Gannett Chairman Expands Empire, Advancing Into the ‘Major Leagues’ : Neuharth Strives to Turn a Profit at USA Today

At a press conference after announcing he would step down, the man with the wavy silver hair, the impish face and the black-and-white clothes explained his decision this way: “We think the band is playing,” said Allen H. Neuharth, chairman of Gannett Co., the communications giant. “It’s a good time to change the guard.”

To admirers, and today they are legion, Neuharth, 62, did relinquish the title of chief executive at America’s biggest media company in a moment of crescendo.

Only the day before his May 20 announcement, Neuharth had announced the acquisition of the venerable Louisville Courier-Journal in Kentucky. In the previous 12 months, Gannett also had bought the Des Moines Register, the Detroit News and, Gannett officials say, it made a “serious” offer to buy CBS in exchange for Gannett stock.

In the process, Neuharth also had cast off, at least partially, the stigma of Gannett as a company that only made big profits in small newspapers--in “the minor leagues,” as Neuharth has put it.

Yet to some insiders there is one instrument at Gannett, the most important one of all, that is not yet in tune--and that made Neuharth’s timing curious.

“I’m amazed that he stepped away from USA Today before it has gone into the black,” said one source familiar with the company’s operations, referring to the company’s national newspaper. In 3 1/2 years, USA Today has lost an estimated $311 million and could lose $50 million to $80 million again this year, industry analysts say.

Few believe that Neuharth, who remains chairman, has relinquished final authority at Gannett. By naming President John J. Curley, 47, as chief executive, insiders said, Neuharth merely formalized a situation already in place, in which Curley runs Gannett day-to-day while Neuharth concerns himself with long-term planning and acquisitions.

Yet Curley’s elevation does put in place an heir apparent. That could prove important if USA Today, on which Neuharth has staked much of his prestige, fails to make a profit.

Whatever happens, Curley will inherit a company drastically different from the one that Neuharth took on as president in 1970. That year, Gannett owned 33 daily newspapers, the Rochester (N.Y.) Democrat and Chronicle, circulation 129,000, being the largest.

Today, Gannett owns 91 newspapers with total circulation of 5.7 million, eight television stations, 15 radio stations and the nation’s biggest outdoor billboard company. It employs 29,000 people, and in 1985 it earned $253 million after taxes on revenue of $2.2 billion.

It is a company with which Wall Street has fallen in love. “Al Neuharth is a genius leader,” said Joseph Fuchs, a newspaper industry analyst with the New York brokerage firm of Kidder, Peabody & Co.

While most American newspapers average pretax operating profit margins of about 15%, most Gannett papers come in at 20% to 30%. Gannett overall usually tops 20% before taxes.

Neuharth also has taken risks that other publishers have not. He believed that Americans would pay more for newspapers than tradition dictated, and Gannett papers now sell for 30 cents or 35 cents, while most newspapers are still a quarter.

He foresaw that newspapers would soar in value, and Gannett has grown because it has been willing to pay more than many had thought prudent. One key reason is that Gannett has the wherewithal to wait four or five years before recovering its investments.

Gannett’s traditional strategy was to buy the only newspaper in smaller cities, set strict profit goals, raise advertising rates and cut costs. Because its parent corporation was able to purchase newsprint in huge quantities, a newly purchased Gannett paper often could save 10% to 15% on one of its major costs immediately. Where a newspaper had separate morning and afternoon staffs, Gannett usually combined them. In every Gannett town where there is a second newspaper, Gannett arranged or inherited a joint operating agreement to share profits and stop competing financially--with Gannett invariably in charge of the joint operating agency.

Lavish Headquarters

Neuharth runs the empire with a close-knit team of aides from new headquarters in Arlington, Va., outside Washington, that are lavishly decorated with Italian marble, Turkish onyx and brass. The executive dining room is built around a lighted red marble indoor fountain.

Neuharth, who calls the headquarters “comfortable,” is famous for his attraction to long limousines, gold jewelry and plush offices. In public, Neuharth’s “signature” is his black-and-white wardrobe, although he recently has added gray suits to match his hair. Neuharth even had decorated Gannett’s corporate jets--there are three, a fourth on order and a King Air prop jet--in black and white with an embossed “G.”

Despite all this, until recently Gannett was often thought--even by some who worked for it--to lack respect in the journalism Establishment. Most of its papers were small dailies such as the Public Opinion in Chambersburg, Pa., and the Gazette in Chillicothe, Ohio. And some Gannett officials felt acutely that “we are not part of the cool crowd,” of journalism, said Gannett Vice Chairman Douglas H. McCorkindale.

‘Ruthless Demands’

Critics, such as Ben Bagdikian in his book “The Media Monopoly,” have charged that “most of the empire consists of vast silent domains where ruthless demands for ever-increasing profits crush journalistic enterprise and block adequate coverage of the news in their communities.”

However, Gannett probably has improved many of the papers it acquired, some newspaper executives say, and qualitative comparisons with big city newspapers are unfair.

But, as one former Gannett journalist acknowledged, “they know how to put out a consistently good paper, but not a great paper, because that is too expensive.”

Neuharth himself, when asked at a meeting of Wall Street analysts once how to pronounce Gannett, answered that the emphasis was on “net--as in money.”

One problem, a longtime Gannett editor says, is that the company moves its good people around too much. “Editors in Gannett don’t stay in one place. And then they become publishers and then vice presidents and so forth.”

According to the yearbooks of the newspaper trade publication Editor & Publisher, for instance, the Independent Journal of Marin County (Calif.) between 1980 and 1983 had three different editors and two publishers. The Wilmington (Del.) News and Journal, acquired in 1978, had three editors between 1979 and 1984. The publisher’s job changed hands at least four times.

Curley said: “I think that criticism was more valid five or six years ago.” While people do like to move, he said, the company is trying to be “more conscious” of placing people in regions where they were reared.

Neuharth dismisses criticism of Gannett’s style of journalism. “I react to all criticism and compliments with equal interest and generally (with) amusement. Those criticisms, especially when they come from media critics, come from something other than facts.”

His disdain for critics notwithstanding, Neuharth has significantly altered Gannett’s course in recent years, steering the company into what even he has called the “major leagues.”

Bought Prestigious Paper

First came the Des Moines Register, circulation 234,440, which Gannett bought for $200 million in July, 1985. The paper, winner of 13 Pulitzer Prizes, was more prestigious than any paper Gannett had ever owned. Curley was the prime motivator inside Gannett for the bid.

A few months later, Gannett bid $717 million for the Evening News Assn., a family-owned company that owned the Detroit News and five television and two radio stations.

Shortly after completing that deal, Gannett announced that it had struck a truce with Knight-Ridder Newspapers, publisher of the rival Detroit Free Press, in which the two companies would share profits, the News taking the afternoon cycle and the Free Press the morning. Such arrangements are allowed newspapers, given that they meet certain tests, under an exemption to federal antitrust laws. The Detroit papers hope to win federal approval later this year.

Gannett officials now acknowledge that they had had “preliminary” discussions with Knight-Ridder about a truce even before bidding on the Detroit News. Gannett does not own any other papers in cities with competing newspapers except where similar joint arrangements exist.

Wall Street analysts say the deal could go down as one of the shrewdest in media history. After selling off four broadcast stations for $200 million and estimating the value of other properties involved, analysts say, Gannett probably paid somewhere between $125 million and $175 million for the News.

“It was dirt cheap, assuming they get the joint agreement,” said John Morton, an analyst with the brokerage firm of Lynch, Jones & Ryan in New York.

Could Enjoy a Profit

Although the Detroit News lost $3.6 million in the year before Gannett bought it, analysts predict that the Detroit papers together could generate $700 million in revenue and enjoy profit margins of 15% or more by 1991. The chief reason is the efficiency resulting from the joint operating agreement.

Neuharth followed that deal by winning the bidding in May for the Louisville Courier-Journal, holder of eight Pulitzers and a national reputation for quality. As in Des Moines, some analysts believe that Gannett paid mightily for Louisville but can afford it.

“In both Des Moines and Louisville, I think it was prestige that attracted Al, fully knowing they can wait a long time--four or five years--for a return on their investment,” said one executive closely familiar with Gannett operations.

In addition, Gannett considered two other deals last year--ones that might have taken the company beyond the major leagues into a class by itself. It held several “conversations” with Time Inc.

At the same time, Gannett held “intense” negotiations with CBS. Both sides exchanged documents. Investment bankers were hired, and Gannett made an informal offer in which it would have held 55% of the combined stock of the new company. But CBS rejected the offer. “I think we got pretty close,” McCorkindale said.

Perhaps Neuharth’s boldest move, however, came in 1982 with the launching of USA Today. Insiders say he launched the paper despite the reservations of some key Gannett officials, and he has hung much of his personal prestige on the project.

“I don’t think there were too many people within the company who thought that was the way to go at first,” said one person familiar with Gannett’s operations. “Al’s belief in it, for ego or whatever else, is what made it happen. Most people would have abandoned it.”

For his part, Neuharth has said several times that the jury is “still out” on USA Today, although he stands by his projections that it will turn a profit by late 1987.

A Drastic Change

The paper represents a drastic change in design and theory of U.S. newspapers. Aimed in part at travelers and those who have moved away from their hometowns, USA Today was an attempt to create in newspaper form the type of headline service provided by television news, those involved in its design say.

Although the concept remains controversial journalistically, many editors say USA Today’s use of sports statistics, color, graphics and computer-generated weather information have forced other newspapers to follow. It also, says analyst Edward J. Atorino of New York’s Smith Barney, Harris Upham & Co., “put aside the stigma” of Neuharth as merely a shrewd businessman.

The irony of USA Today, however, given Neuharth’s legendary profit goals at Gannett, is that the greatest questions surrounding it are financial.

When it began, Neuharth projected that the paper would have a circulation of between 2 million and 3 million, a price of 50 cents a copy and would turn a profit by the fourth quarter of 1987. Advertisers, initially skeptical, have begun to embrace the paper, which now is averaging 13 pages of ads a day, or about 32% of its total space. Most local newspapers exceed 50%.

After one year, the paper had a circulation of 1.1 million. In the next 2 1/2 years it has grown more slowly to 1.4 million. That’s still enough to make it the nation’s second-largest daily, after the Wall Street Journal.

That circulation number also is a matter of dispute. Roughly 17% of USA Today’s 1.4 million copies are bought by hotels, car rental agencies and airlines for 25 cents each and given away to customers. Neuharth calls these “blue-chip” sales and argues that people who get the paper this way, mostly travelers and business people, are among the most attractive readers a newspaper could have.

Issue Is Important

But the Audit Bureau of Circulations, the newspaper industry’s standard auditor, does not count these sales, which it calls “bulk” rather than “blue chip” because it says it cannot prove that anyone is reading these papers. ABC says USA Today’s official daily circulation is 1.17 million.

The issue is important to Gannett. Most of the recent growth in USA Today’s circulation has been in bulk sales, which has gone a long way to compensate for circulation declines following the doubling of USA Today’s price to 50 cents in August, 1985. More troubling, however, could be the enormous cost of producing the paper. Its color pages are expensive, its delivery system complex, and more than 800,000 copies are sold from newsstands or news boxes--which is expensive and requires constant and heavy promotion.

Gannett officials say they want to increase the number of home delivery subscriptions, which today account for only 26% of USA Today’s sales, but they have no target in mind. Subscriptions lock in readers, make planning easier and generally require less advertising to maintain.

Other Gannett operations apparently still lend USA Today help, including the “loaner” program by which local Gannett papers send staff to USA Today for three-month stints. Gannett editors say the program has improved some of their reporters, but critics say the program also has hurt the local papers.

If USA Today did not receive such support from local Gannett papers, said one source familiar with the operation, losses at the paper would be “even greater than they appear.” Industry analysts predict that the paper could lose another $50 million to $80 million this year, bringing the total losses since September, 1984, to a staggering $400 million.

Gannett officials still stand by their target date of late 1987 as the break-even point for USA Today, and some Wall Street analysts, such as Atorino, believe that USA Today “is here to stay.”

Just what might happen if USA Today misses its break-even date apparently is a matter of speculation inside the company.

“USA Today is the fulcrum on which the whole reputation of Gannett and particularly Neuharth lives and dies,” one Gannett executive says. “If it breaks even on schedule, Neuharth will retain his clout. If it is not profitable, however, there could be a board revolution. I don’t know where Curley would come down. But if the board votes to close USA Today, I think Al would resign.”

Tried Two Other Projects

Gannett has tried two other projects tied to USA Today. One was the transformation of Gannett’s Cocoa Today paper in Cocoa, Fla., into Florida Today, a paper that contains all local news and is sold in combination with USA Today, which contains the national and international news. Curley said thatthe results of the “experiment” are inconclusive but that similar arrangements would work in “only a few markets.”

Another experiment was the purchase from CBS of Family Weekly, a Sunday newspaper magazine supplement. Gannett quickly renamed the paper USA Weekend and revamped it to look like USA Today. Curley admits that the effort was in part an attempt to promote USA Today.

But some newspaper editors didn’t like paying Gannett for, in effect, advertising USA Today in their Sunday supplement, and many dropped the magazine.

Even though Gannett added a number of its own papers and several others, and overall circulation is up, USA Weekend has 95 fewer clients today than when Gannett bought it. Curley said USA Weekend is still losing money but is projected to break even next year.

There are other attempts to capitalize on the connections within Gannett. The company is beginning to sell advertising in packages with other Gannett media, the newspapers, billboards, radio and TV. Industry analysts said the network could well prove alluring to advertisers and profitable for Gannett.

Gannett has assembled what it calls the “four-color network,” a collection of more than 200 Gannett and non-Gannett papers capable of producing USA Today-quality color. Advertisers could make one media buy and reach a combined daily newspaper circulation of 15.8 million.

“What Gannett has assembled here is a vast and ever-growing national network for national advertisers,” industry analyst Morton said. If the audience for network television continues to shrink due to cable and other competition, “they will be in a great position to capture a lot of national advertising,” he said. “They are already in a great position.”

(1) USA Today, 1.4 million. . .founded September, 1982 (2) Detroit News, circulation 645,016 . . .acquired 1986 (3) Louisville Courier-Journal/Times circulation 296,965. . .acquisition to be completed in mid-July (4) Des Moines Register, circulation 227,796. . .acquired 1985 (5) Rochester Democrat and Chronicle/Times-Union, combined a.m. and p.m. . . .acquired 1923 (6) Cincinnati Enquirer, 190,686. . . acquired 1979 (7) Nashville Tennessean, 120,825. . . acquired 1979 (8) Wilmington, Del., Morning News/Evening Journal, Combined a.m. and p.m. 120,247 . . . acquired 1978 (9) Camden, N.J., Courier-Post 108,360 . . . acquired 1959 (10) Jackson, Miss., Clarion-Ledger/Daily News combined a.m. and p.m. 102,220 . . .acquired 1982 FO John J. Curley, Gannett president and chief executive