Appeals to Meese : Knight-Ridder Takes Detroit Fight to Wire

Times Staff Writer

With millions in potential profits in the balance, Knight-Ridder, the nation's second-biggest newspaper chain, this week launched a public relations campaign designed to convince Atty. Gen. Edwin Meese III that he should grant its Detroit paper an exemption from federal antitrust laws.

The company's president, James K. Batten, personally phoned some of the nation's most powerful newspaper editors, asking them to send reporters to cover a Knight-Ridder press conference today in Detroit.

Corporate officers also made themselves available for background interviews during the week. And Monday the Wall Street Journal published a lengthy letter from Knight-Ridder Chairman Alvah H. Chapman Jr.

The effort will culminate in today's special board meeting and press conference. There, the company likely will announce that unless Meese approves a joint operating agreement between Knight-Ridder's Detroit Free Press and its rival, Gannett's Detroit News, the Free Press will close.

Under the agreement sought by Knight-Ridder, the Free Press--America's eighth-largest paper--and the News--the seventh-largest--would merge business operations but maintain separate news staffs.

To forge such a newspaper monopoly in Detroit, Knight-Ridder must receive a special exemption from federal antitrust laws. To do that, it must persuade the government that the Free Press is a failing paper that otherwise would fold.

Strong Opposition

Newspapers are allowed such exemptions because preserving independent newspaper voices is considered an overriding social good. More than 20 such joint operations exist.

But the Detroit agreement, proposed in May, 1986, would be the biggest ever--a merger between two of the country's largest dailies, owned by America's two biggest newspaper companies.

From the start, Detroit's mayor, the papers' unions and a citizens' group that included former Free Press Editor and screenwriter Kurt Luedtke have opposed the plan. The papers were close in circulation, with the Free Press dominant in the crucial morning cycle and gaining overall.

Until Gannett, the nation's biggest newspaper chain, bought the rival News in early 1986, most thought the Free Press would win the war.

Knight-Ridder and Gannett first wanted approval of the agreement without public hearings but lost. Then the Justice Department's antitrust division opposed the agreement. Finally, after 18 months of legal pleadings and public hearings, an administrative law judge ruled Dec. 30 against the agreement.

Now, Knight-Ridder finds itself with only a few cards left in its hand.

Atty. Gen. Meese can approve the agreement, despite the law judge's recommendation. If he rejects the plan, Knight-Ridder could pursue it in federal court.

Yet the odds suddenly seem longer than expected, particularly considering that no other agreement to go through public hearings ever has received a negative recommendation from the presiding judge.

So Knight-Ridder, as one key executive put it, is now "scratching to do what we can" to persuade Meese, both through legal channels and through other channels, including its professional relationships with other media organizations.

Following the judge's ruling, said another company executive, it was clear that the company had "a public relations problem." Some of the press coverage, and even the administrative law judge's opinion, the executive complained, had a "fairly cynical if not hostile tone."

Chapman, Knight-Ridder's chairman, seemed particularly bothered by a lengthy Wall Street Journal story that tried to piece together a history of Detroit's newspaper war, one of the last great newspaper competitions.

The story suggested that the Free Press had embarked in 1979 on a high-stakes plan either to drive its rival into submission or lose enough while trying to qualify for a joint operating agreement.

The paper has lost nearly $100 million since 1980, Chapman countered. To think that a public company beholden to shareholders would "deliberately" take that beating, Chapman said, is both wrong and not what the law judge found.

Privately, company officials also expressed dismay at a piece in the Columbia Journalism Review this month by University of California law professor Stephen R. Barnett, an expert in the so-called Newspaper Preservation Act.

Because the Detroit papers are so large and, relative to other joint operating agreements, so evenly matched competitively, Barnett wrote, "approval in Detroit could thus pave the way for JOAs in almost all the 20-plus cities that still have real newspaper competition," a list that includes Los Angeles, Chicago and New York.

Barnett also questioned whether Knight-Ridder really tried to turn a profit in Detroit or whether it instead tried to pursue a strategy of domination by keeping prices low. Retail ad rates in Detroit, he noted, are 22% below other cities on weekdays and 39% below on Sundays.

Chapman and other Knight-Ridder executives, however, argue that given Detroit's weak economy, the laws of newspaper economics and the cutthroat nature of the Detroit rivalry, simply raising prices would have been suicide.

And Knight-Ridder had reason to fight to the death, Chapman suggested. Among America's 30 largest cities, only two--Chicago and Boston--have two profitable newspapers. And since 1982, six cities have seen their second papers die.

The Free Press trails the News by only 40,000 in weekday circulation, but on Sunday, when newspapers earn half their revenue, it lags by more than 100,000.

What's more, the Free Press has only 31% of the classified advertising market in Detroit, to the News' 69%, and overall about 39% of the advertising revenue in the market.

What particularly hurt, Knight-Ridder executives also said privately, was Administrative Law Judge Morton Needelman's comment that he "assigned little weight" to Chapman's testimony that if the agreement were rejected he would recommend closing the Free Press.

The record, Needelman wrote, "contains no convincing evidence that he (Chapman) seriously considered closing the Free Press prior to his witness-stand bolt out of the blue."

Yet those who know him thought Chapman's statement significant at the time and not a pose. "It was probably one of the hardest things he has ever had to say in public," one industry analyst said privately.

Knight-Ridder's board meeting and press conference today, said J. Kendrick Noble Jr., an industry analyst with Paine Webber, are probably designed to dramatize that conviction by having the board formally recommend closing the paper if the agreement is rejected, assuming no credible buyer comes forward.

It also demonstrates, said other analysts, that Knight-Ridder finds itself in tough straits, to some extent outmaneuvered by Gannett, its potential partner in Detroit.

While it was true that the Detroit papers had fought to a virtual draw 18 months ago, when the joint operating agreement was proposed, the Free Press' position is now weaker since it has presented itself as a failing paper.

One reason is that Gannett, which bought the rival News in 1986 only a few weeks before announcing the joint operating agreement, was a competitor with deeper pockets than the News' previous owners.

"It's a whole different ballgame when you are playing against Gannett," one Knight-Ridder executive said.

"They (Gannett) are going to drive (the Free Press) out of business," industry analyst John Morton predicted.

"Gannett is in a win-win situation," Noble said. Gannett would "benefit more if the JOA were rejected," he said, because it would have the Detroit market to itself.

Knight-Ridder, meanwhile, would suffer substantial costs from closing the Free Press, in addition to losing out on the profits of the agreement, estimated by Gannett to be more than $50 million within three years.

Gannett, indeed, has remained largely silent since Needelman's ruling.

And, privately, Wall Street analysts express doubt that Meese will overturn Needelman, particularly given that the Justice Department's antitrust division also opposes the agreement.

Nonetheless, most industry analysts on Wall Street think that the agreement should be approved.

"I believe they will shut down the paper if they don't get the JOA," said Noble, "and if the intent of this law is to preserve newspapers, then it is appropriate they get approval."

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