The Rapid Decline of the New York Times
It's about as much fun being a newspaper publisher as an airline president these days, so Arthur Ochs "Pinch" Sulzberger, Jr. of the New York Times deserves our sympathy. Last quarter's earnings were dreadful. Earnings per share from continuing operations were down almost 75% from the previous quarter as newspaper advertising revenue declined over 10% -- a decline which according to the May earnings report accelerated to 11.9%. Just last week, Lehman Brothers forecast that in a year, its common stock would decline in value by almost half.
Pinch is trying to save the independence of the family-controlled publishing concern (regarded within the family as a public trust), but in the process has put a legendary newspaper empire on a path of decline, eating into capital to pay dividends to the shareholders, paying off employees who accept buyouts, and hoping that the comparatively small internet operations of the company will someday grow enough to balance the decline of the newspaper business.
If he succeeds, the New York Times Company will end not with a bang, but a whimper: Liquidated -- with all stake holders addressed, if not fully content. It is a dreadful comedown for a career that began almost regally.
Pinch represents the fifth generation male heir of the Ochs/Sulzberger family to head the corporation. In 1987, at the age of 35, Pinch became assistant publisher to his publisher father "Punch" Sulzberger, succeeding him in 1992. Today he is also the chairman of the board. Pinch inherited the pre-eminent newspaper in America and arguably the world -- a robustly growing and diversifying media conglomerate.
A family trust elects 10 of 15 directors, through control of 88% of the Class B shares of the New York Times Company (NYTCo). Class A shareholders, who supply roughly 90% of the firm's capital, elect the remaining 5 directors.
If all shareholders carried equal voting weight, the company would long ago have been a candidate for acquisition or breakup at the tender mercies of Wall Street fund managers. NYTCo has underperforming assets. The core newspaper franchise maintains its residual magic as a brand name; and within the lush niche -- urban professional high income people of sophisticated tastes and liberal politics -- the Times has carefully cultivated, its name remains incomparably authoritative.
It remains the best-known American newspaper worldwide. It is focused on its niche and tends to their needs, prejudices, and disposable income. Even those who criticize the media institution's editorial slant -as a recent Vanity Fair piece describes in detail - love to hate it.
Buyers with larger and more diverse media platforms, such as Google and Bloomberg (even Rupert Murdoch has been mentioned in a Times blog) could better utilize the information-gathering potential of the existing journalistic organization, while bringing more flair and money to the project of competing in the declining print newspaper business.
Two different Wall Street funds have already openly made runs at a proxy fight among class A shareholders, and one group succeeded in forcing the company to allow its representatives two seats on an expanded board. The family still maintains control, but outsiders now have access to internal data.
Keeping the family happy
But as long as the family supports his tenure as publisher and chairman, Pinch Sulzberger's job is secure. And it appears that he has attended to their needs zealously.
Despite collapsing advertising revenues, layoffs, and buyouts, (including a catastrophic $814.4 million writeoff of newspaper properties in New England purchased when the internet handwriting was already on the wall) and downgrades of its debt to uncomfortably close to junk status, Pinch Sulzberger increased the dividend almost a third in March last year, from 17.5 cents to 23 cents a share.
Family members hold about 10% of the overall equity through Class B shares, and hold another 19% of the equity via family holdings of Class A common shares, so almost 30% of the $33.3 million in dividends sent out in the first quarter of 2008 went to the family, while the company's equity accounts took a hit for $28.2 million, according to the company's most recent SEC form 10Q.
Unfortunately, keeping that enhanced dividend flowing may turn out to be a bigger challenge than Pinch and his CEO Janet Robinson believed. Lehman Brothers last week questioned whether it could be maintained, and the company's efforts to control costs, touted as a source of cash savings, have so far not yielded the forecast economies. In 2007, CEO Janet Robinson announced a planned reduction in their annual cost base of $230 million in 2008 and 2009, excluding the effects of inflation and one-time costs. That works out to $28.8 million per quarter over the two years, yet operating costs before depreciation and amortization decreased less than half of that in the first quarter of 2008.
Those cost savings are proving very painful and expensive. The company has tried offering inducements to longtime journalists to retire, recognized $11.2 million dollars in expenses last quarter alone. (In addition, as of 3/31/08, the company's balance sheet also carried a further $21 million as "accrued expenses" of buyouts.)
But an internal memo from the paper's assistant managing editor Bill Schmidt, leaked to the New York Observer, told news employees that the buyouts were not enough to lure a sufficient number of volunteers, writing that the company "approach[es] it [layoffs] with a heavy heart."
The Murdoch threat
While funds drain away from NYTCo, Rupert Murdoch swims circles around the floundering flagship paper. He has purchased the Wall Street Journal with the aim of making it more of a general news national paper, targeting the Times' national edition's readers and advertisers. His New York Post already outsells the Times in New York City itself, and News Corp. is now reported to be in talks with the New York Daily News to combine business operations. With the financial muscle to cut prices and steal advertisers away from the Times national and metropolitan editions, Murdoch can force the Times to cut its own prices for the advertisers and readers who remain with it, further pressuring circulation revenue and readership.
The future looks grim indeed for Pinch Sulzberger and the company he leads. Slowly accelerating decline is the best case scenario at the moment. For a man born to wealth unto the generations, prominence, prestige, and a legacy to uphold, it must be humbling to see the future of the family patrimony crumbling before him.
Photo credit: Ian Wilson
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