Paper Money

Not that long ago, the Los Angeles Times was raking in the profits. What happened?

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The Los Angeles Times took a while to sink so low—go back ten years, to the issue of October 10, 1999, and its ills were already beginning to show. In the world of journalism, the Sunday edition is still remembered for devoting the entire magazine to the soon-to-be-opened Staples Center—a package that turned out to be wildly controversial because the Times had agreed to share advertising revenue with the owners of the new venue. This was a serious breach of the long-established division between editorial and advertising, and it became a cause célèbre in the newsroom. “Respect and credibility for a newspaper is irreplaceable. Sometimes it can never be restored,” wrote former publisher Otis Chandler in a scathing letter directed to senior executives that was read in the Times newsroom.

 

But for all the attention the Staples scandal attracted, the paper’s future was telegraphed that Sunday in less obvious ways. The classified section was noticeably smaller than it had been a few years earlier, department store ads were being consolidated thanks to the mergers of several big chains (Robinsons, May Company, the Broadway), the TV magazine was getting competition from electronic listings on cable (the magazine was dropped in 2007), and the business section had page after page of stock quotes that were available from other sources two days earlier. “I can tell you, on the staff level we knew,” says Neil Kaplan, who had been a senior executive handling classified advertising and strategic planning in the late 1990s before moving on to several Internet ventures. “There came a time when we looked at each other and came to the realization that the fundamental economic structure of this industry was gone.”

These problems weren’t unique to the Los Angeles Times, of course. The news business has been in free fall for some time, in part because of a killer recession but more broadly because arrogant and often incompetent owners and operators didn’t have the smarts to recognize that the world around them was changing. The Times epitomized that attitude. But those institutional and economic challenges have been made considerably worse by Sam Zell, the avaricious real estate tycoon who took over the Times’s parent, Tribune Company, in 2007 in a transaction that even he admits was a mistake. Zell made the purchase with practically all borrowed money, resulting in a debt load that Tribune could not handle. Last December the company filed for Chapter 11 bankruptcy protection as a means to restructure the business and pare down the debt.

For now, the Times is living hand-to-mouth, with editor Russ Stanton acknowledging in March that revenues were not large enough to justify the size of the newsroom. Efforts to drum up some extra bucks took an embarrassing turn in April, when publisher Eddy Hartenstein sold NBC a front-page L-shaped ad space to promote the network series Southland. The ad, running in the left column below the fold and then across the bottom of the page, included a fake news story created by NBC to promote the show. While the word “advertisement” appeared at the top and the typeface was different from the rest of the front-page items, editors and reporters were so appalled by the placement that Hartenstein was coaxed into holding a staff meeting. “Because of the times that we’re in, we have to look at all sorts of different—and some would say innovative—new solutions for our advertising clients,” he said. What he didn’t explain was whether the NBC ad represented an act of financial desperation—“I’m just trying to keep the lights on here, folks,” he said—or was part of a broader strategy to blur the line between news and advertising.

The Times has become damaged goods, with hundreds of employees laid off, day-to-day reporting severely curtailed, and national and foreign bureaus either shuttered or consolidated with other Tribune dailies. Circulation has plunged from its peak of 1.2 million in 1991 to 739,000, and it’s likely to keep falling in 2009. All of which has gotten inordinate (some would say overblown) media coverage, although this isn’t just any business—it’s an institution that has held a dominant position in shaping the political, social, and economic fabric of Southern California. Many critical developments in the city’s history—establishing a port in San Pedro, diverting water from the Owens Valley, developing the Music Center—were driven by the Chandler family, which controlled the paper until 2000.

Taking away that influence—or at least reducing it significantly—was bound to elicit a lot of finger-pointing and second-guessing. If only Otis Chandler, grandson of family patriarch Harry Chandler, had stayed on as publisher in the 1980s and beaten back right-wing elements of the family (the paper developed a liberal bent during Otis’s tenure). If only the Chandlers, controlling shareholders of the parent company, Times Mirror, hadn’t sold out. If only Zell’s debt-laden offer seven years later had been rebuffed in favor of a competing last-minute bid by billionaires Eli Broad and Ron Burkle. If only the economy hadn’t knocked the stuffing out of the area’s real estate market.

In the business world there’s nothing unusual about any of this. Companies typically go through a series of stages: innovation and creativity, consolidation and expansion, complacency and slow growth, and finally competition from upstarts who introduce their own versions of innovation and creativity. Then comes the moment of truth: Can the old model be revised to handle the threat? The once-powerful railroad industry took a spectacular tumble in the 1920s because its owners did not recognize how an expanding network of roadways meant more freight being transported by trucking companies and more people traveling by car. The Great Depression only added to their financial woes. After ignoring the competition for far too long and then failing to adequately bolster their service, the railroads ended up pleading for government subsidies.

The Times fell into much the same pattern as the railroads. With no local outlet having anywhere near its reach, and with the costs of entry essentially prohibitive (think of the tens of millions of dollars required to purchase printing presses and establish distribution networks), the paper was a virtual monopoly. By the mid-1990s, classifieds represented a third of total revenues, and profit margins for some ads ran as high as 80 percent. Kaplan recalls that 30 car dealers were each spending $1 million or more a year on advertising. The Times did launch several online ventures in the 1990s, both through its own Web site and online efforts like CareerBuilder.com, which was jointly owned by Times Mirror and other publishing chains. But there was push-back from salespeople on the print side, who were worried about cannibalization. Often, print buys included free Web ads. “They did not understand the medium, and they didn’t want to invest in it,” says Larry Pryor, associate professor at USC’s Annenberg School for Communication and the former editor of the Times’s Web site. “Their attitude was, when it proves itself down the line, we’ll put money into it.”

Advertisers, meanwhile, started to realize that the Web offered greater bang for the buck. Earlier this year Baylor Health Care System advertised for job applicants using several offline and online platforms, among them search engines like Google and Yahoo!. The Dallas-based company purchased keywords tied to a particular position (nurse, physician, radiologist, et cetera) and found that search engine ads delivered 13,879 applicants at an average cost of $4.62 each. Newspaper and magazine ads delivered 852 applicants, at a cost of $354.96 each.

No wonder classified revenue at the Times dropped from a high of about $375 million in the mid-1990s to $170 million in 2008. So far, 2009 is looking even worse. A recent Sunday edition had a paltry 20-page classified section, and cost-saving reconfigurations of the paper’s press runs have eliminated the classified section several days a week. Longtime media analyst Lauren Rich Fine told publishers in 2008 that they should expect print classifieds to be wiped out over the next five years. The business will not entirely disappear, but it’ll barely make an imprint on the bottom line. “There was a point of inflection that nobody noticed,” says Alan Mutter, a journalist turned Internet entrepreneur who blogs about the newspaper business. “They were making so much money on print and charging such incredibly high rates.”

Not helping matters at the Times was a revolving door of publishers (six in the past ten years) that had senior executives caught up in schooling the newcomers and unwilling to stick their necks out on any bold initiatives. The years that Mark Willes was publisher of the Times and chief executive of Times Mirror proved especially damaging, not because he lacked ideas but because the ones he had were so misguided (his directive to raise print circulation by 500,000 just as readers were moving to the Web became an industry joke). Willes was also responsible for the hiring of his successor, Kathryn Downing, who signed off on the Staples revenue-sharing deal. “Mark did not have a computer in his office, his secretary brought e-mail in to him, and he wrote notes with pencil and paper. So he was not pushing for a move to the Internet,” says Jeffrey Klein, who had been a senior vice president in the 1990s (and lost out to Downing for publisher in 1999). “To the extent that you have a strategy, you need to have an executive team that believes in the strategy and is working toward it in a longer perspective than a year.”

Tribune’s acquisition of the Times and other Times Mirror properties in 2000 promised to spur online innovation and increase revenues through chain-wide advertising buys, but the idea flopped. Rifts developed between Times editors and Tribune’s Chicago-based executives, who began cutting L.A.’s budget. Tribune had three of its senior executives try their hand at being publisher of the Times, and they’re all gone. The most recent departure, David Hiller, was derided for knowing little about Los Angeles or journalism—and for not wanting to make key decisions on hiring and budgets.

When Zell started looking at Tribune, the numbers had already begun to slide: At the Times, revenues fell from $1.08 billion in 2005 to $999.3 million in 2007. But he felt that the newspaper business was merely going through a rough patch and that if the hefty debt load could be lightened, he would be around when the industry came back. By restructuring Tribune in a way that avoided paying taxes, the company would have extra cash flow to help service that debt. Zell could hardly have placed a worse bet. He got a company in terrible shape, and the employees got an investor with no experience in managing a megabillion-dollar media conglomerate that was committed to serving the public interest.

Bad enough were the financial terms that many on Wall Street had doubts about from the start. Also questionable was the use of a financial structure, called an employee stock ownership plan, that Zell flaunted as proof that Tribune employees were his partners in the venture (even if they had no control over operations). But what really burned employees were the fortunes made in the deal. Tribune CEO Dennis FitzSimons walked away with about $40 million, while investment advisers Citigroup and Merrill Lynch collected $35.8 million and $37 million, respectively. The Chandlers, who held the largest stake in Tribune after their sale of Times Mirror, received $1.7 billion. Family members wanted out of the business so badly that they were willing to pay taxes on the proceeds, something they had been loath to do over the years.

As of early spring, Tribune was working on its Chapter 11 reorganization, and Zell was fending off a government investigation into the ESOP plan and a lawsuit by present and past Times employees. A Tribune executive said to me that once the bankruptcy is completed, Hartenstein may want to purchase several Southern California news organizations—The Orange County Register has been mentioned—and create a news network that would have papers feeding repurposed content to one another. (The San Diego Union-Tribune had been eyed by Tribune but was eventually sold to a Beverly Hills investment firm.) It’s not a blasphemous idea: Different newsrooms could emphasize their specific strengths and not try to be all things to all readers.

That assumes Zell and Hartenstein stay on beyond the next year or two. Though the Times remains a huge revenue source for Tribune, Zell is not averse to taking a loss on an investment, as he did in 1995 with the sale of Carter Hawley Hale department stores, parent company of the defunct Broadway chain. (“It’s very obvious that the newspaper model in its current form does not work, and the sooner we all acknowledge that, the better,” he said on Bloomberg Television in April.) I’ve been told that a number of local parties are considering offers for the paper. As the economy improves, it would not be surprising to see other potential buyers emerge as well.

Hartenstein isn’t talking about any of this. The former chief executive of DirecTV, whom Zell hired last summer, was not made available for an interview. A Times PR person said my piece was “bound to be negative” and “would not add to the conversation.” Apparently, it’s not only me—the new publisher has advised his executive team, including Stanton, to steer clear of interviews. Leaks to blogs and other news organizations are being regarded as “treason.”

No matter who owns the place, drastic changes are in store. Some probabilities: Home delivery will be more expensive, which should sharply reduce circulation and more accurately reflect the cost of having the paper on your doorstep each morning. Online, of course, will be a growing force, but with Web revenues never likely to match the glory days of print, operating costs will have to be reduced. Real estate will be sold—Zell didn’t get many nibbles on the downtown Times Mirror complex when he put it on the market in 2008, but there’s bound to be interest in the next couple of years. Finally, the print edition is certain to shrink further—and it won’t necessarily be published seven days a week (smaller dailies already are eliminating print editions on some days, and the Seattle Post-Intelligencer has shuttered its print product in favor of a much-truncated online-only edition).

Unlikely as it might seem, the paper still has a lot going for it. The Times is not only a newspaper, it’s a one-of-a-kind, nationally known brand, and brands can be money-making commodities, whatever the size and quality of the newsroom (it remains the largest in Southern California). That’s why big-box stores and supermarkets continue to stuff their advertising inserts in the Sunday edition and why NBC chose to pay a premium for that front-page treatment. In March Stanton went so far as to conjure a hypothetical online-only operation: Based on the current amount of revenue coming in, the Times could generate a respectable profit margin of 10 percent and support a staff of 275 at their current salaries—about 150 people in the newsroom (there are now 600) and the rest selling ads, providing tech support, and handling administration. Such a step could not happen in the short run—too much revenue to be lost from the print side. But the fact that the online-only scenario is even being tossed around says something about the future of daily journalism. The Times is not going away, and for an obvious reason: Chronicling the day’s events, whoever does it, has value. Always has, always will.                                         

Illustration by Joseba Elorza

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