Trouble in river cities

By: Jennifer Saba

The Mississippi River has served as a divider and natural barrier for St. Paul and Minneapolis and their respective newspapers, and each daily has cleaved to its own sense of uniqueness. There are only a few similar markets in the United States, and the one most often compared to the Twin Cities, Dallas/Ft. Worth, actually has plenty of geography separating the two major dailies, so they can comfortably operate as distinct, if competitive, entities.

The two Minnesota cities, on the other hand, back into each other.

In an industry in which papers are often subsumed by their competitors, it’s rare that Minnesota has the luxury of supporting two papers, the St. Paul Pioneer Press and the Star Tribune.

But that could change. The newspaper- operating environment has deteriorated so quickly that St. Paul and Minneapolis, considered one designated market area ? or DMA, a measurement used by advertisers to parcel out dollars ? is in danger of becoming a one-horse town. On top of the plummeting advertising revenue affecting big metros everywhere, both papers have brand-new owners ? and are now embroiled in a heated lawsuit stemming from the Pioneer Press publisher who crossed the river to head up the competing Star Tribune.

Par Ridder’s decamping for the Star Tribune was already unusual by industry standards, but it’s proving to be even more impactful than anyone could have imagined. In the lawsuit brought by Pioneer Press owner MediaNews Group earlier this summer, Ridder testified in a Ramsey County courthouse in St. Paul that he took Pioneer Press proprietary advertising information, including specific rates, and shared that information with executives at his new paper.

With newspaper after newspaper reporting alarming double-digit losses in advertising revenue, a competitor armed with rate information could, in the view of several newspaper execs who declined to be identified for this story, tip the advantage to the Star Tribune.

The backslapping, boys-club aesthetic that publishers have long enjoyed in this industry is giving way to a much more competitive, some might even say mean-spirited atmosphere as newspapers look for ways to survive the transition from print to the Web. The Ridder court hearing only underscores how difficult things have become, particularly for metros that operate in the same sphere.

Former Merrill Lynch newspaper analyst Lauren Rich Fine sums up the Minnesota situation bluntly: “There should be only one paper. Think how many markets have two newspapers, and how many of those operate under a JOA.”

Already there have been rumblings that the “Strib” and “Pi-Press” are headed for joint ownership, especially since Pioneer Press overseer MediaNews Group runs several such operations. MediaNews CEO Dean Singleton claims a joint agreement hasn’t even entered his thought process: “There has never been any discussion of a JOA at this point because both newspapers are profitable, and as you know, one paper has to be unprofitable.”

In any event, both papers ? which have enjoyed prosperity in the past ? are headed for a rough battle in which only one might emerge.

Glory days

“I think if you go way back, despite these two cities being right next to each other, there was quite a sense of separate identity” for the two dailies, says Rick Edmonds, a business analyst with the Poynter Institute. Edmonds should know ? he grew up in Minneapolis and worked as an intern at the Star Tribune during the summer of 1968. “For many years, both papers did well,” he adds.

The Pioneer Press ? along with the St. Paul Dispatch ? was one of the first papers purchased by the Ridder family in the 1920s and the city served as the headquarters for Ridder Publications Inc. Bernard H. Ridder Jr., the father of Anthony Ridder and grandfather of Par Ridder, managed the St. Paul papers in the late 1950s as publisher, spending 25 years in Minnesota. Several members of the Ridder family worked their way through the Pioneer Press, ultimately stamping that paper with the Ridder name in the same way as the Knight family was associated with the Akron (Ohio) Beacon Journal.

For its part, the Star Tribune started as one of three newspapers ? the oldest of which was The Minneapolis Tribune, founded in 1867. At the time, Minneapolis played the pipsqueak to St. Paul’s tough in terms of population and amenities. Minneapolis was half the size of St. Paul; the city didn’t have a fire department, sewage system, or water supply, according to the Star Tribune’s history.

In 1935, the Cowles family purchased the smallest of three papers in Minneapolis, the Star ? eventually combining it with the Minneapolis Journal into an evening paper as the city prospered. In 1941 the family bought the morning Tribune, and in 1982 the papers merged under the banner Minneapolis Star and Tribune. Five years later, it became known as the Star Tribune.

“Legend has it, for years the Ridder family and the Cowles family had a gentlemen’s agreement they wouldn’t cross the river,” explains Ken Doctor, an affiliate analyst with Outsell Research and an editor with the Pioneer Press from 1986 to 1997. That was scotched in the late 1980s when Star Tribune Publisher Roger Parkinson was flying back to Minneapolis, looked down from the descending plane, and declared that Minneapolis was one big city, not two, Doctor recalls.

St. Paul was there for the taking. In 1987, under Parkinson’s watch, the Star Tribune adopted the name “Star Tribune, Newspaper of the Twin Cities” ? and would complain furiously whenever anyone referred to it as the “Minneapolis Star Tribune.”

The Star Tribune benefited from Minneapolis’ booming growth in the 1980s and 1990s when it started pushing into St. Paul territory. The conditions were good. The market outperformed the national economic growth rate, recalls former Star Tribune Publisher Joel Kramer, who currently is exploring the possibility of starting an online newspaper in Minneapolis. The paper’s growth rate caught McClatchy’s attention, and the Sacramento, Calif.-based company purchased the newspaper from the Cowles family in 1998 for $1.3 billion. The acquisition brought McClatchy new cach? and redefined the company from a small and well-managed newspaper operator to a growing and noteworthy chain.

The pressure mounts

But over the past decade, the operating fundamentals of the newspaper industry have changed drastically ? and nowhere is that shift felt more strongly than in big markets, never mind big markets that boast more than one daily. The pressure rose so quickly that over a year-and-a-half period, three major newspaper companies in the country changed ownership, starting in 2006 with McClatchy’s purchase of Knight Ridder. That affected the Twin Cities when McClatchy quickly decided to jettison 12 former Knight Ridder properties, with the Pi-Press citing antitrust issues with the holdover Star Tribune.

McClatchy briefly operated the Pioneer Press “blindfolded” until the company could find a buyer, explained McClatchy CEO Gary Pruitt in a video deposition during the Par Ridder trial. Only one person within Pruitt’s organization knew the financial information, including the paper’s advertising revenue ? and that person could not share that data with other papers in the group. “Basically, we wouldn’t be engaged, involved, or have any knowledge of what was going on at the Pioneer Press,” Pruitt said in his deposition.

In spring 2006 MediaNews Group scooped up the property, along with the San Jose Mercury News in Santa Ana, Calif., the Contra Costa (Calif.) Times, and The Monterey (Calif.) County Herald in a complicated $1 billion transaction that involved Hearst, Gannett, and Stephens Media Group. By the end of that year, McClatchy sprang another surprise, selling the Star Tribune for half of what it paid (about $530 million) to Avista Capital Partners, stating that the property did not fit into its portfolio.

“When you look back on it, McClatchy knew things were going to get worse,” says former analyst Fine. “The positive in all of this is McClatchy had a more honest sense of what was going on in the market than people gave them credit for.” Fine, who has covered the newspaper industry for more than a decade, says that with each passing month, industry revenue continues to drop sharply: “There is absolutely no question that it remains incredibly challenging for all participating. Generally speaking, it’s a nightmare.”

Cuts both ways

Since Avista agreed to purchase the Star Tribune, the paper is reportedly experiencing free fall. During a McClatchy Q2 earnings call, Craig Huber, a research analyst with Lehman Brothers, suggested that year-to-date, the Star Tribune’s EBITDA is down somewhere in the ballpark of 40% to 50%.

Ridder, who has served as publisher of the Star Tribune since March, announced the paper needed to slash 7% of its staff, or 145 positions. He told his paper that over the past three years, total revenue had plummeted by $64 million; classified revenue dropped 23% in Q1 compared to the same quarter a year ago. If that trend continued, the S-T would be operating in the red within a matter of 18 months, the publisher warned. (Ridder and representatives with Avista Capital, including Star Tribune Chairman Chris Harte and partner OhSang Kwon, declined to comment for this story.)

MediaNews Group’s Singleton, a plaintiff in the Star Tribune trial, contends that “everything that’s happened in a major metro market has happened as much or more in the Twin Cities.” He admits there have been dramatic revenue declines at both papers over the past several years.

“At 190,000 circulation daily,” Singleton says of the Pioneer Press, “it is a major metro in its own right, even though it’s the second largest” in the market. “It’s got almost as much circulation as the San Jose Mercury News. It’s almost as big as The Denver Post. So it’s a big newspaper. Both have been hurt by the downturn at metros.” He’s quick to point out that since the Star Tribune dominates two-thirds of the advertising market share, the paper is harder hit by the drop-off in ad dollars, especially in classified.

Arthur Brisbane, the former senior vice president of Knight Ridder who oversaw the Pioneer Press until its sale to McClatchy, recalls that it wasn’t a strong paper within Knight Ridder either. “You couldn’t miss the fact the Star Tribune dominated a larger portion of the metro and had a stronger influence,” he says. The market in general, he adds, was a tough place to do business: “The slow growth environment and high labor costs made it a much more challenging place to run a profitable newspaper.”

While the Star Tribune is making a run at St. Paul, certainly in terms of circulation, the Pioneer Press is tightening its focus. The circulations of the Pioneer Press and Star Tribune overlap in at least some counties, according to the most recent audit reports of both papers. However, the Pioneer Press sells only about 10,300 newsstand copies in Hennepin County, the seat of Minneapolis ? or about 2.5% of its total circulation.

Conversely, the Star Tribune distributes about 14.6% or 41,352 copies of its paper in Ramsey County, home of the Pioneer Press. The Star Tribune reaches about 30% of St. Paul while the Pioneer Press reaches about 7% of Minneapolis, according to Scarborough Research.

The Pioneer Press, however, has grown its circulation over a two-year period, while the Star Tribune has suffered some major declines. Daily circulation at the Pioneer Press is up 1.9% to 193,901 copies in March 2007 compared to the same period in March 2005. Sunday gained 1.8%, to 251,838. During the same period, daily circulation at the Star Tribune slipped 7.7% to 349,131, while Sunday dropped 12.3% to 574,406.

“What I see is the typical confluence of bad business factors and a tough pinch on classified advertising,” says the Poynter Institute’s Edmonds. “I think it’s much more difficult when you have two papers dividing up the market. The newsroom cuts in both places reflect that.”

Brisbane says under Knight Ridder and Par Ridder’s leadership, the Pioneer Press smartly tried to dominate St. Paul while brushing off the other side of the river. In 2005, the paper increased its zoning, improved its local news coverage, and attempted to sell more advertising to small local accounts. And yet Brisbane concedes one has to take the deeper view when looking at the Twin Cities: “Both newspapers have been sold, and one of them has been sold twice,” he says. “That ain’t good.”

From boardroom to courtroom

All of this got infinitely more complicated when Par Ridder left the Pi-Press on March 5 to start his new role as CEO and publisher of the Star Tribune. J. Keith Moyer had vacated the position, and Avista Capital was keen to quickly fill his slot. This came after Dean Singleton had kept Ridder on as publisher of the Pioneer Press, speaking highly of him when he purchased the paper from McClatchy.

Outsell Research’s Doctor has a theory about why Avista would poach Ridder: “He is a smart operator. He knows the Twin Cities, given the family’s legacy there. He understands the dynamics of the market. He can reach out to Minnesota advertisers and be accepted as a local guy. It’s a two-fer. You get someone you think is good for the job and you further demoralize the opposition. You’re not only taking the publisher, but my God, a Ridder! You can understand it very well as a strategic business move.”

Without missing a beat, Doctor adds: “I don’t think they expected him to bring his laptop.”

That reference is to several matters that have come to light over the past months, including the Pioneer Press accusing Ridder of taking advertising information by downloading data from his laptop and transferring it to his new digs in Minneapolis.

At first, Avista reportedly approached MediaNews in hopes of avoiding a suit. But those talks fell apart, and on April 12, Northwest Publications (the LLC that runs the Pioneer Press) sued the Star Tribune Co. in Ramsey County District Court. The suit alleges that Ridder violated a noncompete agreement and swiped two Pi-Press executives from operations and advertising, Kevin Desmond and Jennifer Parratt, each of whom was also bound under noncompetes.

The three-day hearing in June included testimony and video depositions from a wide range of newspaper executives including Brisbane, Joe Natoli (former publisher of The Philadelphia Inquirer and Daily News, who consults for the Star Tribune), industry analyst John Morton, McClatchy CEO Pruitt, and former scion of Knight Ridder and father of Par, Tony Ridder.

During the case, Par Ridder admitted to taking advertising information from the Pioneer Press, including specific customers, contract statuses, the start and end dates of contracts, annual revenue commitments, classified rates, display rates, display rates by zones, and value-added signing bonuses. Ridder testified that much of the information was used in a benign attempt to bring over advertising spreadsheets that Ridder had built himself and planned to use at the Star Tribune. He said he only wanted the templates, not the sensitive data they stored.

Avista Media Industry Partner James Finkelstein said in a video deposition that Ridder took from the Pi-Press advertising, personnel, and financial information, and that it was his understanding that data like that was considered confidential.

According to court transcripts, Philip Sechler ? an attorney with Williams & Connolly, representing MediaNews ? asked Finkelstein, “Do you know whether anybody at Avista had a conversation in which they told Mr. Ridder not to bring information from the St. Paul Pioneer Press to the Star Tribune?”

Finkelstein responded: “Nobody would ever suggest that confidential information should be brought to our paper.”

During his testimony, Ridder revealed that his administrative assistant at the Pi-Press offered to shred his noncompete clause. Another bizarre moment arrived when Ridder was questioned about taking his USB hard drive packed with confidential material from his old paper to his new one:

Q. In fact, the Pioneer Press asked for you to return your USB drive, didn’t they?

A. They asked me to ? yes, they asked me to return the USB drive.

Q. And you didn’t return your USB drive, did you?

A. I thought what they wanted me to return was the actual property. So I returned a USB drive, not the ? not the USB drive.

Q. It was just the $40 USB drive, is what they wanted?

A. Or whatever …

Q. For all you know, the Pioneer Press sent you a memo asking you to return your USB drive, and the next thing they get is an empty new USB drive in its box in the mail from you?

A. Yes. In response to asking for the USB drive, I directed my assistant or the IT person, I can’t recall, to send them a brand-new USB drive.

Attorneys for Ridder argue that Knight Ridder executive Brisbane waived Ridder’s noncompete clause when the company was preparing to put itself on the auction block. Brisbane would not comment to E&P about the trial, but in his deposition he told the court he didn’t recall ever telling Ridder the noncompete was void. If he had, he said, he would have consulted others on the Knight Ridder executive committee.

Judge David C. Higgs is expected to make a ruling at the end of the summer. Meanwhile, Ridder is still acting publisher of the Star Tribune and Desmond remains senior VP/operations. Parratt has been barred from working at the paper due to her noncompete clause, until Higgs decides the case’s outcome (she remains on the payroll, however).

A sign of things to come?

Several people interviewed for this story who declined to be named described Ridder as capable and smart, extremely hardworking, low-key, and a man who tended to avoid any sensationalism ? which makes his admitted missteps all the more surprising. Several sources said it was a shame that Ridder took that information, because in the end, he’s talented enough to run the Star Tribune without it.

As far as Singleton is concerned, he claims the lawsuit against Ridder isn’t personal but purely in the interest of business. “I wouldn’t say there’s any bad blood here,” he says. “It’s been upsetting to advertisers, it’s been upsetting to employees ? and it’s been upsetting to me, too. I want the court to make it right. It was like someone saying, ‘Yes, I stole the money from the bank. But you shouldn’t get upset, because I returned it.'”

How much Ridder’s actions will affect advertising revenue remains unknown, given how terribly the sector is doing these days.

One advertising agency executive says the trial has not impacted his buying decisions for either paper. Bryan Jackson, director of newspaper investment at OMD in Atlanta, says of his negotiations with the Pioneer Press, “When I have called to chat about it they have been very professional, and pointed to their own paper’s stories instead of making comments.”

Singleton says he would have let Ridder go to the Star Tribune without a fight if Ridder would have kept his word to him and MediaNews Group COO (and former Knight Ridder senior vice president/CFO) Steve Rossi. “We initially were going to just let Par go as he made his resignation, based on his promise to me and to Steve Rossi” that he wouldn’t take anyone from the Pi-Press. “We took him at his word, and we probably wouldn’t have done anything if he hadn’t made an offer to 10 people to go to the Star Tribune.”

Barbara Cohen, president of Kannon Consulting, says this could be a harbinger of things to come for the industry. Until newspapers radically realign their cost structures, it’s going to be ugly. Cohen says that when markets become increasingly competitive, from a business standpoint it’s OK for a publisher to jump ship to the competition because “there is a war out there.” She adds, “Ethically, in my heart of hearts, I don’t think it’s right. I think it pushes the envelope. It doesn’t feel good to me.”

Though Avista’s Harte is no stranger to the newspaper business ? his family co-founded Harte-Hanks, and he worked for former Knight Ridder papers ? Singleton believes the new blood snapping up papers just don’t get the honor code that newspaper operators have stood by for years: “Look, they’re a leveraged buyout firm in New York that owns oil rigs and whatever else they own,” he says of Avista. “They just don’t understand what we spend our lives in the newspaper business learning, and that is the only thing you have is your credibility and your integrity.”

E&P Editor-at-Large Mark Fitzgerald contributed to this report.

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