The Washington Post newspaper, one of the greatest institutions of world journalism, is in deep trouble. Circulation, ads and employment have been falling for decades. The newspaper lost $193 million in operating income in 2008 and $164 million more in 2009. Its employees account for a disproportionate amount of the parent company’s pension plan, which now has more than a billion dollars in obligations. The company might be out of business were it not for its profitable Kaplan and television subsidiaries. What will happen now?
Dear readers, your author has been employed in the labor movement for fifteen years and has battled numerous rapacious corporate executives and management consultants. When you have waged combat against an opponent for that long, you learn how they think, what they care about and what they are likely to do. If the Washington Post Company ever brought in a crack turnaround management team, we can imagine what would happen.
Any new team would likely conclude that the newspaper is an unsustainable drag on the rest of the company. Kaplan will have a growing number of competitors in years to come and the company’s television operations have their own challenges, so they cannot carry the newspaper forever. But the newspaper likely cannot be sold for anything approaching the potential worth of its brand name. At the very least, its losses must be minimized. Here’s a brutally ruthless four-point plan that we would expect to see from a turnaround regime.
1. Break the Unions
Many companies break their unions, legally or illegally, for the simple objective of lowering costs. In the Post’s case, a consultant would want to eliminate them to clear the way for radical structural changes. Anti-unionism is not a hard sell to Post executives, who have waged war on their unions for decades. As a result, the unions are nearly broken already. Of the newspaper’s seven collective bargaining agreements (CBAs), four have expired. The agreement with the 435 mailroom workers expired on 5/18/03 and the company imposed its last offer in 2006. That bargaining unit is effectively dead. The newspaper’s last CBA expires on 11/16/11. After that date, it can be effectively union-free if management wants to take on that fight.
2. Terminate the Pension Plan
The Washington Post Company’s pension plan is in no imminent danger of failing, but it is headed in the wrong direction. At the beginning of 2007, the plan had $1.778 billion in assets and $803 million in obligations. At the end of 2008, the plan had $1.327 billion in assets and $1.007 billion in obligations. The plan’s loss on assets of $468.3 million contributed to the company’s disastrous 2008 results, maybe the worst in its history. The company cannot risk this happening again. And if the plan were to become under-funded, 2008 might look the good old days.
Since the pension plan appears solvent for now, it may be eligible for a standard termination. All participants could receive an annuity or a lump-sum payment equal to the present value of their vested benefits. The Post Company would be freed from any funding consequences down the road. Most importantly, the company would gain more flexibility in redefining its terms of employment.
3. Convert Reporters into Independent Contractors
Journalism has long had freelancers. They are cheap, do not receive benefits and are owed no commitment by the company. Nothing is stopping the Post newspaper from increasing its reliance on freelancers, and possibly converting nearly all of its full-time reporters to that status. In essence, the Post would be overseeing a workforce of independent contractors. The company would not have to pay any social security, unemployment insurance or workers’ compensation premiums to these workers. The company could even use these savings to increase their take-home pay.
This is a common tactic in the construction industry, which often misclassifies employees as independent contractors. FedEx treats its drivers as “contractors” and is being sued because of it. But if the freelancers do not operate out of central offices and have reasonable discretion in pursuing their coverage, the Post’s classification of them as contractors could just be legal. And it would save management a ton of money.
4. Franchise Content
After all of the above has been accomplished, the Post will be ready for the final step: outsourcing content. The Post could establish relationships with third-party companies to produce stories that would be vetted by a small team of Post editors. Those companies would then be allowed to carry the Post imprint as franchisees. The logical place to start is by spinning off the Post’s own subsidiaries, like the Gazette, Southern Maryland Newspapers, the Herald and La Raza Del Noroeste. All of them could be licensed to operate with the Post’s brand. So, for example, the Gazette might be called “Washington Post Maryland.” The Post could then sell franchises to many other small operations in its home region and beyond. Its brand would be bigger than ever but its business and employee commitments would be minimal. If one firm under-performed, there would be no need for layoffs or buyouts – just find a competitor, franchise them instead and resume operations.
Under the above plan, The Washington Post newspaper would no longer be a centralized organization. It would operate more like a general contractor in the construction industry. It would have a small central staff of editors, supervisors and marketing personnel who would coordinate with a network of smaller subcontractors that produce content and receive the Post imprint. Most important of all, by maintaining revenues and cutting both labor costs and overhead, the newspaper could be a reliable money maker again.
The Post has already started down this road with the Fiscal Times, a start-up financed by a conservative billionaire that is supplying content to the paper. Post ombudsman Andrew Alexander described their relationship this way: The Fiscal Times is one of the nontraditional news organizations being created to provide specialized reporting. The Post and other media outlets have begun partnering with them to bolster coverage diminished by staff reductions.
The first article submitted by the Fiscal Times to the Post has already generated accusations of conflict of interest. But the Post is still marching into the brave new world of outsourcing with predictable consequences to come.
Let’s be clear: we do not advocate the above plan. It would be a disaster for readers. Reporters would be more transient than ever. Quality would be more difficult to control in a subcontractor network than in a large office of reporters directly overseen by editors. Coverage would be even more driven by profit than it is now. The Post’s brand name will have far greater reach, but ironically, it will mean far less substantively.
The chief alternative to the mass destruction above is charging for online content. That idea has merit because it produces a new revenue stream that, frankly, the Post and other media organizations deserve to have. But it is incompatible with the Post’s existing strategy of cutting staff and coverage, which leads to quality declines. Who wants to pay more for a product that is going downhill? If the Post is going to charge, it must increase its reporter and editor staffing and endeavor to produce better content. If not, its new revenues will be less than expected and visitors will be driven away.
Whatever happens, the awful years of 2008 and 2009 were not a blip. They resulted from the baleful trends of decades. The economic depression merely pushed the storm surge over the levee walls. For better or worse, the company must re-align its business model. Otherwise, we will surely witness the Fall of the Washington Post.
Friday, March 05, 2010
Fall of the Washington Post, Part Five
Thursday, March 04, 2010
Fall of the Washington Post, Part Four
Want to see where the Washington Post Company is headed? Look at the following snapshots of the firm’s workforce in 1993, 2000 and 2008.
Now look at the percentage of the parent company’s operating income earned by newspapers, Kaplan and the other operations.
In the early 1990s, the Washington Post Company derived half its profits from the newspaper business and half its profits from everything else. In 2006 and 2007, newspapers accounted for just 14% of its operating profits. In 2008, the newspaper operations and Newsweek collapsed and Kaplan, broadcast television and cable provided all the profits. Since 2005, Kaplan and television have been carrying print media on their backs. How long can this go on?
The answer: not much longer. Besides the challenges to its newspaper and magazine businesses, the Post Company faces issues connected with its defined benefit pension plan. The company’s pension obligations have increased from $261 million in 1996 to $1 billion in 2008 – a jump of 286%. At the same time, corporate management has not made a contribution to the benefit plan since 2002 and had “no plans” to contribute in 2009. Management has contributed to its Supplemental Executive Retirement Plan, which has benefits paid directly by the firm each year.
Pension issues caught up with the company in 2008. That year, the Washington Post Company reported $65.7 million in net income. That was the lowest absolute amount and the lowest percentage of revenues (at 1.5%) since at least 1984. The company also reported a loss of $630.6 million in “pension and other postretirement plan adjustments,” of which $468.3 million came from losses on pension plan assets. That helped generate a net comprehensive loss of $439.5 million – probably the worst year in the company’s history.
The pension issue is connected to the Post’s business segments. Kaplan now accounts for the majority of the company’s workforce, but the vast majority of Kaplan’s employees have less than five years of tenure. If they are enrolled in the Post’s pension plan at all, they may have very little in vested benefits. But some employees with the Washington Post newspaper and Newsweek have been present at those subsidiaries for many years. They probably account for a disproportionate amount of the company’s pension obligations. So the very divisions that are losing the most money now will also cost the most in pension spending in the future.
One option used by companies in this sort of position is to sell under-performing subsidiaries. But the Washington Post Company is unlikely to sell its flagship newspaper for two reasons. First, the market for print publications of any kind is tough these days. Second, the brand name of the Washington Post, with its aura of Graham, Bradlee, Woodward and Bernstein, still has compelling power. An aggressive management team should be able to figure out how to make money from it.
There may be such a way, but it could very well mean destroying the newspaper as we know it. We’ll conclude in Part Five.
Wednesday, March 03, 2010
Fall of the Washington Post, Part Three
As badly as the Washington Post newspaper has performed, the stellar results of the Kaplan Inc. division have almost made up for it. Almost.
Kaplan is one of the world’s premier educational testing services. The company was created by Stanley H. Kaplan, a Brooklyn tutor who wanted to help working-class kids from public schools demonstrate their competitiveness for college admissions. Kaplan essentially invented the test preparation industry by designing a program to train for the SAT. The SAT’s creators tried to stamp out Kaplan’s business by saying test preparation did not work, but Kaplan was able to prove otherwise before the Federal Trade Commission. The Washington Post Company purchased Kaplan in 1984 and the founder retired ten years later.
Early in its history with the Post, Kaplan was a small part of the parent company’s business. Kaplan only had 600 employees in 1994 and 1995, less than a tenth of the parent company’s full-time workforce. The Post Company did not bother to report separate business segment results for Kaplan until 1999. By then, Kaplan had really started to take off.
Kaplan does much, much more than train students to perform better on the SAT. It offers online bachelor’s and master’s degrees in management, criminal justice, paralegal studies, information technology, financial planning, nursing and education. It has an online law school and a standalone virtual public school. It operates higher education businesses in Europe. It operates 44 English-language schools in the U.K., Ireland, Australia, New Zealand, Canada and the United States. It oversees multiple programs for continuing training of professionals, especially in financial management. It even operates facilities in Shanghai and Hong Kong.
All of this growth has mushroomed steadily over the last two decades. Consider the following measures.
1. Kaplan full-time employment has risen from 750 in 1993 to 13,200 in 2008 – a 1660% increase.
2. In 1993, 149,000 students took Kaplan’s test preparation courses. In 2008, 411,000 students took the courses, a 176% increase.
3. In 1999, Kaplan reported $258 million in revenues. In 2008, Kaplan reported $2.3 billion in revenues, an 806% increase.
4. Kaplan had negative operating income in 1999, 2000, 2001 and 2003. But since 2004, it has contributed $765 million in operating profit to the Washington Post Company, more than any other subsidiary.
The differences in performance between the Washington Post newspaper and Kaplan Inc. are remarkable and impossible for any management team to ignore. What do they mean for the company? We’ll find out in Part Four.
Tuesday, March 02, 2010
Fall of the Washington Post, Part Two
The Washington Post newspaper was once the financial bulwark of the Washington Post Company. No longer.
The Washington Post newspaper’s operating numbers have been declining for decades. Consider these measures.
1. The Post’s average paid daily circulation peaked in 1993 at 823,752. In 2008, it had fallen to 639,724 – a drop of 22%.
2. The Post’s average paid Sunday circulation has fallen from a peak of 1,158,329 in 1992 to 878,110 in 2008 – a drop of 24%.
3. Newspapers make a big chunk of their money by selling ads. The Post’s total annual ad inches have fallen from 4,679 in 1989 to 1,952 in 2008 – a collapse of 58%.
4. The Post’s full-time workforce has declined from 2,950 in 1993 to 2,121 in 2008 – down 28%.
Despite the Post’s declining circulation, ads and workforce, the newspaper has generally made money for the parent company until recently. Its revenues grew from $643 million in 1991 to $962 million in 2006 before falling to $801 million in 2008. The newspaper’s operating income remained positive until 2008, when it lost $193 million. (Preliminary data indicates that the paper lost another $164 million last year.) The disastrous result in 2008 nearly overwhelmed the profits earned by the rest of the corporation.
The company said this about its 2008 newspaper operating loss:The newspaper publishing division reported an operating loss of $192.7 million in 2008, compared to operating income of $66.4 million in 2007. In March 2008, the Company offered a Voluntary Retirement Incentive Program to certain employees of The Washington Post newspaper, and 231 employees accepted the offer. Early retirement program expense of $79.8 million was recorded in the second quarter of 2008, which is being funded mostly from the assets of the Company’s pension plans. Also, The Post will close its College Park, MD, printing plant in the second half of 2009, and none of the four presses will be moved to The Post’s Springfield, VA, plant. The Company reassessed the useful life of the presses and the fair value of the plant building and recorded accelerated depreciation beginning in June 2008; as a result, accelerated depreciation of $22.3 million was recorded in 2008. The Company estimates that additional accelerated depreciation of $29.2 million will be recorded in 2009. Also in 2008, as a result of the challenging advertising environment at the Company’s community newspapers, The Herald and other operations included in the newspaper publishing division, the company recorded goodwill impairment charges of $65.8 million. The decline in operating results is due to reduced revenues and the unusual or one-time operating expense items noted above; excluding these charges, however, the newspaper publishing division still incurred an operating loss in 2008 due to revenue declines.
We do not believe 2008 was a fluke year, but rather the culmination of trends that have been in motion for decades. The Washington Post newspaper’s declining circulation and ads and its shrinking workforce are probably mutually reinforcing. Fewer staff means less news coverage, which means fewer readers and fewer ads. Those forces finally caught up with the newspaper last year due to the nationwide economic recession and they show no sign of easing. Even if the newspaper’s results temporarily improve, continued erosions in circulation, ads and employees are a long-term challenge to the very viability of its business.
Tomorrow, we’ll look at the star of the Washington Post Company: Kaplan Inc.
Monday, March 01, 2010
Fall of the Washington Post, Part One
The Washington Post Company is in the middle of a tumultuous transition. Some of its businesses are doing well. Some are not. The components of the company are headed in different directions. And none of it bodes well for the area’s newspaper of record.
The key to understanding the Washington Post Company is understanding that it is not a newspaper. It is a multi-industry conglomerate that owns, and is named after, a newspaper. The company has five primary business lines: the flagship newspaper and a host of smaller newspapers, like the Gazette; Cable ONE, a cable television service; six broadcast television stations in Houston, Detroit, Miami, Orlando, San Antonio and Jacksonville; Newsweek magazine and its affiliates; and Kaplan Inc., which provides educational services.
Kaplan, not the newspapers, accounted for a majority of the company’s $4.5 billion in revenues in 2008.
And Kaplan, not the newspapers, accounted for a majority of the company’s 20,000 full-time employees in 2008.
Kaplan’s primacy and the newspapers’ decline is the result of decades worth of diverging choices and performance. In this series, we will open the Washington Post Company’s record vaults at the U.S. Securities and Exchange Commission and take you on an unprecedented investigation of the company’s financial history. We’ll find out what the company was, what it is now and what it could very well be in the future. It is time for the truth to emerge in all its unholy glory!
Tomorrow, we will start with the newspaper.
