Murdoch's No. 2 hits the road

Los Angeles (Fortune) -- The murmured question that built to a crescendo over Oscar week was not how many gold statues "Slumdog Millionaire" was going to nab but whether Peter Chernin would stay or leave News Corp.

The media giant's president and chief operating officer -- whose purview included the Fox Searchlight movie studio that released "Slumdog" -- apparently chose to go out on top, after ringing up eight Oscars.

The company announced that Chernin will not be renewing his contract that expires at the end of June, after months of negotiations with his boss, controlling News Corp. shareholder and CEO Rupert Murdoch. "This is not a decision that came easily, but after more than 12 years in my current job, 20 years at News Corp., and 30 years of corporate life, I am ready for new entrepreneurial challenges," Chernin wrote in an internal memo e-mailed to Fox employees.

His departure raises intriguing questions about what he might do next and major questions about what it means for Murdoch's empire amid a brutal economic and media industry upheaval. News Corp.'s (NWS, Fortune 500) shares are down 54% over the past six months, and 67% over the past year.

As I wrote last August, even then people were starting to speculate about whether Chernin would stick around when his latest five-year contract expired.

That was before the media business began to go off a cliff, of course.

Murdoch deferred to Chernin and gave him remarkable autonomy over the Hollywood-based TV and film businesses that account for the largest part of the company's operating income. But the perennial question was how satisfied Chernin, 57, would be as the No. 2 to a legendary media baron who, at 78, has indicated he has no plans to retire and has also made clear that he hopes one day to pass the CEO slot to one of his four grown children (the likeliest contender, James Murdoch, oversees the business in Asia and Europe.)

Leo Hindery, a media investor who served as chief executive of tycoon John Malone's old Tele-Communications Inc. media empire, said he could relate to why Chernin might want to do other things. "I've worked in companies that have super-votes and it's hard. It takes a particular kind of loyalty and grace and talent and Peter has all three of those in spades."

Chernin was already among the highest executives in media -- taking home around $28 million last year in pay and perks, slightly more than his boss. But heading into these negotiations, people close to News Corp. and Chernin said compensation was only one issue.

One person close to Murdoch said that there was a sense that Chernin had a price at which he would have stayed, but that Murdoch and his board were not willing to go much beyond the terms of his last contract. "Did Rupert want Peter to go? No," this person said. "Was he prepared to keep him at all costs? No."

Because he is regarded as both an operator and a "old media" type who understands technology, Chernin's name was was on the gossip mill in recent months as a potential new CEO for both Yahoo (YHOO, Fortune 500) and Apple (AAPL, Fortune 500) (both of which he poured cold water on).

He is expected now to take a rich film production deal with Fox (guaranteed under his existing contract) and perhaps bide his time until an opportunity to run his own show should one of the other companies shake loose among all the turmoil in media.

One executive said there is talk of him working with Providence Capital, the media-focused buyout firm; another said that speculation persists that, financial markets permitting, Chernin might want to be part of a group that would buy NBC Universal from its 80% owner General Electric (GE, Fortune 500). Chernin is already close to NBC Universal CEO Jeff Zucker, with whom Fox has collaborated on a couple of ventures including the Web video service Hulu.com.

Away from business, there is even casual talk about a run for Governor of California or a role in the Obama administration. He is already heavily involved in the charity Malaria No More, where he is chairman.

As for Murdoch, people inside and close to News Corp. said he is taking the news in stride and plans to have most of Chernin's direct reports now report to him. In a news release, he said it was "understandable that at this stage in his life he would want to do something new."

News Corp. has always been an idiosyncratic construct, and the configuration of its executive team and internal dynamics are no exception. At one point, Murdoch's son eldest Lachlan served as Chernin's deputy but the two clashed. Lachlan eventually resigned as a company executive but still serves on News Corp.'s board.

In losing its No. 2, it actually follows the trend at other media giants including NBC Universal, Walt Disney and Time Warner (owner of Fortune and CNN), where the CEO does not have a clear second in command. For now, the realignment may mean additional duties for Tom Rothman and Jim Gianopulos, the co-chiefs of Fox's film business.

In his own internal e-mail, Murdoch lauded Chernin but also noted that he was aware that employees were "hungry" for more cross-divisional cooperation. "There will be a streamlined management structure between our Los Angeles based business units and the rest of the company," he wrote.

Murdoch has already been taking heat from investors for sticking with his investments in publishing -- particularly buying Wall Street Journal publisher Dow Jones in 2007 -- and Chernin's departure will only highlight that scrutiny.