PROFIT PRESSURES
A Question of Margins

BY DAVID LAVENTHOL

After almost a decade of smooth sailing, media company profits plummeted this spring as a rapidly declining stock market spurred a broad downturn. Starting in Silicon Valley and then spreading across the country, executives began to talk about hard choices to maintain profitability, including potential layoffs and other cutbacks affecting editorial content. At one newspaper, the San Jose Mercury News, publisher Jay Harris stunned the media world by resigning rather than agreeing to cuts that he believed would damage the paper's journalism. Harris quickly came to symbolize journalistic concern over Wall Street's relentless profit pressure.This special report focuses on the Harris resignation and the discussion it sparked about the impact of the current downturn and about the tension between profit margins and journalistic mission.

America's newspaper editors were strangely silent, slightly uneasy as Jay Harris prepared to speak at their Washington convention's farewell luncheon in early April. It was almost as though they were about to taste forbidden fruit: one of their own had resigned rather than cut the news budget. And he was going to talk in public about it.

Would he name names? Would Knight Ridder editors join the expected standing ovation? His resignation had reverberated through the newspaper community. What would he do next?

Harris had to be conscious too of the moment and its irony. Three weeks earlier, he had been the publisher of one of the nation's most successful dailies, the Knight Ridder-owned San Jose Mercury News; just named to the Pulitzer Prize board; and one of the media's ranking African-Americans. All that wouldn't have earned him a spot as luncheon speaker at ASNE a day after President Bush stood at the same podium.

But quitting did.

So here he was, "honored" to speak to his peers, knowing that many had faced similar situations, and had chosen to stay and fight. ("It's much easier to rock the boat when you're not in it," a friend had told him.) He described to the group how he made the decision to quit the night after a particularly difficult budget meeting:

"I woke up Saturday morning, about 3 a.m. I had a knot in my stomach and was deeply troubled. While I was asleep the stark reality of what had happened and what seemed to lie inevitably ahead had worked its way to the front of my brain . . . . Resigning was the only way to slow things down."

So he did, and he now found himself "at the symbolic center" of a debate over the soul of the American newspaper. He framed that debate with these questions: "When the interests of readers and shareholders are at odds, which takes priority? When the interests of the community and shareholders are at odds, which takes priority? When the interest of the nation in an informed citizenry and the demands of the shareholders for ever-increasing profits are at odds, which takes priority?"

Harris was passionate and thoughtful. He didn't name names. And when his speech was over, Knight Ridder editors did join the standing ovation.

But stepping back from the drama of the moment, the big question remained: Would the resignation make any difference? The way of life, particularly of public companies, is pretty well defined. Harris himself quoted one stock analyst on the upward limits of the profit margin: "Never enough. This is Wall Street we're talking about."

Nonetheless, there is an argument to be made. It centers around the presumption that newspapers are different; that in providing news and information to the general public they are essential to a democratic society and that their journalistic work shouldn't rise or fall with the cyclicality of the financial markets.

Cyclicality and its consequences have been at work again this spring. Newspaper revenues have been in double-digit decline. Silicon Valley, the heartland of the boom, is in the middle of the bust. And it is not just Knight Ridder. Even The New York Times and Dow Jones have announced cutbacks. If you were running a business and all of a sudden your ability to meet your payroll was threatened, of course you would look at costs.

So I am sure many decision-makers will shrug at Jay Harris's issues and suggest discussing them at a quieter time.

Unfortunately, there never will be a better time. You may have heard the Supreme Court adage: it is frequently a bad case that makes important law, because cases aren't served up like law school exams. You take what comes along. The same is true in this situation. There never is a good time to reconsider profitability strategies, particularly when revenues are oozing away. But this is when Jay Harris resigned. And this is when decisions are being made. And in most instances, cutbacks are being made not to meet payroll, not to pay debt service, not to purchase needed new equipment, but to meet Wall Street's relentless pressure. It is a question of margins.

Let's assume some complexities. Jay Harris has become a symbol, but he notes that resigning was his way; he is not suggesting it should be others' way. This isn't a battle of good vs. evil: all business executives aren't money-grubbing beasts; all journalists aren't unbiased idealists as careful with the company's money as they are with their sources. Reviewing staff effectiveness at any time is valuable. Yet these complexities don't void the issue. So what can be done? Here are eight suggestions:

Was Jay Harris right to resign? Will the waters close over the issues he has raised? No one is proposing to change the free-market economy, but this is a unique moment where some tough issues have been raised. They shouldn't be brushed aside. The boat should keep rocking.
 

David Laventhol, publisher and editorial director of CJR, was publisher of the Los Angeles Times during the last recession.