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Patching The Cracks In The House That Al Built


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PATCHING THE CRACKS IN THE HOUSE THAT AL BUILT

Maybe it was expecting too much. When Allen H. Neuharth retired two years ago, the voluble chairman of Gannett Co. said he wouldn't publicly second-guess his hand-picked successor, John J. Curley. Indeed, in a recent interview, he vowed to stick only to "statements of fact."

So what does Al Neuharth think of Gannett now? In one such "statement of fact," Neuharth notes he "led Gannett through five recessions with 88 consecutive quarters of record profits." Hanging in the air is a pointed comparison: Under Curley, earnings at the nation's largest newspaper chain dropped 5.2% in 1990, to $377 million, on revenues of $3.4 billion. And analysts predict they'll tumble an additional 20% this year (chart).

Curley brushes off Neuharth's comments with a curt: "That's Al." It's no wonder that Curley rarely calls his onetime mentor these days. Not only is he battling the worst advertising downturn in two decades, but the former newspaper editor is also struggling to untangle much of Neuharth's handiwork.

'SOLID GROUND.' Neuharth earned his 88 quarters of growth with a simple strategy. Gannett snapped up newspapers in small monopoly markets and then wrung additional profits out of them through cost-cutting. In flush times, the strategy worked marvelously, enabling Neuharth to transform Gannett from a sleepy chain of small-market papers into a $3 billion media powerhouse.

But when the supply of independent papers began drying up, Neuharth changed his game plan. In 1982, he launched his national newspaper, USA Today. In the mid-1980s, he acquired papers in larger, fiercely competitive markets such as Little Rock and Detroit. And he dabbled in TV programming by bankrolling a joint venture with producer Grant Tinker. Few of the new ventures fared well (table). USA Today continues to bleed. And Gannett recently sold off the Arkansas Gazette after it was trounced by a crosstown rival.

Now, Curley has a daunting task: He must figure out how to jump-start Gannett's growth in an industry that's losing readers and advertisers to rival media. The trouble is, Gannett seems unable to wean itself from newspapers.

That may have something to do with the CEO's ink-stained pedigree: The 53-year-old Curley was publisher of a Gannett paper in Bridgewater, N. J., before he was picked by Neuharth to be the first editor of USA Today. With his rolled-up shirtsleeves, he looks like a harried city desk editor -- a stark contrast to Neuharth's glitzy image. Curley insists newspapers provide "good solid ground" for faster growth.

But some media experts give him a less-than-even chance: "Gannett is not going to be capable of the growth you'll see from other media companies," says Robert Picard, editor of the Journal of Media Economics. Gannett's return on equity remains one of the highest in the industry. But Susan L. Decker, an analyst at Donaldson, Lufkin & Jenrette Securities Corp., expects the company to boost its earnings by a total of only 15% over the next three years -- half the projected average for 12 publicly traded newspaper companies.

TENTATIVE SHOPPER. Gannett's critics say the company is handicapped because it passed up opportunities to diversify into less ad-dependent media, such as cable TV or business information services. Gannett now draws 80% of its revenue from newspapers, compared with 57% at Times Mirror Co. and 71% at Tribune Co. And the other businesses it did push into -- billboard advertising and broadcast television -- have hardly insulated Gannett from the ad slump. Analysts figure that Gannett's billboard earnings will drop 33.3% in 1991, while its broadcast earnings will drop 15.9%.

True, new ventures such as business information services haven't proved a gold mine for newspaper chains, as Dow Jones & Co.'s troubles with its Telerate Inc. subsidiary attest. Neuharth defends his strategy, saying Gannett made shrewder investments in papers than it would have in any other media. With Gannett, he may have a point: What moves the company has made to diversify have been tentative or ill-conceived.

Take its foray into the yellow pages business. Gannett told media analysts its first effort to distribute a yellow pages directory, in Brevard County, Fla., would in time turn a pretax profit margin of 25%. Eighteen months later, Gannett sales reps have told some advertisers that the venture is losing as much as $50,000 a month.

And even some of its newspaper acquisitions have been troubled -- especially where Gannett tried to break into competitive and close-knit markets where it had no strong local connections. The Arkansas Gazette is a woeful case in point: Despite Gannett's greater financial muscle, Walter E. Hussman Jr., publisher of the rival Arkansas Democrat, used his local ties to persuade Little Rock advertisers to support his paper. Gannett sold out to Hussman in October after losing an estimated $100 million in a five-year battle. Says Curley: "It's a market we shouldn't have gone into in the beginning."

The company also seems to have miscalculated in Detroit. In 1989, Gannett tried to end a bloody war between its Detroit News and Knight-Ridder Inc.'s Detroit Free Press by signing a joint operating agreement to share business and production tasks. The two companies were also to divvy up the profits, projected at $100 million annually. But the papers angered advertisers by hiking rates. And by dropping its morning edition as part of the deal, the News lost 35% of its 689,000 subscribers, while the Free Press lost just 4%. Both will probably lose $5 million this year.

Then there's USA Today, which is looking more and more like a costly relic of the Neuharth era. The paper has racked up aftertax losses of more than $350 million in its nine-year run. It has yet to turn its first annual profit and will lose $18 million this year. Publisher Thomas Curley, John's younger brother, points out that circulation is now 1.8 million and still growing. And he predicts McPaper will break into the black in 1992, thanks partly to ads for the Olympic Games and political campaigns. But some media analysts believe USA Today may be condemned to marginal profitability for years to come because the huge fixed cost of the paper's national distribution limits Gannett's ability to squeeze much savings out of it.

NEWS 2000. If the legacy of Neuharth's ambition isn't enough, John Curley must also deal with Neuharth himself. Since 1989, Neuharth has been lobbing grenades from his perch atop the Freedom Forum, a nonprofit organization once called the Gannett Foundation. Last year, he threatened to sell the foundation's 10% stake in Gannett, claiming its 3% dividend was inadequate to a nonprofit. Rather than risk having Gannett put into play, Curley grudgingly paid $670 million to buy back the shares. As part of the deal, Neuharth dropped the name and ties to Gannett.

In other ways, Curley is finally putting his own imprint on the company. Earlier this year, he unveiled a program called News 2000, which uses market research to influence the content of Gannett papers. He is also encouraging publishers to innovate: The Reno Gazette-Journal, for example, is rewarding frequent readers with cards that offer them discounts at area merchants. In nine months, the paper reduced subscriber turnover from an annual rate of 62% to 48%. Curley also says he is spending more than $40 million this year to develop new ventures, such as a weekly baseball tabloid and a radio news service for airline travelers, both of which use the USA Today name.

But there's no doubt Curley's heart remains in newspapers. Indeed, with prices for media properties dropping, one Gannett executive even hints the company may start buying again. But given the industry's and Gannett's woes, Neuharth's newspaper-gobbling strategy may have retired with him.

CURLEY BATTLES NEUARTH'S LEGACY...

Several of the former chairman's new ventures and acquisitions have cost

Gannett since his departure

USA TODAY Has run up aftertax losses of $350 million since 1982. Losses this

year will total $18 million

GTG ENTERTAINMENT Joint TV-show venture with Grant Tinker lost $59 million

before Gannett pulled out in 1989

ARKANSAS GAZETTE Little Rock daily was sold to archrival Arkansas

Democrat after $100 million in operating losses

DETROIT NEWS May lose up to $5 million in third year of joint operating

agreement with rival Detroit Free PressDean Foust in Arlington, Va.


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