The New Look at Wall St. Journal : Business Paper Expands but Profitability Shrinks

Times Staff Writer

They’re the sort of questions the Wall Street Journal might ask:

How much difference does the management of a company really make? Or do matters beyond even the boss’s control--like new technology, the stock market crash and the business cycle--mean more to a company’s fortunes?

Fittingly, these questions now are being directed at the Wall Street Journal itself.

A new management team in the last five years has revolutionized “the daily diary of the American dream,” expanding the staff, broadening its coverage and dramatically altering its corporate culture--all at a company known for cautious management.


But, while that was happening, rivals rose up to challenge the Journal, and its record of financial success began to falter. Advertising linage has declined every year since 1985. Circulation has fallen in three of the last five years. And operating profit margins last year were half what they had been five years ago.

Some Wall Street media analysts place most of the blame on the vast internal changes at the paper, arguing that the Journal’s managers did exactly the wrong things at the wrong time--that, in effect, they made a bigger, faster car just when the marketplace called for a compact and now are trying to fix it by redoing the interior and fiddling with the tail fins.

On the contrary, the Journal’s managers reply, they have done a bold job of managing rough times, making the paper better than ever and ideally positioning it for the future.

“The Wall Street Journal,” publisher Peter Kann told analysts last year, “is much more than a financial newspaper these days.”


The argument is over whether that is such a good idea.

The story of the Journal’s rise is legend now: how quiet Midwesterner Bernard Kilgore in the 1940s dreamed of turning the sleepy financial daily into essential reading for people in business. He invented a new formula for writing feature stories on the Journal’s front page, which was later taught in journalism schools and imitated by papers such as the Los Angeles Times.

And he added it to a strict recipe: three feature stories and a summary of non-business news on Page 1, and straight news accounts of the day’s business inside. The credo behind the formula was that business people are busy, so, if it isn’t absolutely crucial, skip it.

It worked. By 1967, when Kilgore died, Journal circulation had reached 1 million, and, by 1983, under the eye of Chairman Warren Phillips, 2 million. The Journal was the biggest paper in the country and the most profitable.

It was also an eccentric on Wall Street, the rich man at the end of the block living in the smallest house. The archetypal Journal editors were cut in the Kilgore mold. They were mostly Midwesterners, “rumpled, hard-nosed men who lived in Maplewood, N. J., took the train to work . . . and spent evening home with their kids,” in the words of one staff writer.

Wouldn’t Work Elsewhere

They toiled in shabby headquarters on Broad Street, for low wages. “Moonies,” one journalist called them after a job interview--people seemingly with no thought of working anywhere else.

But, by the late 1970s, some began to think of the Journal’s ways as antiquated. A study by the Columbia Journalism Review found an alarming similarity between the Journal’s stories on inside pages and the corporate press releases they were based on. Privately, even Chairman Phillips seemed restive, complaining to aides, for instance, that the company always promoted the same old faces.


Added a Second Section

In 1979, he acted, naming former correspondent Peter Kann as associate publisher. The paper added a second section in 1980 to create more advertising space and, inevitably, more feature stories. But, to transform the Journal fully, Kann hired Journal expatriate Norman Pearlstine away from Forbes magazine and, in 1983, chose him for the paper’s top post, managing editor.

In a now-famous three-hour speech to bureau chiefs, Pearlstine set forth his plans--Pearlstine’s “Castro speech,” as it is now called, the outline of the Journal’s second revolution.

Corporations were restructuring, small businesses and professions such as law and marketing were becoming more important, he argued. “Any paper that is solely thought of as covering the largest corporations in America . . . could get in trouble,” Pearlstine explained in an interview last year. “We needed to expand the definition of business news and do things differently.”

He didn’t waste time. Although initial plans called for a three- to four-year time frame, Pearlstine chose to expand his news staff of about 400 by nearly 25% in a matter of months--an extraordinary pace for any company, but especially for a newspaper.

Carries More Features

The format changed, too, with the addition of several more standing features and columns and more long stories inside. Soon, said Deputy Managing Editor Paul Steiger, there were “15 to 20 really solid in-depth pieces” and many new standing features.

Last fall, the paper for the world’s busiest readers even added a third section--allowing it to modernize its financial tables--a delicate game of trying to make the paper a faster, easier read by making it bigger.


It has amounted to a sudden and silent revolution not only in the Journal but also in the paper’s corporate culture. Pearlstine centered more power with new editors in New York, for instance, lessening the power of the bureau chiefs. Although top management disagrees, many believe it has meant a fundamental shift in the way the paper works, with reporters at the bottom sending fewer ideas up, while more ideas flow down from the top.

The Journal moved to flashy new quarters in the World Financial Center overlooking the Hudson, finished with polished woods, chrome, textured walls and even talking elevators.

And, among top staff members, there has been a vast change in style. Where Kilgore and his loyalists would hardly have been accused of being glitzy, Pearlstine has Hollywood friends and moves in cafe society, and in a wedding at the Rainbow Room married author Nancy Friday, who wrote popularized books about sex. Publisher Kann, meanwhile, married the paper’s foreign editor, Karen Elliott House.

“There used to be no gossip around here,” one high-ranking manager said. “Now, we’ve got plenty.”

It has been a transformation of the sort that the Journal reports on Page 1. At the peak of its success, the biggest and most profitable paper in America set about revolutionizing itself--changing a winning game plan.

And, just as it began to do so, the Journal started encountering financial problems.

First, after rising 30% in five years, Journal circulation dropped by more than 60,000 subscribers in 1984. Then, the paper started feeling pressure on revenues, with profits in the third quarter of 1984 actually dropping below the previous year’s. The next year, Journal advertising linage started to slip.

One factor in the circulation decline was that, by 1984, early morning delivery of the Journal was available to 99% of the nation. No longer could the Journal grow by opening new printing plants, in effect tapping new markets.

Another factor was competition--from the New York Times’ national edition, from USA Today, from chart-laden Investor’s Daily, from improved trade magazines, from local business journals and from better daily business sections at papers such as the Washington Post, Chicago Tribune and Los Angeles Times.

Austerity Program Initiated

Before 1984 was out, Kann and Pearlstine had to initiate an austerity program, sending mixed signals through the paper. Foreign Editor House even issued a memorandum to her staff saying that reporters “either would have to make a significant contribution to the paper or start looking for other jobs.” Some of those receiving the memo had just been hired.

The pressure never really subsided. Circulation declined again in 1985. Although that loss was recouped in 1986 and 1987, the Journal, buffeted by the stock market crash, lost an additional 92,000 readers last year. Advertising linage, meanwhile, has declined every year since 1985.

And people began asking whether the revolution was the cause of the problems or the solution to them.

Fred Taylor, the Journal’s managing editor from 1970 to 1978 and executive editor until 1986, fears that the changes in the Journal have driven readers away and violated Kilgore’s premier instruction not to waste readers’ time with unimportant stories.

“They’re trying to make it the country’s biggest trade paper by soliciting to specific groups,” Taylor said.

In a period of growing competition for readers, Taylor contends, that is precisely the wrong strategy. All the added features and columns have made the paper “harder to read” and “slowed the paper down for the reader,” he believes.

Even such loyalists as Los Angeles bureau chief Steve Sansweet agreed that “the one question you can raise, and we all have internally,” is whether adding so many standing features--such as marketing, law and advertising--has meant that the paper is filling them many days with items that are inessential.

But many, including competitor Malcolm Forbes, have praised the innovations as making the paper easier to read while containing more information. And the new Journal certainly is more aggressive about hard news.

Others contend that the problems were sown before Pearlstine arrived. “The Journal hadn’t got lazy, but (it) was excessively ingrown,” one Journal veteran said. Without the revolution, “if anything, (the last four years) would have been worse.”

Improved Stock Tables

And, if some of the paper’s new features seem to have been added in response to rising competition, that may be just what is needed. The new third section, for instance, includes improved stock tables that counter those in Investor’s Daily, a Los Angeles-based financial newspaper that was born in 1984. “I think that is the kind of change that they had to make,” said the former Journal reporter.

Journal executives deny that their innovations have been defensive.

Part of the intensity of the debate has to do with how the changes were implemented.

Some of the new editors concentrated in New York, for instance, reported having so little to do that, with a nod to landlocked Bolivia, they were dubbed “Bolivian Admirals.”

“I do think it created a chaotic period when so many new people were coming to the paper at once,” Pearlstine said. “It took us a period to digest that.”

Top Editors Reorganized

Last January, Pearlstine even reorganized his top editors, saying they “were tripping over each other.”

At one point, a reporter in California received--in two weeks--nine separate and seemingly contradictory memos from New York about what was wanted.

Critics say the confusion has made them wonder if management knows where it is headed.

But Deputy Managing Editor Steiger said that “any entity that doesn’t do some experimentation will quickly atrophy.” If people inside the paper are confused by change, “that is the sort of psychology that is traditional in newsrooms . . . . I wouldn’t attribute more significance to it than that.”

Senses High Morale

Pearlstine also does not see communication as a problem. “My own sense is that the morale is as good as, or better than, at any time that I can recall.”

And, to some extent, it is true that the main problems the Journal has faced--additional competitors and the end of new markets to tap--have had nothing to do with Pearlstine’s expansion.

What is less clear is whether management discounted those factors when it planned the Journal’s expansion--whether, as former Journal reporter and frequent critic Dean Rotbart puts it, “They didn’t see a day coming when they wouldn’t have double-digit growth.”

On the contrary, Pearlstine responds, he made the changes precisely because “I did know those things (would happen).”

$100 Price of Paper Cited

In fact, management at first blamed the circulation slump in 1984 on a “psychological barrier” among readers to the Journal’s annual subscription price rising above $100.

Kann maintained, as he still does, that, although all the other publications compete for readers’ time, “there is nothing that competes head-on with the Journal in its unique role” as the nation’s business daily.

What’s more, Kann argued, because the professional and managerial sector of the population was growing faster than the population overall, the Journal would keep growing.

It remains a matter of internal debate now whether the Journal is a mature publication, its era of great growth behind it. “Maybe 2 million circulation is as big as it gets,” one former executive said. “We think this is a plateau,” said Kann, and that the paper will start growing again, “but I can’t prove that to you.”

The decline in Journal advertising linage since 1985 is more subtle. Last year the paper, along with many other major dailies, was hurt by the drop in financial advertising after the stock market crash. But, even during the bull market and merger mania of 1986 and 1987, it was slipping--a change from the early 1980s, when Journal linage grew even during recessions.

Advertising Policy Changes

One reason was a structural shift in who advertised in newspapers. National advertising, the backbone of the Journal, has slipped industrywide, especially hurting magazines. Few expected this, at the Journal or anywhere else.

Moreover, critics cannot document that the Journal has lost advertising to the competition. But it is true that business advertisers have more choices now about where to spend their newspaper budgets.

Even some brokerage analysts, long admirers of the Journal, wonder if its expansion did not exacerbate the problems. Peter Falco, who follows newspapers for Merrill Lynch, believes Journal management was “complacent” about costs. And he wonders whether that played a role in eroding the Journal’s envied operating profit margin--the percentage of every dollar of revenue from operations that is kept as profit before taxes--from 30% in 1984 to 15% last year.

New Attitude on Costs

Pearlstine admits that he is now “born again” about costs. He does not deny that in January, 1988, he told some of his staff in a meeting that at times he “took pride in being over budget and thought only wimps came in under budget,” according to a report of the meeting in The Journalist and Financial Reporter, a newsletter that devotes a fair amount of space to doings at the Journal.

But that is not to say, Pearlstine argued, that “it was a mistake to go through that expansion (in 1984), and I think it is one of the reasons we feel so confident” about the paper now.

That is Kann’s position, too. After major changes in the economy, the rise of competition and a market crash, “I think we are coming out of that period with a better newspaper, with an extraordinarily loyal core audience and a clear sense of who we are and what our mission is . . . . We kind of look at that and say: ‘Not bad.’ ”