TWO
BROTHERS.
TWO WORLDS
BY
BRENT CUNNINGHAM
John
Arthur, "Boom" and Doug Arthur, "Bear"
(Photos ©
Larsen & Talbert; Leo Sorel)
They
grew up on either end of a close, four-brother cluster in Cold
Spring Harbor, Long Island, an affluent former whaling town an
hour from Manhattan. Today, John and Doug Arthur are still close,
but they have settled on opposite coasts, root for opposing baseball
teams, and make their livings on opposite sides of the newspaper-industry
debate over quality journalism and the bottom line.
They
take different views, for example, of Jay Harris's resignation
as publisher of the San Jose Mercury News. Doug, one of
Wall Street's leading newspaper-industry analysts, cites the predicament
Anthony Ridder, Knight Ridder's c.e.o., found himself in when
the Silicon Valley economy ran aground. "Tony had to make some
tough decisions. And to the extent that his publisher, his hand-picked
publisher, didn't like the choices that were being made, my sense
is that that publisher chose a poor way to demonstrate it."
Now,
big brother John, an assistant managing editor at the Los Angeles
Times, on Harris: "He was a highly respected, long-time newspaper
professional, and if he felt that some line had been crossed,
and he felt that he had to take a stand and walk out, I admire
him for it."
John,
fifty-three and towering, was weaned on the newspapers his father
brought home on the train from the city. On summer nights he would
type up the late sports scores and leave them for his father to
read in the morning before going to work. "I remember my mother
yelling at him because he had newspapers stacked in his room that
were six months old," says Doug, or Douglas, as John still calls
him. He has been managing editor of the Times's Orange
County edition and editor of its Valley edition, and he helped
lead the paper's Pulitzer Prize-winning coverage of the dramatic
shootout in North Hollywood in 1997. Now, from behind a desktop
fortress of paper, beneath the watchful gaze of an orange-haired
San Francisco Giants doll, he runs the Times at night,
oversees both the sports and travel sections, is a lead editor
on the shift to pagination, and directs the Times's national
edition. He gets so wound up when a story is breaking, colleagues
say, that he seems to tremble. "When something happens that John
likes," says Carol Stogsdill, who worked with him at the Times,
"he stands up, throws his arms out and yells, 'Boom!'"
Doug,
forty-five, a managing director at Morgan Stanley Dean Witter,
landed closer to the tree. His father was a stock broker and his
grandfather a Wall Street lawyer. Doug is considered the bear
of the dozen or so analysts who cover the publishing sector. He
developed a complex stock-ranking system last year that elevated
him to third on Institutional Investor magazine's list
of top analysts. And he was one of the first to sour on newspapers,
downgrading all his stocks as the market peaked on January 14,
2000, at a time when newsrooms were still bulking up rather than
slimming down. When the energy crisis hit California, Doug's team
was the first to drill down to see what impact it would have on
the state's newspapers. "Doug is a professional skeptic," says
Susan Watson, a former vice president for investor relations at
Gannett. "And he relishes the role."
Despite
the differences -- Doug spent Memorial Day at the French Open,
John at a softball tournament in Oceanside -- each brother understands
and respects what the other does. "It's all rational behavior.
Nobody invests to lose money," says John. "The analysts are part
of that system." Doug, meanwhile, says his brother's lifelong
passion for newspapers has given him a more nuanced view of his
own job. "When people say newspapers are no longer relevant,"
he says, "it tells me they are just too lazy to read them."
The
tanking economy, newsroom layoffs around the country, and Harris's
shot across the bow in San Jose have reignited the rhetorical
battle for the soul of American newspapers. Listening to John
and Doug Arthur discuss the issues underlying that battle reveals
just how differently the two sides see the world.
David
Willman, a reporter in the Los Angeles Times's Washington
bureau, spent three years investigating the Federal Drug Administration's
drug-approval process. His stories got Rezulin -- a diabetes drug
that had been fast-tracked for approval by the FDA but was actually
killing people -- pulled from the market, and won the Pulitzer
this year for investigative reporting. At a toast at the Times
the day the Pulitzer was awarded, Willman said that only newspapers
have the mandate to dig into stories like this. "His reporting
saved lives," says John Arthur.
For
journalists, the situation is clear. Newspapers, unlike semiconductor
companies, are quirky, labor-intensive operations that have a
crucial and constitutionally protected role to play in society.
"The oil of democracy," is how Burl Osborne, the outgoing publisher
of The Dallas Morning News, puts it.
Despite
the pervasiveness of television and the rise of the Internet,
newspapers -- and increasingly their Web sites -- remain the forums
for competing ideas, the deliverers of information, and a check
on the powerful. And to the degree that Wall Street squeezes ever-higher
profits from newspaper companies without regard for the long-term
damage done to their ability to fill this role, it is bad not
just for newspapers but for society as a whole. "If we spend X
million dollars covering the Florida recount," says John, "which
was a story no one saw coming, then we'll probably have to tighten
up somewhere else to even out the budget. And we'll do that. But
first we go out and cover the recount the way it has to be covered."
Such
a purist proposition doesn't fit well with the other side. "I'm
not sure I'd go too far in saying newspapers have a special role
in society," says Doug Arthur. Others in the investment community
are less diplomatic. "I think that's a joke," says one money manager
who spoke on the condition that his name not be used. "The media
is manipulated by whoever wants to manipulate it. To say they
are high and mighty is an outdated notion." For this side, the
situation is equally clear. When newspapers went public, they
became subject to the same financial pressures as semiconductor
companies. And since then, the investment world has changed almost
as dramatically as the media world. Today's capital market is
global, instant, and hyper-competitive. Portfolio managers are
judged on their ability to determine which company will perform
the best in the next quarter, so that is how they judge the newspapers.
There are investors -- Warren Buffett was mentioned by a number
of people interviewed for this story -- who are in for the long
haul, riding a quality company through its inevitable peaks and
valleys. But most are focused on the monthly ebb and flow of stock
prices and earnings. "The reactions in the market are so quick,"
says Tim Stautberg, a vice president of investor relations at
E.W. Scripps. "If you own mutual-fund stock, you are looking at
it at least monthly, if not daily, and thus the portfolio managers
are under enormous pressure because there are so many places people
can put their money. That pressure works its way up the system,
and so there is this focus on short-term earnings."
In
this arena, long-term typically means two to five years, and journalistic
excellence is factored in only to the degree that it bolsters
financial performance. "I don't think there's any question that
if a newspaper franchise does not, over time, keep the product
compelling, it will lose audience," says Doug Arthur. "This is
something that investors clearly look at." In other words, a good
paper arguably will attract more readers and thus more advertising.
The issue of newspapers' high credibility relative to other media
is another example of how John and Doug come at the same idea
from different perspectives. Doug talks about how that can be
used to leverage future growth on the Internet. John says credibility
is earned over the years with stories like Willman's FDA series.
Stories, he says, that are more likely to happen when the newsroom
-- not the shareholder -- is the company's top priority. Both
perspectives are valued and respected in their different worlds.
This
clash of values is the newspaper industry's own cold war. No matter
that John Arthur knows that newspapers aren't charities, and Doug
Arthur thinks more investors should take a longer view of their
investments. The reality is that Wall Street's worldview is "cold
and calculated," says Doug. There is little sympathy for the inefficient
journalist who whines about democracy and a higher calling.
ANALYSTS:
BIT PLAYERS OR KINGMAKERS?
Analysts
like Doug Arthur can make more than $1 million a year. Their buy-and-sell
calls can influence the investment of billions of dollars. They
provide research and recommendations to an array of investors,
and they also let the newspapers know what Wall Street expects
of them. They are liaisons, but they are also handicappers, and
it is the investors who are placing the bets, based to varying
degrees on the accuracy of the analysts' gut calls and the precision
of their expertise. In 1999, institutional investors owned nearly
67 percent of all publicly traded newspaper stock, according to
Taking Stock: Journalism and the Publicly Traded Newspaper
Company, a new study by Gilbert Cranberg, Randall Bezanson,
and John Soloski. These institutional investors -- major banks,
mutual funds, pension funds, and the like -- are primarily focused
on short-term financial performance. Thus, so are the analysts,
even if they don't entirely agree with such a limited view of
newspapers. Interestingly, most of the analysts interviewed for
Taking Stock said public ownership, on balance, had been
bad for journalism, even as they said they don't pay much attention
to the editorial quality of the papers they analyze. "How do you
analyze stocks? I'm interested in one thing," says Doug Arthur.
"And that's what makes the stocks go. You can talk all you want
about the Internet, about secular trends, but it is the ad revenue
that drives it."
This
short-term focus on profit margins, John Arthur says, erodes a
paper's newsgathering resources. "When editors have to fill space
with inexpensive wire copy," he says, "their own coverage has
to suffer. Who will inform the electorate if newspapers don't?
The 6 p.m. news? You've got to be kidding." Short-term focus also,
he says, makes long-term editorial planning difficult. When Mark
Willes, the former Times Mirror c.e.o., pulled the plug on New
York Newsday in 1995, it was a textbook example of short-term
financial goals undercutting long-term journalistic commitment.
The ten-year-old paper had shaken up local coverage in New York,
nudging The New York Times to eventually beef up its metro
section. But it was still losing money and Times Mirror stock
was flagging and analysts were urging that New York Newsday
be purged. So it was.
How
much influence the top analysts actually have -- both with the
newspaper companies they cover and the investors who own the stock
-- depends on their reputation and track record, on the degree
to which investors do their own research, and on who's talking.
The investor-relations folks at the newspaper companies interviewed
for this story played down the importance of the analysts, saying,
in effect, that the company's performance over time matters more
to investors than the short-term drop in stock price that an analyst
can spark with a negative report or downgrade.
But
listen to what the c.e.o.s said about the analysts in Taking
Stock: "Analysts have a lot of influence . . . . I pay a lot
of attention, and the industry as a whole does, too," says Tribune's
c.e.o., John Madigan. Gary Pruitt, c.e.o. of The McClatchy Company,
says, "They have quite a bit of influence in general . . . because
what they say can influence the stock price, and I have to serve
the interests of shareholders." Doug Arthur says the companies
-- not investors -- are the most sensitive to what analysts say.
"If I publish something negative about a company, the c.f.o. will
be on the phone with me, maybe within the hour, letting me know
they don't like it," he says. The other side of the equation --
the investors -- are more difficult to read. "We've had clients
tell our company and our sales force that they don't care which
stocks we like or don't like, what they need from us is research,
our insight, and expertise," Doug says. "But the facts don't really
support that, because if we upgrade or downgrade a stock we can
move it dramatically." After Doug's downgrade in January 2000,
most newspaper stocks dropped 20 to 30 percent over the next ten
months. Some fell even further. How much of a factor his negative
tilt was in that selloff is open to debate, but it clearly played
a role.
Dick
Holcomb, a portfolio manager for the Michigan state pension fund,
which is a big investor in newspapers, explains the analysts'
role this way: "Media company A may be doing all the right things,
but if I talk to my sell-side analysts and they tell me that the
next quarter is going to be rough, that retail ads are soft and
getting softer, then I may take my 2 percent stake in the company
down to 1 percent with the idea that I will buy it back at a profit
later. The media company won't understand this. They'll say, 'Why
are you selling our stock? We're an excellent company.' What they
don't understand is that it isn't a comment on the overall quality
of the investment, but simply a temporary move to make the hit
less painful for the people who have money in our fund."
No
company that raises money by selling stock is spared from shareholder
pressure, even those like The New York Times and The Washington
Post, which have family trusts controlling the majority of voting
stock. A strong stock price means more money for acquisitions
and other growth. It is also a factor in determining executive
bonuses and the value of employee stock options, and lessens the
likelihood of a takeover attempt.
When
a newspaper stock slips dangerously low, analysts again play a
key role. "Let's say we are in a long recession and there's stock
that is selling for $40 a share," says Holcomb, "and we get an
offer for $60. Here is where the analysts play a huge role. Unless
they believe that the stock is really worth, say, $80 a share,
and can convince me of that, I am going to sell for $60 because
I have a fiduciary responsibility to get the highest return, and
I can take that $60 and reinvest it and get a higher return somewhere
else."
THE
JACK WELCH SCHOOL OF NEWSPAPER MANAGEMENT
The
first thing you see in the lobby of the Los Angeles Times
building, dead-on at the far end of a bank of elevators, is a
screen with Tribune Company's stock price for the day, as well
as other company news. The screens -- there are fourteen of them
around the building -- predate Tribune's purchase of Times Mirror.
But they are a powerful sign of the times. Before the dot-com
bubble burst last year, it seemed the entire country had gone
stock-option mad. Journalists bolted from newspapers to stake
their claim in the promised land of cyberspace. So newspapers,
too, opened up stock options to editorial employees in an effort
to remain competitive. But John Arthur rues, rather than rejoices
in, this enhancement to his retirement income.
Sitting
in the nearly empty cafeteria at the Times building, he
does not fit with the excitable editor his friends described.
He is tired. As we talk, his eyes slide up to the stock screen
on the cafeteria wall. "It is a way of reminding me that part
of my salary is tied to the performance of the company," he says
of his stock options. "I don't think it is an appropriate way
to compensate editors, frankly."
But
this is what corporations do today. As publicly traded newspaper
companies have grown up, there has been a corresponding shift
to professional management -- meaning leaders who come from the
business world and not the newsroom. They follow a philosophy
personified, Doug Arthur says, by Jack Welch, the General Electric
c.e.o., who became the prophet of efficiency and earnings in the
global economy. "This industry has gone from entrenched, family
ownership that doesn't pay much attention at all to what shareholders
think," says Doug, "to the other extreme, where they are too sensitive
to pleasing shareholders in the shortest period of time." Consider
this: despite precipitous declines in advertising and a bleak
earnings outlook, newspaper stock prices have held steady or risen
since the first of the year. "So, in fact, investors are seeing
through this earnings valley," says Doug, kicked back in his corner
office with a view of the Hudson River. "And it is making some
of the short-term, cost-saving actions by newspaper management
look unnecessary because companies aren't being penalized for
very weak earnings."
Yet
the shift in company management strategies has widened even further
the culture gap between the people who run the companies and the
people who gather and edit the news. As John Arthur moved through
the ranks in the newspaper business, he witnessed this sea change
firsthand. After working for two family-owned papers, he came
to the Times in 1986, when it was still dominated by the
Chandler family even though it had gone public in 1964. "All the
corporate stuff felt distant," John says. When Willes arrived
in 1995, he says, the Times entered a period of crisis.
"Suddenly, we had a business-side masthead full of people who
didn't know anything about newspapers." That became painfully
apparent one day in 1998 when the Times ran a page-one
story about a lawsuit that accused the Macy's department store
in San Francisco of violating state and federal laws regarding
handicapped access. "One of the business-side vice presidents
who I worked very closely with, and whom I liked and respected,
said, 'Why would you run a story on the front page that embarrasses
one of your biggest advertisers?'" John says. "That's when I knew
there was a problem." The crisis period ended with the Staples
Center scandal, which John calls "a nightmare scenario of what
happens when editorial judgment gets mixed up with business priorities."
As for his new bosses -- the Tribune Company -- John says he likes
what he sees so far. "I think they have treated us well, and are
doing their best to protect us here. I do worry, though, about
their ability to make long-term investments in the paper because
of this focus on earnings. We'll just have to see how it all turns
out."
Tribune,
like all newspaper companies, has considerably more to worry about
today than just sustaining editorial excellence. If the emergence
of a global capital market has quickened the pace and shortened
the focus of Wall Street, consolidation in the radio and television
industries and the emergence of new technologies -- namely the
Internet -- have produced a crowded, competitive media market
that newspapers cannot ignore. "This has changed the goals of
the management teams that run these companies," says Doug. "They
can no longer just raise prices and fees at will. They have to
run tough businesses with good margins and good cash flow. If
they don't do that, investors get annoyed, and there is a much
broader set of options for investors in the media sector than
there was twenty years ago." Beyond pleasing investors, newspapers
need the purchasing power that a strong stock price and healthy
cash flow bring to grow in an age of convergence and cross-ownership.
"You've got to have the cash flow to invest," says Doug, "and
you only have the cash flow to invest if you are making good money.
At the same time, you must be mindful of investing in the product.
So it's a balance."
STRIKING
A BALANCE
John
and his wife have three daughters and a home in Santa Monica.
Doug and his wife have two dogs and live in the Long Island house
where he and John grew up. The Giants -- John's team -- currently
have a few more wins than the New York Mets -- Doug's team. Their
worlds are different, yet inextricably bound. For them, a balance
is struck through love and respect.
But
in the absence of that blood bond, how does the newspaper industry
reach détente with Wall Street? The industry has been described
as being like "a men's club," full of tradition and camaraderie.
Maybe therein lie the roots of collective resistance. Maybe, John
says, it will take all of the c.e.o.s following the lead of Donald
Graham, the c.e.o. of The Washington Post Company, who has long
made it known that he manages for the long haul and investors
who don't like it can put their money elsewhere. That's exactly
what Al Neuharth, of all people, urged at a conference at the
University of Missouri journalism school in April. What would
happen if all the newspaper c.e.o.s said enough? "Their stocks
would sell off," Doug Arthur says, without hesitation. Would the
investors eventually come back? "I think they would, but not with
the same enthusiasm." So maybe saying "no" to the market wouldn't
be the financial disaster some have portrayed it to be. In fact,
when Doug pulls up the pertinent data on his computer screen,
they show that the stock of the Graham-led Washington Post Company
has gained value at almost the same clip as Gannett stock over
the last ten years, despite vastly different management philosophies.
One can argue a range of contributing factors; for instance, that
having Warren Buffett own a sizable chunk of the Post is reassuring
to investors. But, as Doug says, "despite a relatively cavalier
attitude toward earnings, Washington Post has still been a reasonably
good stock to own."
Striking
a balance requires compromise from both sides. Since most newspapers
already are hugely profitable, it raises the question, How much
is enough? The consistent answer from Wall Street is that the
market will always demand more. But readers are demanding, too,
and they have other choices. So the question lingers. Between
John and Doug Arthur, and between the newsrooms and the boardrooms.
"We live in a greedy society," says John. "But this is a pressure
newspapers don't need right now . . . The move to raise margins
doesn't seem to have a ceiling. Why is 10 percent good enough
for some industries and we gotta go to thirty?"
Brent
Cunningham is CJR's associate editor.
Sidebar:
The First Newspaper Analyst
