Los Angeles Times Resists Cost-cutting Measures

Charles Bobrinskoy is vice chairman of Ariel Capital Management. Among its many media-related holdings, Ariel currently has 6 percent of the Tribune Company's stock -- roughly 15 million shares -- in its portfolio.

John Carroll, starting with you, how unusual is it to see an editor and publisher lead a kind of mutiny at a major paper like this?

JOHN CARROLL, Former Editor, Los Angeles Times: I don't recall ever seeing it before. It's very unusual.

JEFFREY BROWN: So what's going on?

JOHN CARROLL: Well, I think every good editor has a point which he has to define for himself, at which he must quit or resist, rather than damage the paper further. And that's where I believe my friend, Dean Baquet, is at this moment.

I hope it can be worked out, but he wants to be editor of a first-rate paper. And I think he's afraid that that dream is being dashed.

JEFFREY BROWN: Staying with you, you gave a speech earlier this year called, "What will become of newspapers?", in which you addressed, quote, "the conflict between those who serve the reader and those who serve the shareholder." Now, is that what you see going on in Los Angeles?

JOHN CARROLL: It is. You know, there used to be a unity of purpose on the part of people who owned newspapers. They served several masters. They served the counting house. Making money was important, but it was also important to serve the community that gave roots to the paper and also to serve journalism, to uphold high standards.

It seems to me -- I've been in the business a lot of years -- that, in this era of publicly owned newspaper chains, the money part has overshadowed all else. And obligations to journalism, obligations to the community have fallen by the wayside to a considerable extent, and that is really the tension that's causing this problem.

CHARLES BOBRINSKOY, Ariel Capital Management: We don't think this is unusual, as maybe others have suggested. It's very common for a boss to ask a division manager to cut costs and to have to take people out. It's very common for that division manager to push back.

I ran a division of Citigroup for 10 years, and I'd get a call about every other year asking me to cut people, and I always pushed back. That's part of the nature of business.

What's unusual here is this has gotten into the press, and that's unfortunate, because it has called into question almost an insubordinate role of the editors in Los Angeles. At this point, the board of the Tribune may be questioning whether it makes sense to stay public and have all of this dirty laundry aired.

JEFFREY BROWN: What is the problem at the Tribune and in the industry in general? What do you see? Why is the value down?

CHARLES BOBRINSKOY: The market, which has been very positive about newspapers for a long, long time -- the market has always loved the strong cash flow, the lack of new competitors -- the market has gotten very concerned about the threat of Internet and, in our judgment, has overreacted.

The stocks of all newspaper companies have declined for about five years. In our estimation, the market is not properly evaluating the Internet growth that the newspapers have. Most of these companies have Internet growth of 20 percent-plus a year, but the market has focused on concerns about declining circulation.

JEFFREY BROWN: And it's often pointed out that the L.A. Times itself makes about 20 percent a year in operating profits. Now, in many industries, that would be pretty darn good.

CHARLES BOBRINSKOY: Right. It's not the profit margin that counts; it's the direction of profits. And right now, those profits have been flat. A lot of people think they've been declining. They actually haven't been. They've been flat, not growing the way we, as shareholders, would like them to, but the cash flow has been very good and the profits have been stable.

What people are concerned about is the future. Will the Internet take away readers and produce pressure on earnings in the future?

JOHN CARROLL: It does. And if I could add to something that Charles said, we are in a difficult position with the Internet and vastly increased rivalries for advertising. So the business has some clouds over it, yet it is remaining at a 20-percent profit margin, which is a very handsome margin by the standards of most industry.

I can tell you from my experience at the Los Angeles Times that you cannot sustain a 20-percent margin at that paper without diminishing its quality year after year. If I could wave a magic wand and change the circumstances under which our corporate leaders operate, I would try to see if they could get away with reducing the profit margin to 10 percent.

I can almost promise you that, if they could cut it to 10 percent, the circulation would stop dropping. It would probably start gaining. And we would be able to invest very heavily in the Web, which is crucial to the paper's future. At a 20-percent margin, I feel strongly that we are cashing in the paper's future in favor of current earnings.

JEFFREY BROWN: So, Mr. Bobrinskoy, there you hear it. I mean, if the people at the paper -- and Mr. Carroll is speaking along the lines they speak -- if they say the quality is hurt to try to keep up those profit margins, how much consideration is that due for shareholders?

CHARLES BOBRINSKOY: You can imagine we're not going to be enthusiastic about cutting the profitability of the L.A. Times in half. In fact, the 20-percent margin is actually below industry averages and below where the L.A. Times used to earn during times when it won many Pulitzer Prizes and had a very good reputation for journalistic excellence, which it still has.

By the way, I'd point out the L.A. Times has more reporters than the Washington Post.

So the bottom line here is we think there can be a wonderful, happy medium where everybody gets along. The quality of the L.A. Times can remain strong; the profits can be strong, with growing Internet traffic. What may change is how the L.A. Times is owned. All of the Tribune may become a private company, where the company doesn't have to worry about these quarterly fluctuations in earnings.