Hearst's practices elsewhere hint at strategy in newspaper battle here
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The privately held Times has been forced to reveal secrets ranging from details of internal accounting to its annual dividend payout to Publisher Frank Blethen.
The Hearst Corp., meanwhile, has disclosed little about itself or its intentions for its paper, the Seattle Post-Intelligencer.
That's because much of the information about The Times has come from a lawsuit Hearst filed in April last year to block moves by The Times that could shut down the P-I or end the companies' joint operating agreement (JOA). In such a situation, the legal discovery process focuses more on The Times and less on Hearst, which has doled out scant information about its own operations.
When a Hearst spokesman at New York headquarters was asked recently about the company's long-range plans for the P-I, he provided a prepared answer repeating previous Hearst statements. "Throughout this dispute," it said, "Hearst's goal has been to continue publishing the P-I under the JOA. That is still our goal."
Any other details, the spokesman said, are "confidential," and the company declined to provide interviews with senior executives.
Still, there are plenty of clues to Hearst's strategy for its newspapers, and all appear to point in the same direction: Boost profit by eliminating the competition and controlling the market. That's the pattern that emerges from notes and memos the company has turned over in its Seattle lawsuit, as well as federal and private investigations of its operations in other cities.
In San Antonio, for example, Hearst quietly cut a deal in 1992 to purchase Rupert Murdoch's San Antonio Express-News for $185 million. Three months later, it shut its own paper, the San Antonio Light, firing the Light's 650 employees.
A year later, Hearst boosted the News-Express daily ad rate by 41 percent and its Sunday rate by 50 percent, according to Editor & Publisher Yearbook, an industry publication.
In Houston, Hearst secretly negotiated the $120 million purchase of the Houston Post's assets in late 1994. Without disclosing the Hearst deal, Post owner William Dean Singleton then publicly announced he was conducting a search for a buyer. Six months later, he shut the Post, saying no buyer could be found, and said the paper's assets were being sold to Hearst, which owned the competing Houston Chronicle. Hearst raised the Chronicle's daily and Sunday ad rate the next year by 62 percent, according to E&P.
In San Francisco, Hearst bought the San Francisco Chronicle for $600 million in 2000, then paid a local publisher $66 million to take Hearst's flagship paper, the Examiner, and essentially gut it.
In 2003, E&P said, ad rates at the Chronicle had risen by 11 percent.
Hearst's competitive tactics have touched off several Justice Department investigations into its newspaper operations around the country. So far, none has accused the company of any wrongdoing.
In 2000, a federal judge in San Francisco criticized Hearst's efforts to close the Examiner but said evidence showed the paper was "a failing company" and could be shut under federal antitrust laws.
But last December former distributors for the Houston Chronicle sued the company in state and federal court in Houston, claiming they were pressured to falsely boost circulation figures so Hearst could raise ad rates after it gained a monopoly in the market.
In February, U.S. Rep. James Sensenbrenner, citing a constituent's complaint, asked the Justice Department to investigate whether "the Hearst newspaper chain may have been acquiring other newspapers and shutting them down for anti-competitive reasons."
Sensenbrenner, chairman of the House Judiciary Committee and a Wisconsin Republican, asked the Justice Department attorneys for "any thoughts you might have about whether the use of illicit means to falsely inflate circulation numbers in a one-newspaper town might violate the antitrust laws."
In a statement in response to questions for this story, Hearst said the Justice Department's antitrust division sanctioned its actions and acquisitions in San Antonio, Houston and San Francisco.
The company denied any wrongdoing in the distributors' legal case, calling their allegations "meritless." Hearst also said it was unaware of Sensenbrenner's letter and had not been contacted about any complaints either by the congressman or the Judiciary Committee.
"Hearst does not engage, nor has it ever engaged in such conduct," it said.
The two companies
Hearst is, of course, no stranger to controversy. But the company, now controlled by heirs of the legendary William Randolph Hearst, maintains a determined low profile. When reporters ask questions, Hearst guides them to a flattering, 2-year-old Business Week profile. A spokesman said it is the latest information available.
This much is known: Hearst owns a dozen newspapers, 27 television stations and a host of other media properties. Together, they generate more than $5.2 billion in revenue annually.
Hearst's empire bears some internal similarities to The Times, but on a far larger scale. The Blethen Corp., representing 16 Blethen family members, controls The Times Co., which owns eight newspapers, Web sites, real estate and other properties in Washington and Maine.
The Hearst Family Trust, representing 61 direct Hearst descendents, runs Hearst's worldwide media and real-estate empire. Five Blethens sit on The Times Co.'s board; seven Hearsts sit on Hearst's.
But while the Blethens adopted a hands-on approach to running The Times Co., the Hearsts hired professional managers to run their company.
Victor Ganzi, Hearst's 57-year-old chief executive, is a former tax lawyer who spent a dozen years with Hearst before ascending to the top job. His predecessor, Frank Bennack, ran Hearst for 24 years.
Both Bennack and Ganzi have provided hints about the P-I's future.
During negotiations in 1997 over restructuring the JOA, then-CEO Bennack wrote in a note to Frank Blethen, "All of us are in agreement as to the probabilities here."
Six years later, Bennack, now retired, explained in a deposition that he was referring to the probability that as the JOA's "senior paper" The Times was "more likely than the P-I to survive."
Ganzi offered his own position in a memo to himself in December 2002 after spending a day negotiating with Times executives. The memo, included in documents in Hearst's lawsuit, refers to the P-I as a "failing newspaper — in '81, in '99, and now and future."
In 1999, during JOA negotiations, Hearst insisted that it be given a first right of refusal to buy out the Blethen family's 50.5 percent stake in The Times Co. if the Blethens decided to sell in the next 10 years. For that option, Hearst agreed to pay the Blethens $10 million over the decade.
Neither Hearst nor the Blethens will disclose details of the arrangement, claiming it was a private deal and not part of the JOA. But Times Publisher Blethen has jokingly called the option "selling the sleeves off a vest" and says his family has no intention to sell.
Selling a ghost?
More recently, Hearst's handling of its Seattle paper has been more confusing. Since it filed its lawsuit in April of last year it has:
• Put the P-I up for sale (in August).
• Yanked it off the market (in September) after King County Superior Court Judge Greg Canova ruled in Hearst's favor in its lawsuit.
• Left it as is (in March) when a three-judge state Court of Appeals panel reversed Canova's ruling.
• Warned, in a petition last month to the state Supreme Court to hear its case, that if The Times prevails in the suit, "it spells the death of the P-I."
Hearst's offer to sell the P-I in August also mystified some who saw it.
According to three people who read the confidential prospectus, Hearst was offering a vapor paper — no presses, no delivery trucks, no staff, no circulation list, only a lease on the newspaper's rented office, the P-I name, a chance to renegotiate the paper's union contract and the rotating neon globe on the roof.
"There was really nothing there," says a Seattle attorney who read the document.
Hearst said in a statement that it put the P-I on the market because it had to and that the sale was "a serious offer." It took that action, the company said, after The Times notified Hearst in April last year that, under a JOA accounting formula, The Times had lost about $10 million from 2000 through 2002. The notification triggered a negotiating process, mandated by the JOA contract, which requires the two companies to either close one paper or end the JOA.
Without the JOA, Hearst said, the P-I can't survive because The Times handles printing, distribution, marketing and other business operations for both papers.
For their part, Times officials contend Hearst doesn't want to sell or continue publishing the P-I. What Hearst wants, The Times said, is to use financial losses incurred under the JOA to drain The Times' assets, then force the company to sell its paper to Hearst. Then Hearst would shut the P-I, The Times has said.
Tactics elsewhere
Perhaps the clearest indicator of Hearst's strategic thinking about its papers is its tactics over the past dozen years in the three largest cities where it owns newspapers.
In those cities — San Antonio, Houston and San Francisco — Hearst has focused on getting rid of its competition, not sharing the market as a second paper.
Esther Thorson, associate dean of the University of Missouri's School of Journalism, called Hearst's strategy in Texas and San Francisco a "classic pattern" in the newspaper industry.
"You kill off your competition so you can raise your ad prices," Thorson said.
But few newspaper companies have raised their rates as aggressively as Hearst after gaining control of a market.
In a 1995 study titled "Newspaper Monopolies: Profits and Morality in a Captive Market," Fred Blevens, associate dean of the University of Oklahoma's College of Journalism, cited data showing that newspaper ad rates rise an average of 20 percent to 30 percent after a company takes control of a market.
In an interview, Blevens, who was the San Antonio Light's city editor when Hearst closed the paper, said newspaper acquirers often are willing to pay a "monopoly premium" of two to three times the market value of a paper to get single-paper leverage over advertisers.
Hearst's effort to sell the Light to meet Justice Department antitrust rules was perfunctory, Blevens said.
In his study, Blevens challenged a claim by George Irish, head of Hearst's newspaper division and the Light's former publisher, that Hearst contacted 80 possible buyers but found no takers.
Justice Department documents that Blevens obtained under a Freedom of Information Act request show that a broker hired to contact prospects for the Light made only one serious evaluation of a potential buyer. At the same time, a Hearst attorney sent derogatory newspaper clippings about the prospect to the Justice Department's antitrust division, where he formerly worked, according to Blevens.
When the Newspaper Guild, the union representing newsroom employees at the Light, located a potential buyer willing to keep the Light going in a JOA with the Express-News, Blevens said: "Hearst ... faced with that alternative ... rejected it outright."
Houston deal
In Houston, when Singleton closed the Post in April 1995, Hearst's Houston Chronicle announced it in a way that suggested the shutdown and Hearst's purchase of the Post's assets were simultaneous events.
"Post closes; Hearst buys assets," the Chronicle headline read the day after the Post was shut.
But in internal memos, Justice Department antitrust attorneys who investigated the closing said Hearst struck a deal to buy Singleton's paper six months before it was shut.
The memos, first obtained by the alternative paper the Houston Press, say Hearst and Singleton's Consolidated Newspapers "reached an agreement in October, 1994, for the sale of Houston Post Co.'s assets for approximately $120 million." The memos were obtained independently for this article through a Freedom of Information Act request.
A news release issued by the Justice Department in 1995, when the Post closed, called Singleton's efforts to find a buyer for the paper "extensive and thorough."
In an interview, Singleton said he approached Hearst in 1993 after he concluded the Post could not be profitable. Hearst turned down his offer to combine the two papers in a JOA, as well as a proposal to jointly print the Post and Chronicle outside a JOA.
"I guess they thought they were holding a pretty good poker hand," he said. "Why share profits with me in the market for the next 50 to 100 years if they thought I wasn't going to make it anyway."
Singleton said he hired a broker who shopped the Post to 49 possible buyers — without knowing about the Hearst arrangement.
"The deal with Hearst was contingent on whether we could find another buyer and on Justice Department approval," he said. "We worked our butts off to find someone who would have kept life in the paper."
The only other bidder, A.H. Belo Corp., owner of the Dallas Morning News, withdrew its $70 million offer after a closer inspection of his paper, he said.
Singleton said that when he outlined the chronology of his arrangement with Hearst in a speech to the Houston Chamber of Commerce, the alternative weekly covered the speech, but the Chronicle did not.
San Francisco deal
In San Francisco, where the two papers operated under a JOA, Hearst began taking control of the market in 1999 by proposing to shut its own paper, the Examiner, and buy the larger San Francisco Chronicle for $600 million.
When Justice Department officials demanded Hearst first search for a buyer for the Examiner, Hearst offered the paper without any presses or trucks. Justice Department officials forced a second offer six months later, this time including the trucks and presses.
Hearst threatened head-to-head competition with The Chronicle if the larger paper's owners, the de Young family, wouldn't sell. But Judge Vaughn Walker, who presided over a lawsuit filed in U.S. District Court in San Francisco to challenge the Examiner's shutdown, concluded, "Such threats were merely posturing in business negotiations, not genuine expressions of intent."
Hearst eventually paid a local publisher, the Fang family, $66 million over three years to take the Examiner off its hands so it could buy the Chronicle. The Fangs turned the Examiner into a weekly giveaway, then fired most of the staff when Hearst's three-year subsidy ran out.
The skeletal Examiner was purchased in February by Denver billionaire Philip Anschutz.
Congressman's questions
Questions about Hearst's competitive practices have also been raised by Sensenbrenner, the House Judiciary Committee chairman.
In a Feb. 10 letter to the Justice Department's antitrust division, Sensenbrenner asked federal investigators to look into whether Hearst had used the Newspaper Preservation Act to engage in "allegedly anticompetitive (newspaper) closings." The legislation, passed in 1970, provides immunity to JOAs from most federal antitrust rules.
In a May 19 reply to Sensenbrenner, assistant attorney general William Moschella noted that the antitrust division had investigated Hearst's actions in San Antonio, Houston and San Francisco and determined they met federal requirements.
Moschella said Justice Department attorneys are currently investigating the Seattle JOA "to determine whether any conduct associated with the operation of that agreement raises significant competition concerns under the federal antitrust laws."
"Based on the division's findings," he said, "the department will take whatever steps are necessary to preserve competition in the relevant market."
Moschella also called on Sensenbrenner to supply details of any alleged circulation inflation. A Judiciary Committee spokesman said Friday that Congress was in recess and no action had been scheduled on Moschella's reply.
Lawsuits filed last December in state and federal courts in Houston allege that Hearst pressured independent distributors to inflate the Chronicle's circulation figures in Houston after the Post was shut.
The suits, filed by five former distributors for the Houston Chronicle, contend that, after the Houston Post closed in the late 1990s, Hearst pressured Chronicle distributors to take more papers than they needed.
Hearst then used the distributors' numbers to artificially boost the Chronicle's circulation figures, citing those figures to raise ads rates, the distributors allege.
According to the Editor & Publisher Yearbook, the Houston Chronicle's circulation dropped in 1994 and 1995 before the Post was closed. In 1996, the first year the Chronicle had the Houston market to itself, the paper's circulation rose more than 30 percent, with small gains the subsequent two years.
Steven Halpern, who distributed the Houston Chronicle to about 4,500 subscribers on the city's north side, says that, during that period, Chronicle managers pressed him to accept papers he was not selling.
"When we were playing games,' said Halpern, one of the distributors suing Hearst, "I'd have 400 extra papers on the books."
In fact, Halpern said, the number of Chronicle subscribers in his district dropped after the Post closed, even though the Chronicle's circulation statistics showed an increase.
"We were defying gravity," he said. "There was always a veiled threat that if you wouldn't go along, the next guy would."
According to the distributors' lawsuit, Hearst submitted false circulation figures to the Audit Bureau of Circulations, a trade group that verifies newspaper-circulation figures. The figures were then presented to advertisers to set ad rates, the lawsuit says.
In its written statement, Hearst noted the Texas state court dismissed the distributors' lawsuit "with prejudice," which means it can't be refiled in the court. Hearst said it has also moved for a dismissal of the case in federal court.
Jerry Payne, the distributors' attorney, said the case was dropped by the state court and refiled in a broader form in U.S. District Court because the distributors were independent contractors and ineligible under state law to sue Hearst as their employer.
The federal lawsuit accuses Hearst of violations of federal and state antitrust regulations, including inflation of circulation figures, Payne said.
"Their whole business philosophy is to gain monopolistic power in the various media areas where they operate," he said. "They've been using these techniques for years from San Antonio to Seattle."
July trial for the Houston case is set for summer of 2005.
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