A tale of two families

By Stephen J. Simurda

The Knights produced great newspapers, then went public. The mediocre Newhouses fought the IRS to stay private. Guess who's producing great journalism now?

When Pulitzer Prize-winning journalist Richard Aregood resigned as editorial page editor of the Philadelphia Daily News six years ago to take the same post at the Newark Star-Ledger, he left more than a job. He also left one of the nation's most respected newspaper companies, Knight-Ridder Inc., a publisher that blended a reputation for journalistic excellence nurtured by the Knight family with hard-nosed business acumen honed by the Ridder family. That 1974 merger of the Knights and Ridders had produced a publicly owned company whose 31 daily newspapers (including the Philadelphia Inquirer, Detroit Free Press, Miami Herald and San Jose Mercury News) often win awards for journalistic excellence.

In moving to Newark, Aregood joined Advance Publications, a private company tightly controlled by the Newhouse family ever since its inception in 1922. While the family's newspapers were quite profitable, their reputation for journalistic excellence was another matter. For years, the company's papers (including the Cleveland Plain Dealer, the New Orleans Times-Picayune and the Portland Oregonian) were viewed as mediocre news organizations, at best. Unlike Knight-Ridder, with its vast team of well-trained professional managers who recruited ambitious journalists, Newhouse was run by a small clutch of family members who at times seemed indifferent to the company's newspaper holdings. The family lavished more attention on the glitzier (if less profitable) magazines in the company's well-known Condé Nast division—like The New Yorker, Vanity Fair and Vogue. Still, Aregood says he has no regrets about his move to Newark.

“After 28 and a half years at the Daily News, I had been through too many changes, too many cutbacks, too many bright ideas from corporate headquarters,” he says of his disenchantment with Knight-Ridder. When he was approached about the job at the Star-Ledger, Aregood was receptive. “I didn't leave angry; I just got a better job,” he says.

The Newark job seemed better partly because, over the past decade or so, Knight-Ridder and Advance Publications seem to have moved in opposite directions. Publicly traded Knight-Ridder, while highly profitable, has struggled to meet the demands of the investment community and to compete with other public newspaper companies, which has resulted in cutbacks and battered morale at many of its papers.

“I don't think Knight-Ridder's star has gone out,” says John Morton, a nationally known newspaper consultant. “But it has dimmed a bit.”

At the same time, after years of ignoring the journalistic side of their business, the Newhouse family has awakened to the realization that high-quality newspapers make more money than mediocre ones. “It was probably a recognition that you can't get by publishing crappy newspapers,” Morton says. “Readers have too many other diversions.”

The result is a change in the trajectory of two large and successful family newspaper companies. Newhouse is on the rise, while Knight-Ridder is working to avoid falling farther from its once-lofty perch. The story of how this change occurred reveals how fundamental decisions made by families many years ago, as well as events over which they had no control, can dramatically alter the future of a family business.

To understand Knight-Ridder, one must look at the two families that created it. Charles Landon Knight purchased the Akron (Ohio) Beacon Journal in 1903. When he died 30 years later, he left the paper to his two sons, Jack and James, who started searching for growth opportunities. In 1937 they bought the Miami Herald, and then the Detroit Free Press three years later. Over the next 29 years they carefully acquired a handful of other newspapers, building a successful small chain of properties that were known for their journalistic quality and for the company's willingness to allow editors to pursue their vision.

One telling example of the company's farsighted commitment to public service occurred during World War II, when newsprint shortages plagued the industry. To provide adequate space for news, the Miami Herald's longtime editor Lee Hills decided to stop printing advertisements, and the Knight brothers went along with his plan. Public approval, and circulation, soared. And the competing Miami News never recovered the circulation it lost to the Herald during that time. The News eventually went out of business, leaving the Herald with a monopoly in the lucrative Miami market.

But by 1969 Jack Knight was 75 and concerned about the effects of inheritance taxes on his family as well as who would succeed him. (Jack Knight's eldest son was killed during the final two weeks of World War II, and another son died of illness in 1958.) Going public seemed the best solution. However subliminally, that decision introduced a new corporate priority—impressing Wall Street—which in turn led to Knight Newspapers' 1974 merger with Ridder Publications Inc.

If the Knight family was known for publishing high-quality newspapers, the Ridder family was known for publishing profitable ones. Herman Ridder started the family business in 1892 by purchasing the Staats-Zeitung, America's largest German-language newspaper. By 1926, he began expanding the business, purchasing the Journal of Commerce. Over the next few years he bought newspapers in Minnesota, North Dakota and South Dakota. Duluth and Grand Forks weren't necessarily major media markets, but Ridder's papers there generated steady profits. In 1952, Ridder Newspapers (having passed to the founder's three sons) moved to California, buying a newspaper in Long Beach as well as the San Jose Mercury and News. The company eventually merged the San Jose properties into one newspaper, and family members watched with delight as Silicon Valley became one of the hottest growth areas in the country.

In 1969, the founder's grandson Bernard H. Ridder became president and CEO, and the company went public. That same year, Bernard's son, P. Anthony Ridder, became business manager of the Mercury-News. Tony Ridder, who earned a degree in economics from the University of Michigan in 1962, had already spent several years learning the newspaper business in cities ranging from Aberdeen, S.D., and Duluth to St. Paul, Minn., and Detroit. By 1977, he would be publisher of the Mercury-News.

For several years after the 1974 merger of the two family businesses, things went about as well as could be expected. The Knight family influence improved the editorial quality of the former Ridder newspapers, and the Ridder family's business skills brought greater organization and profits to a Knight chain that had often run by the seat of its pants. But both families suffered from a dearth of possible successors. Jack Knight had seen two sons die, and his only grandson was murdered in a robbery attempt in his Philadelphia apartment in 1975, while he was working as a copy editor at the Daily News there. Tony Ridder was the only Ridder in his generation being groomed to take over the business.

Jack Knight died in 1981 at the age of 86, but the company continued to thrive. By 1985, Forbes magazine reported that Knight-Ridder had seen ten years of rising profits and was “awash in cash.” With Tony Ridder presiding over the fantastic growth of the San Jose Mercury-News but not yet ready to assume control of the company, Knight-Ridder turned to James Batten, a respected former editor at Jack Knight's Charlotte Observer and a protégé of the revered Lee Hills in Miami.

When Batten became CEO in 1988, he eased the concerns of many Knight-Ridder editors who feared the Ridder family's bottom-line orientation would subsume the Knight family's high ideals. As one former Knight-Ridder executive told the Washington Journalism Review in 1996, “Batten gave the editors some confidence that their interests wouldn't be sold out to the bean counters. His presence is that important.”

But Batten's ascension to the top job coincided with Wall Street's growing disenchantment with Knight-Ridder. In 1988, Forbes criticized Knight-Ridder for not following the example of Gannett Co. and Tribune Co. and diversifying its holdings more aggressively. By 1991, the newspaper industry was in deep recession, and Knight-Ridder's profit margins had shrunk from 15% in 1987 to 10.8%, at a time when other large newspaper chains, such as Gannett, boasted profit margins closer to 20%. Securities analysts started carping, and the price of Knight-Ridder stock fell. Batten tried to use his personal charm to mollify critics by emphasizing the need to maintain high-quality journalism. But it was soon clear that cutbacks would have to be made.

Newsroom employees didn't take the belt-tightening message well. In Philadelphia, famed editor Eugene Roberts, who had transformed the Inquirer into one of the nation's finest newspapers, left abruptly in 1990 after 18 years and 17 Pulitzer Prizes. Morale among reporters and editors plummeted at that paper, as well as in Miami and Detroit (where a prolonged strike wore on). At the same time, Tony Ridder began taking a more active role in the running of the whole company. He became the lightening rod for the bitterness of many employees, who dubbed him “Darth Ridder.”

Then, in 1995, Frank Batten suddenly stepped down after being diagnosed with cancer at age 58. Tony Ridder took over as CEO, probably at least a few years sooner than anyone had planned. And Knight-Ridder started evolving into a company much more firmly identified with the Ridder family's legacy. Tony Ridder continued trimming the company's newspapers to eke out more profit and satisfy stockholders. And last year, in a move solidifying the symbolism of the Ridder family's control over the company, he moved the corporate headquarters from Miami to San Jose. Revenues at Knight-Ridder remain strong ($3.2 billion in 1999), but net income dropped a bit to $340 million in 1999 from $366 million in 1998.

Most of the Knight-Ridder saga has played out quite publicly over the years. As a public company, it reports on all its major decisions and operations. And it has a staff of people employed to assist with shaping its corporate image. The company's website (www.kri.com) tells the business's history in great detail. A visitor could spend hours there learning about its various holdings.

Over at Advance Publications, it's a very different story. The Newhouse family maintains tight control and has always been unwilling to reveal much about their operations. Brothers Samuel I. (Si) Newhouse Jr., 72, and Donald Newhouse, 70, run the company, Si as chairman and Donald as president.

The Newhouse culture is a direct reflection of its tight-fisted founder, Samuel I. (Sam) Newhouse (1895-1979), who watched his Russian immigrant father fail in his first business venture. At the tender age of 13, Sam had to become the man of the house when his father's health forced him to leave home for long stretches of time. Sam Newhouse began working for an attorney in Bayonne, N.J., who eventually asked Sam to go to work at a failing daily newspaper the lawyer owned. By age 16, Sam Newhouse had turned around the fortunes of the Bayonne Times and was sharing in its profits and adding relatives to its payroll—a tradition that would continue.

In 1922, still in his 20s, Sam Newhouse bought his first newspaper, the Staten Island Advance. By the time he died in 1979, his media empire included 31 newspapers, seven magazines, six television stations, five radio stations and several cable TV franchises. But the company's organizational chart existed only in the head of Sam Newhouse, who rarely worked at a desk and was known for moving from place to place with an old brown briefcase bulging with papers. He had no corporate staff to speak of, and no executive committees to make important decisions.

To keep his company in the family, Sam Newhouse issued non-voting common and preferred shares in Advance Publications to his wife, his two sons and two brothers. The voting shares—just ten of them—he kept for himself. When he died in 1979 and passed these voting shares on to his sons, the family filed estate tax papers with the IRS contending that these ten voting shares were worth just $182 million, and that the estate tax bill was just under $49 million.

The IRS took strong exception. By its calculations, Sam Newhouse's estate was worth $1.2 billion and the Newhouse family owed $609 million in estate taxes. The IRS even sought to collect a 50% civil fraud penalty, claiming the family was trying to dodge its tax responsibilities. With the penalty and interest, the IRS eventually sought more than $1 billion from the family.

The Newhouse family decided to fight. They had little choice: The alternative was to dismantle the company to pay the tax bill the IRS presented them. The case dragged on for ten years, but in the end the Newhouses emerged victorious. In 1990, a judge found in the family's favor, and the Newhouses paid the government just $48 million in estate taxes. To some observers the case was one of the biggest crimes against the IRS in history. But the unseen side benefit was the vast improvement since then, under family control, in the quality of the Newhouse newspapers.

Sam Newhouse's unstructured culture survives at Advance Publications even today, when the company has estimated annual sales of $4.2 billion and is ranked 36th on Forbes' list of America's largest private companies. According to Newhouse lore, a few years ago someone mentioned to Donald that perhaps it was time to hire a corporate staff to help run things. “If I had a corporate staff,” Donald Newhouse is said to have answered, “they would want to do something.”

Needless to say, there is no corporate staff at Advance. But there are plenty of Newhouses. Over the years, several dozen family members have worked in the business, and members of the next generation await their turn at the helm.

This approach made money for the Newhouses but rarely produced great journalism. The family took a hands-off approach to editorial matters, leaving individual editors with a great deal of autonomy. “The condition of their newspapers was a reflection of the management style when Sam was alive,” says consultant John Morton. “The person who was in charge [at an individual paper] basically ran the place. It could be good or it could be horrible.” And since making money was always the paramount goal, newsroom managers tended to avoid expending any unnecessary funds on projects with journalistic merit that had no direct commercial payback.

In 1990, for example, Newhouse's highly profitable Springfield (Mass.) Union-News was embarrassed by public allegations that its reporters knew about the local district attorney's ties to organized crime but weren't allowed to write about them. Other charges soon spilled out about similar cases over the years in which the Union-News had protected public figures or avoided controversy. Newhouse's big papers in Cleveland, New Orleans and even Newark (Si's operating base) were similarly viewed among journalists as some of the least desirable places to work in the country.

Si and Donald seemed to get the message. “All of a sudden the family decided they wanted to have better newspapers,” says Richard Aregood. “They went out of their way to hire editors who knew what they were doing” and give them more resources. When Aregood came to the Newark Star-Ledger in 1995, he and other news executives proposed adding a new “Perspective” section to the Sunday edition—a kind of week-in-review section, devoid of advertising (and, consequently, of revenues). That's the kind of idea that never would have gotten off the ground at a Newhouse paper more than ten years ago. But Si Newhouse “said it was an improvement to the paper” and gave the green light, Aregood recalls.

Since 1990, the company has brought in new editors to run the Star-Ledger, Cleveland Plain Dealer, Portland Oregonian and New Orleans Times-Picayune, as well as to oversee the Newhouse News Service (whose bureau chief, Deborah Howell, also left Knight-Ridder). In January 2000, a glowing story in the Columbia Journalism Review concluded that the Newhouse papers now offered “something rare for editors now that most newspapers answer to Wall Street: freedom to shape a paper without measuring everything against the bottom line.”

Suddenly, it seems, Newhouse newspapers are desirable places to work. At the same time, Knight-Ridder papers are often places where journalists feel stuck.

What has caused the difference? The decision by both the Knight and Ridder families to go public in 1969—in contrast to the Newhouses' decision to fight to stay private—is the biggest factor. The thinning of the Knight and Ridder gene pools, compared to the fecundity of the Newhouses, may be another. While going public eased inheritance burdens for both the Knight and Ridder families, just three decades later the Knight family has virtually no involvement or interest in the business. And except for Tony Ridder, who reportedly controls about 5% of Knight-Ridder stock, no other member of his family holds a significant stake in the company or a high-level job.

As a result, Knight-Ridder has endured years of complaints from stockholders and analysts that the company's bloated newspapers keep them from earning a 20% profit, which analysts see as the holy grail for such publishers. “It's still possible to publish a good metropolitan newspaper and make a 20% profit,” says Morton. “The New York Times does it, the Washington Post does it.” And thanks to years of staff reductions, Knight-Ridder's Philadelphia Inquirer is approaching that goal as well. But it's come at a cost. “In the long run you have to pay attention to Wall Street,” Morton says.

The Newhouse family, by contrast, doesn't have to listen to Wall Street. Sam Newhouse gambled, but the old man won. With his ploy of issuing preferred stock to his family and keeping only a few voting shares, he managed to insulate his heirs from a big estate tax bill. He didn't worry much about journalism, but he did worry about estate taxes—and American journalism is better off as a result. The Knight and Ridder families did not undertake such strategies and were forced to go public—probably to the detriment of their readers.

To be sure, had the IRS won its case against Newhouse (and many feel the government mishandled the case), things would be quite different today. But the real test for both companies will come when the economy slows down again. Another recession in the newspaper business will test both Newhouse and Knight-Ridder, says John Morton, who was a government witness in the Newhouse estate tax trial.

“In the early 1990s, all of the publicly traded newspaper companies made big cutbacks and hurt themselves,” Morton says. “They were eating their seed corn.” Privately owned companies can be more insulated from the economy's dips, if their owners are willing to accept smaller profits.

“If there's another recession, you'll see more cutbacks at Knight-Ridder,” Morton notes. Whether the same thing happens at the Newhouse family's newspapers remains to be seen, of course. As their saga reminds us, in business, unlike literature, there's no such thing as a final chapter.

 

Stephen J. Simurda contributes regularly to Family Business and Columbia Journalism Review from Williamsburg, Mass. (ssimurda@ journ.umass.edu).

 

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Winter 2001

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