by Adam Hartung | May 21, 2007 | General, In the Rapids, Leadership, Openness
In January of this year I blogged about the White Space prevalent in the highly Disruptive Virgin culture. Sir Richard Branson has built an empire from small beginnings by constantly Disrupting his organization and creating White Space. Many high paying jobs have been created, and lots of money made for investors, due to this Phoenix Principle culture.
But there can be a definite downside if a Phoenix Principle culture is not managed well. Disruptions and White Space can be opportunities to overspend, and overinvest, leading to losses and failure. White Space is not child’s play. It is where new Success Formulas are formed via the crucible of competition. It is critical that managers in these environments have their "feet held to the fire" to produce results. Otherwise, cash flow is negative and profits never materialize. That’s bad news.
All businesses need a mix of Explorers and Stabilizers. Explorers usually become in short supply in Locked-in cultures, because optimization of the old Success Formula says that these kinds of managers are unnecessary. So Locked-in companies have to recruit Explorers to identify and create Disruptions, and then to have the skills for managing the creation of a new Success Formula.
White Space companies, and projects, need Stabilizers as well. Activities need to be disciplined and directed toward managing for cash flow and profit in the Rapids. As we saw all too well in the 1990s internet boom, too many Explorers make short shrift of these requirements, and their businesses simply flame out.
And that risk is now at Virgin Media. Using clever planning and intense hard work, Virgin Media has built itself into a large and powerful company that delivers mobile phone service, land-line service, internet service and satellite television service across Europe and other parts of the world. The company has made several growth-oriented acquisitions in the process, and those acquisitions have saddled the company with a huge debt load (see article here). This is big trouble for a business in the media game, because assets are not long-lived. So the debt payments go on after the technology needs to change – sucking up cash that should be used for changes and growth. Virgin Media is now losing money, and forced to make debt payments, while its primary competitors (the Murdoch-controlled Sky and British Telecom) are in far healthier financial shape. This is a risky situation, that may require someone buy out Virgin Media or it risks a precipitous decline that will be bad for Virgin as well as its investors, suppliers, employees and customers.
In the headlong rush to grow at Virgin Media, the managers may have been short a sufficient number of Stabilizers. The Explorers, which are sure to be popular in the Virgin culture, have been allowed to push the company growth. But now the entire Virgin Media organization is at risk. If there had been a more balanced management, with more Stabilizers, it is very likely the company would be in better financial shape and more competitive.
Everyone loves a party. And we all want to have a good time. But, if someone gets drunk the party can come to a crashing, unpleasant end. White Space can not be run like a party. It is a business. And if there aren’t Stabilizers around to control the consumption of resources, then the White Space business can find itself crashing.
by Adam Hartung | May 12, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
On May 5 the rumor hit the newspapers that Microsoft was considering buying Yahoo (see article here). Both companies insisted this rumor was unfounded. Then, on May 10 it was reported that Microsoft bought a 4% stake in CareerBuilder (see article here), competitor of Monster and Yahoo! HotJobs, for an undisclosed sum. These reports drive home the differing viewpoints between investors, who want White Space to drive value, and management, that wants to Defend & Extend the past.
Microsoft built its empire upon a Success Formula as a near monopoly. Systematically and effectively Microsoft first dominated the market for small computer operating systems with MS-DOS. They leveraged that knowledge and kept the company in the Rapids with the hugely successful Windows operating system. Then they overwhelmed all competitors making their suite of personal automation products (Word, Excel and Powerpoint supported with the Access database and a slew of supporting free products such as Internet Explorer and Outlook) a near monopoly as well. This Success Formula of building a totally dominant position in software products for PCs now dominates all decision-making.
Unfortunately, the market for personal computers no longer has the high growth rate it once did. Customers don’t feel compelled to purchase upgrades, as the recently released Vista has shown. Instead, they are doing more with other tools such as PDAs, mobile phones and even MP3 players. Additionally, the growth in PC usage has turned much more to internet environments such as search and entertainment (such as Google and YouTube) rather than the PC as a personal productivity tool. But Microsoft’s Lock-in to their old Success Formula has kept them out of these new markets.
Investors look at the slower growth and huge cash pool at Microsoft and long for the company to find new White Space. Yahoo! would be large enough and in a market with enough growth to actually represent an opportunity for Microsoft to move from its low-growth Swamp back into the high-growth Rapids. So investors are pushing the company to make moves to create and fund White Space to drive future value enhancement.
But Microsoft is so Locked-in it shows no inclination to take such a move. Dabbling into a segment such as career tools keeps the investment very low. Four percent of CareerBuilder in no way Challenges the Lock-in, and does not offer an opportunity to create a new Success Formula. By making this investment Microsoft tells investors "we have no intention of addressing new Market Challenges. We intend to remain Locked-in and hope Vista will someday give us the kind of growth we used to obtain from such new releases."
Investors will remain disappointed with Microsoft. But management, which is insulated from external investors by the large holdings of Bill Gates and its extremely large market capitalization, can ignore this disappointment. And by overlooking the White Space opportunities in favor of near meaningless small investments management signals investors the company has no intention of doing anything different any time soon.
Which should make the executives at Google extremely happy!
by Adam Hartung | May 7, 2007 | General, In the Swamp, Leadership, Lock-in
Eddie Lampert has finished yet another year at the helm of Sears Holdings. And during that time he’s proven he can cut costs. He hasn’t proven he can make money – even by selling assets. The stock remains highly priced largely on the belief he’s building a war chest to do great hedge fund deals, but so far he’s not demonstrated Sears and KMart give him the resources to pull that off. Instead of looking like Warren Buffet, his idle who turned a worn out textile company named into Berkshire Hathaway into a tremendous investment vehicle, Mr. Lampert looks more like the captain of the Titanic who kept up reassurances until imminent peril took down the ship.
Mr. Lampert was once a banker, and he’s never one to ignore the opportunities for financial machinations. Sears most recent quarterly financials show a profit. But all of that was engineered from one-time items like dividends from Sears Mexico and gains off a legal settlement with Sears Canada (see article here). Meanwhile, sales at stores open a year turned out another decline – this time of nearly 5%. Quarter by quarter Sears stores keep selling less and less. And more stores are closed. And the cash current is getting thinner and thinner.
Mr. Lampert closed the investor relations department. So to know what’s going on is opaque, to say the least. At the recent annual meeting he declared that his plan is to rebuild the Sears and KMart brands (see article here). After practically killing the previous ad budget, he intends to start new ad campaigns (although the budgets were not revealed.) His plan, or should I say hope, is that by "positioning" Sears and KMart he can improve performance. Yet, he’s said nothing about why WalMart, Target, Kohl’s, JCPenney, Loews and Home Depot would roll over and let him start eating into their market shares.
Mr. Lampert would like to make some acquisitions. But the problem is that 2007 is not 1977. Mr. Buffet started Berkshire Hathaway when the world of deal-making was still pretty small. There weren’t dozens of multi-billion dollar hedge funds with ample resources chasing every imaginable deal. Bershire Hathaway was able to pick and choose its deals, using very conservative financial analysis when valuing investments. Today, only the most aggressive investors become buyers, and that means paying a pretty price for those acquisitions. So Sears Holdings can’t generate enough cash to play into the huge deals, and the competition is so intense on smaller deals that none can be had. Mr. Lampert is reluctantly being drug into trying to keep Sears and KMart alive, but he has no idea how to do that.
Sears and KMart were companies in trouble when purchased by Mr. Lampert. But he never Disrupted them. He never set up White Space. Instead, he tried to milk them of their cash in order to buy other companies, and he’s proven he can’t do that well. So he keeps trying to string along the company another quarter, but meanwhile competitors are pounding away at the weaknesses of a company with no viable value proposition. And as a result, Sears Holdings drifts closer toward the Whirlpool.
by Adam Hartung | Apr 26, 2007 | Disruptions, In the Rapids, Leadership, Openness
Lately I’ve been pretty hard on companies in this blog, so today I’m taking time to highlight two examples of companies following The Phoenix Principle on the road to long-term evergreen success.
Firstly is Motorola (see chart here). As previously blogged, Motorola is under attack by corporate raider Carl Icahn who would like to borrow a lot of money and pay it, as well as existing cash, out in a special dividend to investors. In other words, do to Motorola what Sam Zell is doing to Tribune Company. In the face of this effort, Motorola announced Tuesday it is buying Terayon Communications Systems to gain more capability (specifically software for delivering video) to it’s television set-top box business (see article here). Keep in mind, in 2009 the television system switches from analog to digital and the demand for set-top boxes to go with all the existing analog TVs is sure to grow – possibly exponentially. This acquisition is a great example of continuing to fund the White Space in a market that is in the early stages of the Rapids. Now that’s a great use of corporate cash – and will provide a real return to Motorola investors. If Motorola leadership and investors can keep the shark away.
Secondly is J.P. Morgan Chase (see chart here.) J.P. Morgan Chase is run by Jamie Dimon. Mr. Dimon is a very colorful character well known for short patience. When Jack Welch institutionalized White Space he was nicknamed Neutron Jack. Mr. Dimon may someday get a similar monicker for his willingness to Disrupt his own people and organization. And this week J.P. Morgan announced the acquisition of technology company Xign (see article here). Xign has been a pioneering company in developing the e-payments system for automated commercial (or busineess-to-business) transactions. This is projected to become a $1.7 billion market by 2010, even though you may never have heard of Dynamic Discount Management (DDM for short). Here we see a Disruptive leader investing in a new business opportunity at the front end of very high growth – exactly the kind of White Space that should excite investors. Compare this with the actions taken by J.P. Morgan’s primary competitor – Citigroup – last week when they laid off 5% of their work force and starting shutting offices and centralizing decision-making in order to protect their faltering old Success Formula.
Far too many leaders use Defend & Extend Management and kill the growth of their company. They manage for protection of the old Success Formula and wipe out all capabilities to Disrupt. They refuse to invest in White Space in favor of trying to prop up the old Success Formula. But there are reasons to be optimistic. There are companies using The Phoenix Principle and positioning themselves to migrate their Success Formulas forward to meet new Market Challenges. You just have to keep your eyes open and look.
by Adam Hartung | Apr 25, 2007 | Defend & Extend, General, Leadership
I have spoken in this blog about Financial Machinations. These are actions taken by management to manipulate the financial results in order to make the Success Formula look better than it really is. In short, financial accounting provides so much flexibility for how to “book” things that it is possible for any business leader to manipulate revenues, expenses and assets from quarter to quarter without breaking any rules (auditors will approve the changes) or laws. Beyond these accounting manipulations, there also exists manipulation of the company growth rate and earnings per share by simply reporting quarter to quarter numbers without highlighting critical adjustments – such as an acquisition that inflates revenue or a stock buyback that reduces the number of shares.
IBM (see chart here) gives us an example this week. While IBM is a great company with a rich history and actually quite a bit of White Space, this week the company announced it will use classical financial machinations in an effort to protect its Success Formula (see article here). Shareholders benefit when companies pay dividends, or when the share price goes up. IBM announced it was going to borrow money in order to buy back shares. This means that without any change (better or worse) in the company’s ability to address market Challenges the earnings per share can be manipulated by leadership simply by deciding to buy additional shares – using borrowed money (in other words, without affecting operating cash flow).
This is a warning sign. When companies do well, management does not need to manipulate financial results. The only reason to undertake such an action is to protect the existing Success Formula. In IBM’s case the company’s most recent earnings announcement (last week) saw earnings increase in North America only 1%. Even Gartner (the notable analysts that cover technology companies) showed concern over these results stating “There are mixed signals about how much businesses are prepared to lay out for new technology initiatives.” (see article here)
IBM is not alone. In the last year such notable companies as Microsoft, Hewlett Packard and Motorola have all undertaken similar actions to increasing a pond of funds for buying back shares in order to manipulate earnings per share and stock price. In the last year, stock buybacks doubled increases in dividends. And the S&P 500 spent more on share buybacks ($432billion) than the U.S. government spent on Medicare (see Chicago Tribune source article here.)
In these days of financial transparency, augmented by the internet, such manipulations are unnecessary. They indicate companies that are interested in Defending & Extending their Success Formulas. Phoenix Principle companies are focused upon market Challenges and addressing them with White Space to remain evergreen.
by Adam Hartung | Apr 24, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
When you can predict behavior in business it is the first step to taking competitive advantage. When you can predict competitors, you know what to do to beat them. And you can take steps as an investor, employee, supplier or customer to decide how you’ll interact with them in your own best interest.
I blogged several days ago that the buyout of Tribune Company would force them to continue taking actions operate their Success Formula More, Better, Faster, Cheaper rather than addressing changing market factors. Even though it is certain this behavior will continue to hurt performance because that Success Formula is woefully out of date and not meeting market needs in world where news travels via the web. The debt load alone would create that Lock-in since it dramatically limits options. Further, the leaders last year were manipulating results (all very legal I’m sure) in order to maximize their bonuses and mask bad business performance.
What have we seen this week? On Friday the Chicago Tribune reported (see article here) that the company cash flow was off 12%. Of course! The leadership did everything possible to goose up cash flow at the end of the last year in order to maximize bonuses and attract a buyer for the company. It was easy to predict that cash flow would decline, and results would lag peers even in the struggling media industry. Then today Tribune Company announced it is cutting jobs across all its properties (see article here.) Of course, it has to cut costs to protect the old Success Formula. (When what the leadership needs to do is invest in internet projects to transform the company.)
Tribune once made a lot of money. Then the market changed as people moved from newspapers to the internet. But Tribune company did not adjust to that market change nearly rapidly or powerfullly enough. The company tried to tweak it’s Success Formula with cost cutting exercises while hoping the business would return to its prior state. Now, it’s More Of The Same while management keeps hoping that the past will return. But it won’t happen. And things will keep getting worse as cost cuts lead to further problems with the paper and fewer readers and fewer advertisers leading to more cost cuts – a vicious cycle. The business needs to change remarkably toward the internet – but now leadership and ownership is so Locked-in to the old Success Formula they can’t. They’ve refused to Disrupt and there is no White Space. And so Tribune Company is becoming very predictable. That’s bad for the employees, suppliers and new debt-holders. Good for competitors.
by Adam Hartung | Apr 11, 2007 | Defend & Extend, In the Swamp, Leadership, Lifecycle, Lock-in
Today Citigroup announced it intends to dramatically overhaul operations (see stock chart here). The company will cut 17,000 jobs as it strives to remove $1.2B in expenses. Citigroup says it is doing this in order to grow. Huh?
Setting the stage: Citigroup is the country’s largest financial institution. Until the last few years when oil prices drove up profit for oil companies, Citigroup was the most profitable company in the world. But the last few years it’s profit growth has not kept pace with competitors such as J.P. Morgan and Bank of America (see full article here). Several stock analysts have charged Citigroup with not keeping up its competitiveness, despite pioneering much of what is most successful in the industry today. Expenses have risen at a 9% clip, which has been faster than revenue at 6%. Quotes from Jim Huquet at money manager at Great Companies reflect the consensus view, "They are moving in the wrong direction, and probably going to end up trailing chief rivals…Our concern is that the company really doesn’t have a good sense of where it’s heading..they need someone in charge with a bigger vision…[asset management] is a very profitable.. it provides ocmplexities to management…key rivals have been able to work through those issues…They talk about cost-cutting and stratetgic planning as if they’re coming up with some huge revelations…well-managed businesses do that just like breathing…managing costs and growing revenue aren’t luxuries."
The key player is Chief Executive Charles Prince. Mr. Prince is a a lawyer, and when he was appointed many people thought his background appropriate for dealing with compliance issues that became very important after 9/11/01 and passage of both the Patriot Act and Sarbanes-Oxley. But now, Citigroup is facing a serious Market Challenge. Its competitors have begun copying several of its successful businesses and products, and applying their own innovations to operate those businesses more profitably. Citigroup needs to adjust to these changing industry forces that have impinged its profits. Citigroup needs to revitalize the innovation that has been a cornerstone of its long-term success.
What did Mr. Prince and Citigroup do? Like I said above, announced a 17,000 person layoff. That’s about 5% of the workforce (across the board, of course.) Citigroup will ship a lot of this work offshore – with Poland an apparent beneficiary (see article here.) They also intend to centralize purchasing supplies and services. Now remember, Citigroup isn’t making physical product where purchasing is central to manufacturing. We’re literally talking about buying paperclips, staplers and computer programmers. Nonetheless, centralization is a core plank of the plan as they hope to move global purchasing from 65% of spending to 80% by year-end and 100% by end of 2009. Let’s see, this is the CEO of a DJIA company taking on a significant market Challenge by focusing on how the company buys supplies!?! The COO said "That’s the kind of philosophical change we’re looking at enforcing throughout the company." (see full article here.)
Today, financial services is a digital business. The work is all bits and bytes for traders and lenders, and digital documents for borrowers and lenders. So, naturally, Citigroup is cutting $375million in technology this year and about $550million additionally each year through 2009. The company is closing 40 Smith Barney offices and, according to the COO "closing down facilities where we have excess space, closing down some small businesses that we have been in for a long time….Because of the way we were structured internationally, there was a lot of duplication between global product capabilities and capabilities at a sector level and then in a regio an dthen in a country..we were able to take out a lot of those duplicate capabilities." I’m reminded of Ralph Waldo Emerson’s famous line "needless consistency is the hobgoblin of small minds."
Citigroup has not hit a growth stall, but it has been impacted by rising competition. The company is at an important junction. It needs to deal with serious marketplace Challenges being wrought by well-funded, smart and large competitors. And, it is taking action to Lock-in its old Success Formula! Rather than dealing with the market Challenge the top brass is focusing on The Problem (the earnings). Instead of addressing the lack of performance in White Space projects, they are cutting costs and killing off these projects. Citigroup isn’t using innovation to deal with the market and get back on track – the leadership is slashing costs to short-term beef up profits and in the process Locking-in even further the Success Formula which has recently seen weaker results. They aren’t stepping up to maintain their position as global leader, but instead falling back into Defend & Extend management in hopes they can recapture old profit rates.
Of course, this plan completely ignores the competition. While Citigroup is busy with cost cuts, BofA and JPM will keep marching forward with their customer acquisition and new product programs. BofA and JPM will continue to push to lower their costs, greatly nullifying the supposed benefits of Citigroup’s efforts. In fact Joseph Dickerson of Atlantic Equities believes BofA is likely to hire many of the Citigroup ousted folks to staff its rapidly growing European expansion! While Citigroup is looking in the rear view mirror and trying to catch past results by whacking away at its old Success Formula, Jamie Dimon at JPM is whacking away at their customer base while matching their cost model – and then some.
Turning to Defend & Extend Management practices is absolutely the wrong thing for Citigroup to do. The company isn’t in dire straits. It’s not facing bankruptcy or being attacked like GM. But Citigroup did take its eye of the marketplace while focusing on the compliance matters (by the way, everyone in the industry had to step up to the same compliance issues Citigroup faced). This has allowed a re-invention gap to develop. Instead of turning back to the marketplace with White Space projects, many of which already exist, to rebuild the Success Formula for better results the CEO and COO are turning inward, and slashing costs to Defend & Extend the problematic business. After this enormous write-off we may see a few quarters of improved results (or maybe not), but long-term this is definitely not a good move for shareholders, bondholders and employees.
by Adam Hartung | Apr 8, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
March auto results came out last week. (See article here)
Toyota sold 12% more than a year ago. Honda’s U.S. sales rose 11%. Nissan’s rose 8%. Hyundai and Kia also posted increases. GM sales fell 4%. Ford sales fell 9%. Chrysler sales fell 5%.
What’s interesting is the comments made by the U.S. manufacturers. GM said sales were off because of "planned reductions in sales to rental fleets." Ford said they also suffered from declining rental fleet sales, but they are dependent upon big-vehicle (SUV and truck) sales and the F-Series saw a 15 percent sales decline. And, of course, last year saw record sales for these vehicles so this month should be ignored. They also seemed to miss that sales of Toyota’s full-size truck sales quadrupled (that’s 4x) in the month.
Defend & Extend management reacts to problems by pretending the problems don’t exist, or saying that there’s an explanation indicating the problem isn’t real. Avoiding the problem is a common reaction to problems for D&E managers.
GM, Ford and Chrysler are loaded with D&E managers more intent upon prolonging the Success Fomulas than dealing with the market Challenges. Meanwhile, Toyota, Honda, Nissan, Hyundai and Kia are selling more cars. When a Success Formula no longer produces positive results it needs to change. But Defend & Extend managers are unwilling to admit it. And until they do, it makes competing much easier for the small market players.
by Adam Hartung | Apr 8, 2007 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
There are lots of ways to Lock-in a Success Formula, and one of the best is compensation. If the Board of Directors, or management, wants to make sure that Defend & Extend management flourishes, all it has to do is compensate people to do what they’ve always done.
We’ve seen this tactic executed well at the Tribune Company (see chart here). As I’ve blogged recently, Tribune has done nothing for shareholders for years (check the chart if you have any doubt). And now it’s moving forward on a leveraged buy-out that’s sure to leave it no cash for any new initiatives, despite incredibly fierce market Challenges from new internet players. As was recently stated by the soon-to-be Chairman Sam Zell, he doesn’t even care of if cash flow goes up, he just doesn’t want it to go down (see full quote here.) Well, he can hope for that unlikely outcome – but it’s not the point of this blog.
Rather, this blog is about the compensation for the senior team at the Tribune. According to the Chicago Tribune newspaper (see article here), top management is being rewarded very healthily for this deal. The Chairman is getting not only his $1M salary, but a bonus almost 5x his previous. And, he’s getting big guarantees of future pay and bonus for 3 years. Most of the management team will, in fact, get huge severance payments no matter how the future turns out for the business.
Tribune Chairman FitzSimmons is a lawyer by training. So what did his personal Success Formula tell him to do when the market shifted and the internet started driving down revenues and profits? Instead of trying to fix the business, he opted to sell it! For a lawyer, a legal solution seems lots better than a business one. And, to make sure he got everyone on board to do a deal, he tied compensation to creating one. As the article points out, for the last year his bonus was largely tied to increasing cash flow – not to finding new revenue sources, or finding new advertisers, or developing a strategy to compete. No, it was tied to generating cash. So, he and his team kept up the pressure to CUT COSTS. And through that, he pumped up the cash flow in order to make an acquisition more palatable and find a buyer. The compensation wasn’t tied to dealing with market needs, but rather to Defending & Extending the broken Success Formula, and finding a buyer to take it over.
Now we can look to the future. The vey top management of Tribune will share in approximately $650million of bonuses if the company can pay off the $13billion of debt the company will hold post-transaction (see article here). Once again, compensation wll drive the Lock-in to doing nothing new, and instead continue the cost cutting to D&E the failing Success Formula.
Suppliers, shareholders, bondholders and the consumers of newspapers in Chicago, L.A. and elsewhere will all suffer as the Tribune continues to be raided for more cash to dig out of this new debt avalanche. But the people who made the decisions are getting hefty sums. And it just goes to show the power of compensation as Lock-in. No risk was taken of possibly saving the business – only cutting costs from a horribly broken Success Formula. Good luck Mr. Zell. And to all of us who have depended on the Tribune Company.
by Adam Hartung | Apr 4, 2007 | Disruptions, General, In the Swamp, Leadership, Lock-in
The Chicago Tribune on-line published an interview with new owner Sam Zell. You can see full article here, but parts are worth repeating:
Q: How do you get your information? Do you read newspapers? Do you read online?
Zell: I’ve never read online. I don’t have a Blackberry. I read five newspapers a day, Chicago Tribune, Wall Street Journal, New York Times, LA Times, Financial Times. And I read everything. I read Forbes, Fortune, Business Week.
The new leader of a business who’s very viability is threatened by a new technology does not use it. And we’re to expect he’s prepared for the Market Challenge facing Tribune?
Q: Is it OK for a (top) manager to say, ‘I don’t want to do what you want me to do?’
Zell: No. He has the opportunity. He has the job. Whatever the terms of the job are, he has to live by them. All I can tell you is that, I am your boss and I tell you to do something that is not unethical, but is in line with some big corporate program or directive or philosophy, you’ve got a choice. You can play or you can go work for somebody else…Everybody’s entitled to an opinion. But once you’ve chosen to work with somebody and the lines of the story are clear, I don’t know how you could operate a business if you lay out a strategic plan and then have 20,000 people opt out.
Does this sound like a leader prepared to use White Space in order to find a solution to the thorny market Challenges which have led the Tribune into a 5 year slide?
Q: In the newspaper business, raising revenue means either raising advertising rates or raising circulation or a combination of both. At first blush, which of those makes more sense. How do you do that?
Zell: This is for sure an amateur guess at this point. But I would think the biggest single issue is circulation and circulation penetration. And I think the issue is what if, how do we do this, what’s our cpm? And how can we lower that cpm to make us more competitive with other forms of media. Those are the kinds of questions that I think are relevant. I think the answer is probably we have to find ways to increase circulation and to increase penetration.
Let’s see, the biggest issue is circulation, and that is down because more people, especially young people, are getting news from places other than newspapes (especially the web). And the new leader doesn’t use the web, or even a Blackberry. So how’s he planning to increase circulation? Does he think Tribune has been ignoring this problem the last 5 years? Is he aware of some "silver bullet" for newspaper circulation problems that isn’t known to people at Chicago Tribune, Los Angeles Times, New York Times, Washington Post, et.al.?
Q: But the ESOP isn’t going to have a seat on the board. Why not?
Zell: The idea was that two of the independents would be run by the ESOP. But in the end, it was all about alignment of interests, and nothing else matters. I’m putting $315 million into this deal, cash.
Sounds pretty clear who’s in charge here. The 65 year old guy that reads 5 newspapers a day (how many people do that? how many under 40?) and doesn’t use the web. And he’s not exactly open to ideas from the employees, who ostensibly own the company but have no representation.
Sam Zell has hooked his wagon to the Tribune management team that has not addressed the market Challenges for the last several years. He is comfortably blind to these Challenges. He’s going to use $7.2billion of other people’s money (bond holders) to try and get a return on his $315million. As a real estate magnate, such use of leverage fits his personal Success Formula. But the Tribune is not just a building on Michigan Avenue. Customers and revenues are falling, and there’s not a limited amount of news availability – like there is land.
Defend & Extend Management is planned at Tribune Company. And that means more cost cuts and further erosion in the business. Where’s Steve Case (former CEO of AOL) when you most need him? At least he knows how to use the internet.
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