THE NEW, HUGGABLE FCC

By ERIK LARSON

Family gatherings don't often take place in the bland hearing rooms of the Federal Communications Commission, but last week Rupert Murdoch showed up with his wife, daughter and son-in-law and grabbed front-row seats. When his daughter Elisabeth began showing off baby pictures, a grinning Murdoch joked, "Hey now, cut that out."

Suddenly, an investigation that had imperiled Murdoch's ownership of his Fox network -- a probe he once dubbed a "witch-hunt" -- had become a family affair. And the five commissioners did nothing to change the mood, voting unanimously to endorse a resolution that could soon free Murdoch to resume terrorizing the established American networks, as he has done for the past two years. "It was a kiss on the cheek for Murdoch," says an influential Washington communications lawyer.

Since late 1993 the FCC has been examining allegations brought by a branch of the National Association for the Advancement of Colored People, later bolstered by NBC, that Murdoch's 1985 purchase of TV stations now at the core of his Fox network violated a U.S. law that barred alien companies from indirectly controlling or owning more than 25% of a station. The N.A.A.C.P. further charged that Murdoch was guilty of a "lack of candor" -- that he had tried to hide the true ownership structure from the commission.

In the course of the investigation, Murdoch disclosed that his Australia-based News Corp. owned 99% of the equity of the original Fox stations, even though it held, through a chain of intermediary companies, only 24% of the stations' voting stock. In its ruling, the commission found that this structure did indeed violate the law, but it then gave Murdoch a choice: submit a plan to reduce News Corp.'s ownership to 25% -- a paper maneuver that Murdoch has said could cost him more than $200 million in capital-gains taxes -- or convince the commission that waiving the requirement would better serve the public interest. The commission rejected the "lack of candor" charges.

Murdoch says he will take the public-interest route -- he's got until the middle of next month to make his case. Several Washington media lawyers and executives say his success is virtually assured. Indeed, in remarks made at the fcc meeting, three commissioners telegraphed their belief that Murdoch had already succeeded. In launching a fourth U.S. TV network, he satisfied a long-sought commission goal of stirring increased competition among the networks. Commissioner James Quello, a critic of the investigation, stated that he would like to waive the 25% limit immediately. He asked, "Why mess with success?"

But the bonhomie in the room failed to reflect the heated conflict the investigation's findings had ignited among the commission's staff. The investigators considered recommending everything from blanket exoneration to a formal accusation of "lack of candor." They encountered less than complete disclosure, says an FCC official, but failed to find evidence of deliberate deception.

Nonetheless, some of the staff's dismay leached into the final 74-page resolution. At one point, for example, the report cites a memorandum from an attorney who had managed Murdoch's initial FCC application, which states that Fox's ownership structure is "arguably vulnerable to challenge" and that it is therefore "paramount" to avoid any change that "would potentially invite re-examination" by the commission -- a memo known among commission staff members as the "somewhat smoking gun." The commission resolved that this memo "plainly indicates" uncertainty existed about the ownership structure but that otherwise it offered no proof of a deliberate campaign of deception.

However, the report openly condemned Fox's March 1994 response to a commission query requesting that Murdoch disclose exactly how much of the original TV stations' equity News Corp. owned. Murdoch's lawyers replied that the matter was "immaterial," prompting the FCC to repeat the request. Only then, and for the first time ever, did Fox explicitly disclose that News Corp. owned 99% of the Fox stations. Fox's attorney stated that even though the company had never disclosed this before, the overall level of ownership "has always been recognized." But the commission disagreed and blasted the attorney for trying to prove otherwise.

Thursday's decision, though short of a complete exoneration, nonetheless seems certain to free Murdoch to re-energize his drive to build Fox into an equal of the NBC, CBS and ABC networks. The investigation slowed his progress, coming on the heels of two bold deals that sharply altered the competitive landscape. His successful pre-emptive bid in late 1993 to acquire rights to broadcast National Football League games, and his $500 million investment last year in New World Communications, which brought to Fox a stable of powerful new affiliates, changed the strategic balance among the networks.

Now broadcasters are bracing for another Murdoch strike. Fox's affiliates expect Murdoch to make a run at buying world rights to broadcast the 2000 Summer Olympics in Sydney, Australia. Murdoch recently told TIME that he has a billion dollars in the bank and that he has restructured or eliminated virtually all the short-term debt that nearly crushed News Corp. in 1990. "I don't think there's a question of if there's going to be a big new deal," says one broadcasting executive, "but when."