Leaders of organizations, especially those with lots of employees and/or big revenues, have a leveraged impact when making decisions. If a manager with 8 people in a group makes an error, it’s felt by those 8, plus those all 9 work with. If the CEO of a business with over $1B of revenue, or more than 1,000 employees makes a bad decision think about the leverage that creates. Lots of people suffer. Not only the employees, but customers, investors and suppliers.
This is very apparent now at Tribune Company and especially the newspapers it controls – including the Los Angeles Times and the Chicago Tribune. These aren’t the only 2 businesses owned by Tribune Corp., but their success, or lack therof, has a serious impact on the 35-50 million people that are tightly connected to the markets where they report the news. Yes, it is true that newspapers no longer have the power they once did. But there’s no doubt that lots of our news is still dependent upon writers and editors working at these two newspapers. If we’re to root out political corruption at the state or local level, or report on energy crises, or agricultural concerns we depend significantly on reporters at big city newspapers. As reported in BusinessWeek recently (read article here), these newspapers are now at significant risk of failure due to the leadership of Sam Zell.
Back at the end of 2006 Tribune’s equity value was down 65% from its high in 1999. Revenues had been declining since 2004. Cash flow was being propped up with draconian cuts across the organization. Pink slips littered the hallways, and long-term employees were being handed early retirement plans. It was clear that management was doing everything possible to dress up the corporation for a higher valuation to some potential suitor – which was proving hard to find. Most people were very wary of the proposed pricing, recognizing that changing market dynamics in media were pushing advertising more toward the web, and coming right out of newspapers. Meanwhile, in cable targeted channels were fragmenting the market leavng variety channels running reruns or second-rate programs (like CW) with precious few eyeballs and struggling ad revenues. This was all bad news for Tribune Corporation. Something needed to be done that would help Tribune find a new way to compete and grow against the ever-more-popular internet and ad-placement behemoth Google.
Enter Sam Zell, who had a Success Formula he was ready to apply. Throughout his history he had bought beaten up real estate, borrowed a gob of money against it, done some fixing up, leased it out and then sold it for a big gain. In real estate, this had always worked. So he was ready to apply his Success Formula to newspapers. He had no plans to change the operating Success Formula at Tribune Corporation, believing the revenue problems would self-correct. He read 3 papers every day, so he figured people would be like him and return to reading newspapers soon enough. And advertisers would follow. He was going to own the Cubs and Wrigley field, but he didn’t much like baseball, so to him this was just another asset to leverage and sell. Same for those 25 second-tier television stations around the country. He didn’t intend to change the Tribune’s operating Success Formula, just tweak it a bit. And overlay his own Success Formula based on lots of debt, waiting for recovery, doing some simple sprucing, and being overbearing with employees.
Of course, as I predicted in my several blogs at the time, this was a recipe for disaster. The Tribune Corp needed a big dose of internal Disruption, and plenty of White Space to figure out where advertisers were going and how to appeal to them. Tribune needed to move hard and fast to more web understanding, and dramatically rethink how to manage its independent television stations in a world where they were the weakest of weakening broadcast stations – as well as the most generic of cable stations. Revenues were going to continue to decline – and facing a predictable economic weakening they would decline a lot and very fast. The last thing Tribune Corporation needed was more debt. It needed to conserve its assets to pay for a transformation of the company – after it could figure out what that transformation needed to be!
After adding an additional $8billion debt, growing it to $13.5billion,, and investing only $350million of his money, Sam Zell set off on a path of value destruction. And who holds the bag? The bondholders of course. Someone once told me that debt was not supposed to carry risk – that’s what equity was for. But Zell convinced investment bankers to sell his extremely risky bonds to various holders (mostly pension funds) so he could finance an overpriced deal. Now those bondholders have seen as much as a 65% reduction in the value of their investments. Were the pensioners to know they wold be so glad! Mr. Zell’s Success Formula, so tied to real estate during boom times, was the worst thing that could be applied to the struggling newspapers at Tribune. But he was able to apply it using other people’s money – so he has little to lose and much to gain while the bondholders have much to lose and almost nothing to gain.
Meanwhile, employees across Tribune are falling like flies exposed to DDT. And the news products in L.A. and Chicago are getting weaker with each passing month as journalists aren’t there to write. The people of these great cities are simply left knowing less about what’s happening in their metropolises. Everyone in both cities is getting a cold slap from this folly.
Mr. Zell keeps saying he’ll do whatever he has to do to make money with Tribune Corporation. But that’s not true. What he means is he’ll do whatever his old Success Formula recommends he do. So now, as his own newspaper boss says, they are chewing off a leg to try and get out of the falling revenue trap. This is not an approach that will make for a strong Tribune Corporation. It is a path toward a corporation with no resources, weak products and customers left without a solution. What Tribune needs is White Space to figure out how to compete as a 21st century media company. But instead all energy is being diverted toward paying off the bonds Mr. Zell sold to fund his all-too-risky bet on debt.
We all have a responsibility to understand our Success Formulas. And to understand those of the people who would lead our organization. If we see that Success Formula Locked-in, we can bet on more of the same – regardless of the outcome. Mr. Zell would rather fail as a cost-cutter than lead Tribune Corporation to its next legacy of success. But unfortunately, it is all the people dependent on Mr. Zell who will suffer most – the vendors, customers, investors and employees. They will suffer from his outdated Success Formula even more than he will – as he jets each weekend to between his home in Malibu and his home in Chicago. Leaders have the greatest responsibility to recognize their Success Formula Lock-ins, and be open to Disrupt and use White Space to find solutions which can succeed. Because when they fail, everyone around them fails as well.