Will Tribune Tower Again?

By: Jennifer Saba Since last spring, when it was basking in Pulitzer glory, the Tribune Co. has suffered a series of surprising setbacks. "The Tribune Company had a horrendous 2004," says Goldman Sachs newspaper analyst Peter Appert. "Everything that could go wrong, did."

The circulation scandals at Newsday and Hoy in New York reverberated not only through the halls of the Chicago headquarters, but they also had repercussions for the industry at large, spooking some advertisers and calling into question proposed rate hikes. The foul ad environment in Los Angeles produced lackluster revenues at the company's highest-circulation paper, the Los Angeles Times, exacerbated by an unexpected circulation falloff.

Louis Sito, publisher of Hoy and vice president of Tribune Publishing, was expected to lead the company's entire Hispanic-print push to great heights. But Sito left the company as the circulation scandal broke. Months later, he was mentioned in reports of an alleged kickback scheme involving Newsday distributors.

The publishing side wasn't the only arm of the company with problems. Tribune's TV unit, with its WB stations, experienced a decrease in network ratings and lower ad revenue. All of this resulted in what Appert calls a "blow to [Tribune's] reputation." In early January, Appert rated the company's stock as "underperform."

Last year, Tribune's stock was off 18.3%, Merrill Lynch reported. As Business Week phrased it, the circulation scandals, sagging readership of the Times, and softness in its TV unit "are hammering results."

The question is not whether Tribune will recover. Every industry analyst and expert interviewed for this story expressed faith that Tribune will come back strong and regain its spot as one of the industry's best-overall outfits. Merill Lynch rated the company as a "buy" in mid-January, noting that it believes the company "will deliver among the best EPS growth rates in the industry during 2005." Tribune's overall profit margin for 2004 is estimated to come in at about 27.6%, and approximately 25% in the newspaper division, according to Merrill Lynch.

Tribune may be on track to mend, but the way to true fiscal health usually races along one of two paths: Get more ad dollars or make cuts.

Unfortunately, the 2005 ad revenue forecast for the industry is looking tepid at best, pegged somewhere in the 4% range. Furthermore, expectations for national advertising are shaky, which could effect newspapers in larger markets like Chicago, Los Angeles, and New York.

With all this in mind, there's concern in the trenches about how far the company will go to atone for its miscues, and how much of the burden other papers throughout the company are expected to carry in cuts and other measures.

With the appointment of Scott Smith to president of the publishing division, Tribune is signaling to the investment community that its top priority is getting its house in order. Smith's predecessor Jack Fuller, who retired in late October, rose through the ranks as a Pulitzer Prize-winning writer. (Tribune is retaining Fuller as a consultant this year at $51,500 a month.) Smith came up through the financial side, most recently as president, publisher, and CEO of the Chicago Tribune.

"Someone with more financial [knowledge] is more critical right now," says Lauren Rich Fine, an analyst with Merrill Lynch.

For all the setbacks, Smith told E&P in mid-January, the division is in relatively healthy shape and he's committed to continuing great journalism while managing expenses and growing revenue. "We are optimistic about our future," he says. "We say that knowing there are great challenges that we face."



Circ drops on two coasts

When Newsday announced in June that it had misstated its 2003 circulation by what amounted to roughly 97,000 copies, Tribune's less-than-aggressive initial response to the crisis didn't help matters. Then it turned out that number had also been fudged for the first half of 2004.

Merrill Lynch's Fine notes that Tribune has since risen to the occasion to settle the matter as quickly as possible. Newsday has published several stories in which the paper explored its own misdeeds. In addition, Fine points out that she's been "pleasantly surprised" by Newsday's recovering ad volume: "I think they have been flat to up slightly in revenues in the past few months ? even with new ad rates."

Newsday has not completely cleared its hurdles. The misstatements angered some advertisers, and led to lawsuits that are still pending against the paper.

For better or worse, Fulcrum Global Partners' Edward Atorino puts Newsday into perspective: "Newsday clearly hurt Tribune. But Los Angeles is a bigger problem than Newsday, when you get down to it."

Indeed, the Times has been hit on two fronts. Surrounded by competition, the paper sustained a huge drop in circulation. Daily copies are down roughly 5% according to the latest figures from the Audit Bureau of Circulations. Unlike Newsday, the Times dropoff had more to do with management refocusing the circulation after the Times Mirror acquisition, explains John Morton, an industry analyst with Morton Research.

"Re-jiggering your circ isn't a bad thing at this point," says Appert, adding that Tribune is trying to make circulation more valuable to advertisers.

Beyond the circ decline, the paper's advertising revenues dropped. "The economy in [L.A.] has been lousy," says Atorino. "It's not their fault that the movie and transportation and retail sectors have been lousy. They are doing the right thing. They changed the product and refocused the circulation, and hopefully it will come back."

The Times relies heavily on the movie category, a sector that is not only changing but also represents a disproportionate percent of its national advertising, says Appert. The slowdown may not be a blip, either. Appert thinks the decline in movie spending is more of a trend. Last year, publishers blamed the slowdown on the Motion Picture Academy moving up its awards show. This year it's a lack of blockbusters. "[Studios] are shifting their ad dollars to the Internet and TV, and it's hurting the Times. It's really a significant factor," he says.



Cutting staff, at a cost

Even before the Newsday crisis hit, Tribune was lagging. On June 7, Fuller announced 200 jobs (roughly 1% of its work force) would be eliminated because of "slower than anticipated growth." He pinned the shortfall on a few papers, including the Times.

The Times made significant staff reductions through layoffs and buyouts ? 190 positions within the paper and its affiliates. Through the same process, Newsday cut 172 positions in 2004.

Faced with growing competition and the fact that the Times and Newsday are considered two of the nation's best papers, axing staff, particularly newsroom staff, might be a questionable solution. Morton says the cutbacks are partly a reflection on former Times Mirror management which, compared to the rest of the industry, overstaffed its papers.

When asked if he thought the cuts are worth it, Morton says that it's difficult to tell. "You hate to see news staff squeezed," he replies. "That is one of the reasons I liked Times Mirror papers, because they did tend to spend more on staffing. On the other hand, they didn't have notable profit margins. I would hesitate to say that cutting news staff is good in the face of declining readership and circulation."

It should be noted that when Tribune acquired the Times Mirror properties (then valued at $8.3 billion) in 2000, the Times wasn't exactly in great shape. Sure, it was staffed to the gills ? but the paper was suffering from a battered reputation following the Staples Center controversy. And for all of Tribune's setbacks in 2004, it was also the year that the Times took home an impressive five Pulitzers ? which some argue makes the cuts at the paper even more painful.

A report in American Journalism Review revealed recently that when the Times' top editors found out about the cuts, Jack Fuller and Tribune CEO Dennis FitzSimons agreed to sit down with them. A three-hour meeting ensued. Managing Editor Dean Baquet described it this way: "Obviously we didn't get what we wanted, but nobody slammed the door in our face."

New publishing chief Smith frames the cuts in the context of market conditions: "Revenue plateaued at the Times, which coincided with five Pulitzers. We didn't ask for that timing. It's the way the world evolved, and as appreciative as we are of that great recognition, we concluded we needed to make a mid-course correction. It's a little more abrupt in a fundamental premise.

"What we said to investors in the fourth quarter is that some of the East Coast papers [had to go through cuts]. Ideally you want to do it job by job, but occasionally we need to do something more significant. We're trying to manage this process as smoothly as we can, and occasionally it's more bumpy than we would like. But being financially strong and journalistically strong is important to us."

Goldman's Appert says, "Tribune is very focused on sustaining cash flow and profitability, and very aggressive at managing costs. I think to some extent there's such a sharpened focus to deal with the pressures of a weak L.A. market, it had to bear down on all their papers to some extent. To be fair, the bulk of the pressure is coming into markets where there are problems."

Beyond the well-publicized Newsday and Times cuts, The Hartford (Conn.) Courant trimmed its newsroom staff and the Orlando (Fla.) Sentinel cut nine people from its entire company.

Ashley Allen, vice president of corporate communications at the Sentinel, says that all staffing decisions are made at the local level. The Sentinel was having a slow year, and damage wrought by several hurricanes forced eliminations in staff.

Brian Toolan, editor and senior vice president of the Courant, had to lay off |seven people in the newsroom to meet budget targets.

Toolan tells E&P, "If you are a member of a newspaper group that is a publicly traded company, things are good if you're doing good financially and things are less good collectively if your [parent] company is not strong financially. How big of a role does that play with the business of the Hartford Courant? I think it's of modest consequence." He added that he has "every expectation" that they will be hiring, hopefully in the first quarter.

Tribune also announced it is consolidating all of its papers' Washington, D.C., correspondents into one bureau. The move forces more pruning.

Smith bristles when asked about the perception that the Newsday/Hoy/Times problems were causing cuts at other papers. He says those who wonder why the home paper, the Chicago Tribune, has been largely spared need to know that the paper is among the best in the company in terms of growth.

It should be noted that the cuts at Tribune have not yet equaled the overall toll at Knight Ridder papers when that company made chain-wide layoffs a few years back.

"I don't really question Tribune's commitment to doing the best journalism they can," says Rick Edmonds, a researcher and writer on business issues for the Poynter Institute. "You have to be real when you eliminate capacity. I have no reason to say this is happening like it did at Knight Ridder when they made heavy cuts." He warns, "You don't want to set up a dynamic, especially with editorial people, where they lose confidence in their company."



Don't go changing

But Tribune's cutbacks are already noticeable. Just look at The Sun in Baltimore. The paper recently extended a buyout to its pressmen (some 28 took the package), and about 18 staffers took buyouts in June. In recent months, the Sun made a series of drastic changes to its editorial content. Comics were dropped and the Today, Sports, and Business sections saw cuts and alterations.

Readers were angry that the paper addressed the changes in such an abrupt manner, and Paul Moore, the Sun's reader representative, penned a stinging column about how the paper mishandled the move. "The front-page notices used the word 'revamped' to describe the changes. But the real word is 'reduced,' and that is what thousands of readers noticed and complained about," he wrote. "The main reason for all of this is simple: cost reductions."

Granted, comics and crosswords are hot-button issues for readers. And as Bill Salganik, president of the Washington- Baltimore Newspaper Guild and Sun business reporter phrased it, "Better 'Mary Worth' than me." He believes Sun management is trying to do good journalism, but worries if all the content changes will best serve readers. The Sun reinstated some comics, crosswords, and columns as E&P went to press.

Sun Publisher Denise Palmer says the paper will launch a badly needed redesign this September, something that hasn't happened in a decade. She's also very aware of the challenges created by the fact that readers generally don't welcome change.

She also notes there is some uneasiness within her ranks ? not so much anger at Tribune, but the realization that the industry at large is changing: "People are finally realizing the industry is under a lot of pressure, and that it's not as easy historically to grow. And if it's not growing, that's an added challenge."