The Only Good Market: A Dead Market

From its very start, the Gannett Co., which is now the nation's largest newspaper chain (with 89 dailies at last count) has been a distinctly American institution. Like the country that drove out native inhabitants coast to coast behind the motto, "The only good Indian is a dead Indian," Gannett has lived by the principle that the only good market is a dead market -- that is, one without competition.The company was founded in 1906, when Frank Gannett bought he Gazette in Elmira, N.Y., for $20,000. "Although the Gazette was profitable and its competitor, the Evening Star, was not, Gannett reasoned that he cold make even more money if there were only one paper in town. So he bought the Star and merged it into his own," according to the business journal Dun's Review. "Working exactly as monopolies are supposed to do, the paper generated so much cash that Gannett decided to use the same strategy in other cities."Thus was born an idea that now rules journalism in America, where 98 percent of cities have no daily competition.For decades, this eminently pragmatic view of newspapering remained a regional one. Under Frank Gannett, the company showed little interest outside the Northeast. When he died in 1957, he owned 21 papers in small cities, most of them in upstate New York. His successor as chairman, Paul Miller, stepped up the acquisitions pace, moving into markets both larger and more distant, as far away as Guam and Honolulu. But like the founder, he avoided competition.In 1967, the company went public, offering its shares on the New York Stock Exchange and thus accepting an incessant demand for profits from shareholders and security analysts, whose concern was not journalism but the bottom line. It was a challenge easily met. In the next decade, under Miller, Gannett grew from 28 papers to 73, and annual revenues rose from $185 million to $558 million. Today, those figures have been dwarfed. Gannett's 89 papers, plus 23 television and radio stations, bring in revenues exceeding $4 billion.The numbers are stunning testimony to the power of monopoly economics, a power summed up succinctly by John Morton, a leading newspaper-industry analyst: "In monopoly situations, newspapers can be a license to print money."Other observers have concurred. "Even at the industry's present level of profitable performance," states one, "Gannett is in another league. While most papers average pre-tax operating profit margins of about 15 percent, Gannett comes in at nearly 30 percent. And Gannett does it in what has become the contemporary formula: by searching our monopoly markets and buying into them. Most Gannett papers operating in markets all to themselves.""With no significant competition to worry about," adds the Los Angeles Times, "a company like Gannett can -- and does -- jack up its circulation and advertising prices almost at will, a practice boasted of openly when speaking to security analysts about what a good, safe investment Gannett stock represents." An admiring broker happily concurs: "Gannett's management lives, breathes and sleeps profits, and would trade profits over Pulitzer Prizes any day."But such priorities have not impressed media critics as easily as they have Wall Street traders. As the Los Angeles Times has put it: "The [Gannett] publishers are, in fact, largely scorned for looking on their papers as 'cash registers' -- for sacrificing quality to profit, for producing newspapers that are too often timid, parochial and mediocre."Time magazine similarly has given faint praise: "The stereotypical Gannett paper has a circulation of 40,000, profit markings that dazzle Wall Street and a reputation for lassitude ... Most exemplify the new blenderized newspaper, which leaves no mark because it has so little sting." And a Columbia University journalism professor once summed up the disdain of many critics by noting that Gannett talks "As if the business of journalism is business and not journalism."Such descriptions did not sit well with Allen Neuharth, who in his trademark sharkskin suit succeeded Miller as chairman in 1978. So he set out to dress up Gannett's image -- but not by diligently raising standards at the dozens of newspapers in the chain. Neuharth had bigger things in mind.A short, energetic man known for his ego, intelligence, combative nature and temper tantrums, Neuharth has flaunted the values that took him and his company to the top. During his era as head of Gannett (from 1978 to 1989 -- he has since then been succeeded by a longtime company man named John Curley), he became the most striking figure in cutthroat, bottom-line journalism. "With Al," said a rival publisher, "you never know where the suit ends and the shark begins."In his 1989 autobiography, "Confessions of an S.O.B.," Neuharth tells with pride how his boyhood opposition kept his widowed and destitute mother from remarrying; how he forced the man who hired him at Gannett, Paul Miller, into an unwanted retirement; how he outmaneuvered a colleague in a business merger by eavesdropping on a telephone conversation; and how he defeated adversaries in numerous business deals, then figured out ways to rub salt in their wounds. He extolled the pleasures of his "first-class life," among them "limousines and drivers at every destination." He did not mention, however, the time when he was so abusive to a chauffeur on the way to a Florida airport that the driver stopped the car, ordered Neuharth out, and left the head of the nation's largest chain hitchhiking to catch his plane.Nor does the book mention Gannett markets such as Salem, Ore., where Neuharth's hand-picked publisher ruthlessly and deliberately destroyed a small weekly competitor, sending reports on the lethal campaign directly to the boss; or Santa Fe, N.M., where under Neuharth's direction Gannett blatantly violated its contractual agreements with an ill and aging man from whom it had bought the local paper; or Hartford, Conn., where Neuharth colluded in an elaborate scheme that brought Gannett a fraud conviction for giving false circulation figures for a failing newspaper it was trying to sell; or of Southern California, where the chain's outdoor advertising division enthusiastically participated for many years in a criminal price-fixing conspiracy.Neuharth's book was largely scorned by reviewers. "Judging by what he relates," said Fortune's, "the man who built Gannett into American's largest newspaper chain is a conniver, backstabber and liar, and executive so utterly without principle and so totally self-absorbed and so self-indulgent he could startle even the most cynical muckraker."When Neuharth rose from president to chairman in 1978, he already had been instrumental in Gannett's meteoric rise. Now he wanted to try something really big. While continuing to add papers to the chain in his early years as top boss, Neuharth was laying plans for his grandest dream: a color-filled new nationwide publication, to be called USA Today. In September 1982, 15 years ago, that dream became reality.With its splashy graphics, lavish use of color, sharply abbreviated articles and emphasis on non-substantive areas such as sports, entertainment and weather, USA Today was praised, ridiculed, debated and imitated from the day it first hit the newsracks. During its short span of existence, no other newspaper has had greater impact on the industry.Most professional observers were underwhelmed in the paper's early days. One of them, noting the high-quality paper on which USA Today was printed, sniffed: "It doesn't rub off on you hands or on your mind." Distinguished media critics Ben Bagdikian sighed: "Unfortunately, the nation's first truly national daily newspaper of general circulation is a mediocre piece of journalism." And the Washington Post added: "Like parents who take their children to a different fast-food restaurant every night and keep the refrigerator stocked with ice cream, USA Today gives its readers only what they want." A permanent nickname resulted: "McPaper."Yet apparently Gannett's brash new creation was indeed giving vast segments of newspaper readers what they wanted. Seven months after its debut, USA Today was distributing more than a million copies a day. Within two years, the only American newspaper with a higher circulation was the Wall Street Journal. Yet behind the big numbers, "The nation's newspaper" became almost at once a huge financial disaster.Though heavy start-up deficits were projected, the actual losses stunned even the country's richest chain. In its first four years, USA Today lost $458 million, and it contented losing at a slower rate for another seven years before showing its first tiny profit in 1993. With staffers "loaded" from other Gannett papers, and with large capital investments in printing plants and other equipment, the full deficit sustained by USA Today easily exceeded $1 billion.At most companies such a hemorrhage of red ink would be fatal. Gannett, however, had an easy answer to its billion-dollar problem: Just jack up the return from all its other papers to cover the shortfall. Throughout USA Today's dark years, the chain managed not only to avoid a decline but also to keep profits, by squeezing its captive markets even harder. And it worked: Since its 1993 breakthrough, USA Today has stayed in the black. Last year it had an operating profit of $39 million on revenues of $464 million, and future projections are ever higher. The initial billion-dollar loss many never be recovered, but USA Today is firmly established as a major national journalistic presence. Along with USA Today, the Neuharth era was marked by the biggest acquisitions in Gannett history. Irked by the criticism that his chain did not practice good journalism, Neuharth decided to go out and buy it. So in the mid-1980s, Gannett paid top dollar for some of the most respected mastheads in America: the Clarion-Ledger and Daily News in Jackson, Miss., the Arkansas Gazette in Little Rock, the Des Moines Register, the Louisville Courier-Journal and Times, and the Detroit News. The total cost was $1.3 billion.It was a price Neuharth was willing to pay for respect, without spending years earning it. All of these papers had Pulitzer Prize heritage; thus Gannett's checkbook enabled him to say in his memoirs: "Lest you wonder, Gannett newspapers have won their share of Pulitzers. Thirty-seven in all. Some before they joined Gannett, some since." By actual count, however, only eight of those 37 prizes were won under Gannett supervision. All the rest were bought.Then, despite Neuharth's boasts, Gannett rapidly began eroding or gutting the quality of its showcase journals. In both Jackson and Louisville, the two papers bought by the chain were merged into one, with sharply reduced space for news. In Little Rock, Gannett lost a furious competitive struggle with a locally owned paper and closed the Gazette, "The Oldest Newspaper West of the Mississippi." In Detroit, the chain engaged in a series of unfair labor practices that a federal judge found to be the cause of a bitter two-year-old strike that is not yet settled and which has undermined the content and the circulation of the once-respected News. And in Des Moines the Register is a shell of its former self.Both Little Rock and Detroit brought vast losses for Gannett. But the monopolies in Jackson, Louisville and Des Moines -- and in more than 80 other cities -- caused profits to rise inexorably, even as proud journalistic heritages died. Nowhere was the Gannett difference more clear than in Des Moines, where in 1985 Gannett had by a wide margin toped other bidders seeking to buy the family-owed Register. "Our investment paid off quickly," Neuharth bragged in his book. "Earnings quadrupled in our first four years of ownership." Says Charles Edwards, a member of the Cowles family who remained: "If my grandfather had known these newspapers could make this much money, he never would have died."At $165 million, Gannett's sealed bid in Des Moines was $35 million higher than the next offer. Later, one of the losing bidders was asked if Gannett had overpaid. Not at all, he replied. But how could he think that, considering the huge difference? "Simple," he said. "Gannett is prepared to do things we won't do to make money."SIDEBAR:In virtually all the 89 American cities where the huge Gannett Company operates newspapers, it does so without daily competition for the all-important advertising dollar. In a monopoly or near-monopoly, Gannett can drive up its rates at will -- the formula that made it the nation's richest chain.In a word, Gannett despises competition -- even from strong alternative weeklies -- and has taken ruthless measures to eliminate whoever gets in the way of its profit plans. Normally the tactics used by Gannett to crush competitors are ferociously kept secret by the chain. Even when sued on antitrust charges, which has happened repeatedly, Gannett gets court orders to seal the evidence, to protect its "trade secrets." Yet in one dramatic case, those secrets got out.Over a two-year period, from 1976 to 1978, Gannett ran an annihilation campaign that destroyed the Community Press, a once-thriving weekly in Salem, Ore. The defunct paper sued, and a thick file of documents, testimony and other evidence accumulated in the federal courthouse in nearby Portland. As usual, Gannett had a gag order placed on the file. But when I -- as a Gannett competitor in Santa Fe, N.M., trying to save my weekly from a similar fate -- went to the court and asked to see the file, I got an astonishing response. Instead of saying it was locked away, a careless clerk handed it to me.For the next three days I copied down verbatim the contents of the file, which spelled out in detail just how the biggest chain operates when it goes in for the kill.According to the file, Salem's weekly paper was driven out of business by a program called "Operation Demolition," which called its attack agents "The Dobermans." In a memo to headquarters, Gannett's Salem publisher made his intentions clear: "Our Goal is to fatally cripple the Community Press."The successful tactics he used were many:*Free advertising for merchants who dropped the weekly.*Expense-paid vacations for advertisers who stopped using the weekly.*Questionable "associations" giving cut-rate deals to advertisers who stopped using the weekly.*Threats to stop doing business with companies that advertised in the weekly.*Bonuses paid to the "Dobermans" for spreading false rumors that the Community Press was in financial trouble.*Targeted campaigns to drive small, local "meat and potatoes" advertisers out of the weekly.*Threats to not accept the advertising of business that also used the weekly.*Visits to distant chain-store headquarters to suggest that local managers had been bribed to use the weekly.And finally, when the Community Press was about to fold:*Threats to not take back the advertising of merchants who did not drop the weekly immediately.The annihilation campaign worked, and the Community Press was "demolished" just as planned. But clearly Gannett did not plan on a quick antitrust suit, which subpoenaed records of the campaign before they could be destroyed. Nor did Gannett plan on a reporter accidentally getting into the secret file and revealing the chain's methods of execution.Before leaving Oregon, I asked the advertising manager of the defunct Community Press what he thought Gannett had learned from Salem. Was it possible that the lawsuit there (which ultimately led to a multimillion-dollar payment to the weekly) had taught Gannett to play clean in the future?No, he sadly said. "What they learned in Salem is this: Do what you did before, but don't document it next time."Richard McCord, a 25-year veteran journalist, is the author of "The Chain Gang: One Newspaper Versus the Gannett Empire," a harsh critique of the nation's largest newspaper company. Published in 1996 by the University of Missouri Press, the book currently is in its fourth printing.

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