a very skilled financial guy," said Larry Haverty, portfolio manager at Gabelli Multimedia Funds, which holds News Corp shares.
"If James has to do something else, which I hope doesn't happen, I have tremendous confidence in Chase running the company," said Haverty, who has known Carey for more than 20 years.
But that assumes Rupert Murdoch won't be around to run the businesses he has spent six decades building. Pictured working out in London with a personal trainer this week, Murdoch could maintain hands-on control for years.
"It is like Frodo with the ring, the act of giving up power after 60 years I can't imagine him making that gesture, I can't imagine him living in retirement," Chenoweth said.
"He would loathe the very idea. If you were his children looking to succeed him at some point I would have thought that Dame Elisabeth Murdoch's every year must be a somewhat depressing celebration," he said of Rupert's mother.
"Although they are very close it is a reminder of how long lived the family is and how long their father will be calling the shots for."
Dame Elisabeth Murdoch is 102.
(This story was corrected to show Murdoch's age is 38, not 39)
(Additional reporting by Michael Smith in Sydney and Yinka Adegoke in New York)