Murdoch has a plan. Zell doesn’t.
The two companies have gone down distinctly divergent paths in the six months since Mr. Murdoch bought Dow Jones and Mr. Zell almost simultaneously acquired Tribune. Dow Jones has a well-defined and apparently well-funded set of objectives, while Tribune is foundering amid declining newspaper sales, burdensome debt and a series of demoralizing cutbacks.
Since taking command of Dow Jones, Mr. Murdoch has been aggressively positioning the Journal to challenge the New York Times as the leading national newspaper, which includes taking aim at the wealth of advertising the NYT has attracted to its sumptuous food, fashion and travel magazines.
Whether you approve of the way he did it or not, Mr. Murdoch has installed like-minded editors and senior publishing executives to reshape the Journal in his image. And it is plain to see that he has the means, motive and opportunity to project the reinvigorated brand around the world in print, on the air and over the Internet.
In the same period Mr. Murdoch has put his stamp on Dow Jones, Mr. Zell has failed to articulate, let alone implement, anything approaching a strategy for growing the company he loaded with debt at the time its primary business, newspaper publishing, has been deteriorating at an unprecedented, incalculable and so far intractable pace. Diversified as Tribune may be in broadcasting and a likely-to-be-sold baseball team, nearly three-quarters of its sales are produced by its newspapers.
Far from leading and inspiring the employees he maneuvered into a co-ownership plan they neither wanted, approved nor can control, Mr. Zell has spent the last six months haranguing, insulting and terrifying the very people whose support he needs to salvage this troubled deal.
The absence of an effective strategy at Tribune became manifest last week when Mr. Zell announced that, for want of better ideas, he intends to make sweeping cuts in staffing, pages and news coverage that are bound to further erode the already-tottering franchises of some of the most esteemed newspapers in the country.
:: “They are going to take 500 pages out a week” across the various Tribune newspapers, said an unidentified executive quoted by Editor and Publisher. “That is gargantuan.” Future tightening of the newshole would come on top of the reductions that made it possible in the first months of the year for Tribune to save 18% in newsprint expense at the same time the cost of this key commodity was rising by double digits.
:: As to staffing, “you can eliminate…a fair number of people while eliminating not very much content,” said Randy Michaels, Sam’s second in command, in a conference call last week. Future cuts in the publishing division would come on top of the 860 positions already scratched this year, an amount equal to 5% of the work force. “If you work hard or you are producing a lot of output for us, everything is great,” Randy told analysts. “But we think we have a way to right-size the paper and significantly reduce our costs.”
Notwithstanding Randy’s spin, these initiatives are likely to be perversely counterproductive, because they will undercut the very reason that people buy newspapers and that advertisers advertise in them: the content.
You can fool some of the people some of the time by slipping an ad on page one, running more wire stories, skinnying down the op-ed section or carrying recruitment ads only two days a week, but wholesale cost cutting (memo here) will diminish Tribune’s newspapers to the point that discerning readers (and most of the remaining customers indeed are discerning readers) will begin to ask themselves if the paper is worth buying.
In a growing number of cases, the answer may be “no,” potentially triggering a spiral of declining readership, falling revenues and deteriorating profits.
While this self-defeating strategy would seem to make no sense, it appears to be the only alternative available at this point to prevent the Tribune Co. from breaching the terms of its looming debt obligations. The longer Tribune can scrape up enough cash to remain current with its creditors, the more time the company will have to grope, albeit belatedly, for a way to turn around the struggling newspapers that generated 72% of the company’s $5 billion in annual revenues in 2007.
The problem is that no business can remain successful over the long term if the only way it addresses declining sales is by cutting costs. You not only begin to degrade the product but eventually run out of things to cut. Businesses must grow sales and profits to build value. If they go the other way for a sustained period, they will falter and potentially fail.
Desperate measures would not be required today if more diligence, discipline and foresight had been brought to bear when Mr. Zell was contemplating the Tribune purchase, a process that commenced more than a year ago.
Nothing has happened in the interim to blindside Mr. Zell. Apart from the precise velocity that advertising sales were to plunge this year, all the problems of the newspaper industry were known well before Sam inked the deal in December that saddled Tribune with a staggering $12.6 billion in debt.
Tribune’s debt requires the company to dedicate some $1 billion of its annual operating profits to interest payments. In the 12 months ended March 30, those profits, which have been shrinking as costs rose and sales declined, amounted to $1.3 billion, leaving scant margin for backsliding at a time of double-digit drops in newspaper revenues.
While it is unimaginable that Mr. Zell did not have a detailed and well-conceived plan to build the business when he bought it, it is even more amazing that the institutional lenders who funded this risky and highly leveraged transaction did not insist on seeing one.
In retrospect, it seems obvious that Sam did not buy Tribune because he had a brilliant vision or burning desire to transform this tradition-bound media company into an innovative, next-generation publishing power. Rather, he seems to have been attracted by the low price for an asset no one else wanted, as well as the handsome tax advantages that the employee-ownership plan delivers to him.
Caught flat-footed, Sam Zell and his cohorts now appear to be managing Tribune Co. by simply making things up as they go along. But they are playing with live ammo.
They are responsible for more than $12 billion in debt, the livelihoods of some 19,000 employees and major media outlets serving tens of millions of residents in some of the biggest cities in the land. If the Zellsters don’t get this right, those constituencies will pay a staggering price.