Orange County Business Paper Is Latest Link in Growing Chain

When Donald L. Keough took charge of the Los Angeles Business Journal and the San Diego Business Journal last year, he knew exactly what to do. He had, after all, founded or overhauled 18 such newspapers before.

Just as he had done in San Francisco and San Jose and Sacramento and many other cities across the country, Keough first focused on the editorial side. He implemented a redesign, beefed up the staff, and tightened the focus on day-to-day news that affects small- and medium-size local businesses.

Then he lit some fires under an advertising sales staff that had, he said, become complacent. Finally, he began the laborious and expensive process of converting the papers from freebies to paid circulation.

Sixteen months later, both publications are turning a profit, and Keough is turning his attention to project number 21: the Orange County Business Journal.

Keough’s current employer, CBJ Inc., purchased the biweekly tabloid from its founders last month for an undisclosed sum, and it is now up to Keough to convert the paper to a profitable weekly and devise ways of exploiting a business news franchise that covers most of Southern California.

That latter task could be harder than it sounds.

Keough’s former employer, Kansas City-based American City Business Journals Inc., built a national chain of weekly business papers at a frantic pace, only to find itself with unmanageable debts and without a clear concept of how to make the papers work together. American City was forced to divest about a third of its holdings--including the San Diego and Los Angeles papers--and the company’s founders agreed in June to sell a controlling interest in the firm to Ray Shaw, former Dow Jones & Co. president, and the Oklahoma Publishing Co. for $22.7 million.

CBJ, which is headed by Kansas City real estate investor Larry Bridges, has more modest ambitions: Keough said new weekly papers are being considered for Long Beach, San Bernardino-Riverside and Ventura County, but they are several years away.

Even so, CBJ still must answer the central question facing the 10-year-old business journal industry. As Keough asked rhetorically: ‘Is there any benefit to managing these things in the aggregate, or do you simply have separate small businesses? I believe there’s value in the aggregate,” he adds, “but some investors have concluded that there isn’t.”

Local business newspapers began to sprout up around the country in the late 1970s as businessmen sought alternatives to the skimpy business coverage in local dailies and the big-company bias of national organs such as the Wall Street Journal and Business Week. One of the first to see the potential was entrepreneur Mark Vittert, who recruited Keough in 1980 from the Columbia (Mo.) Daily Tribune to run a business weekly in St. Louis.

The paper was a big success, as were subsequent ventures in Indianapolis and Philadelphia. Keough, a short, friendly man who brims with energy, then decided he wanted a piece of the action, and when Vittert wouldn’t give it to him, he pitched his ideas to Kansas City real estate entrepreneurs Michael K. Russell and William H. Worley.

Russell was enthusiastic, Worley much less so, Keough recalled. “I walked in my first day on the job,” Keough said, “and Doc (Worley is a veterinarian) said, ‘Of all the crazy things Mikey has done, this is the craziest.”’

But after the Kansas City Business Journal broke into the black in 11 months, the skeptics were convinced. And Russell, with Keough as the editorial and operations point man, set about building American City into a national chain. The company, which went public in 1985, started its own papers, bought others from local entrepreneurs, and purchased the Vittert and Scripps-Howard chains.

The advantage of a chain, Russell said, was that it enabled all the papers to use a proven journalistic approach--a tabloid, newsprint format with a focus on hard news that affects smaller, local businesses--and avoid having to “reinvent the wheel” in every city. In addition, the company hoped to be able to persuade national advertisers to use a network of local papers as an alternative to the national business press.

14 Publications Unloaded

While Keough’s journalistic formula worked in individual markets, American City suffered from too-rapid expansion, slower-than-expected turnaround at some papers, weakness in the advertising market after the stock market crash and increased competition from reinvigorated business sections at many dailies. The company was forced to unload 14 publications, with six profitable papers (including Sacramento and San Jose) going to Minneapolis publisher Mark Hopp for $46.1 million, and the unprofitable Los Angeles and San Diego papers going to CBJ last April for $3.3 million.

Initially, American City was to continue running the Los Angeles and San Diego publications and get half of any profits under a management contract, with Bridges and CBJ as silent partners. But Bridges, who declined to be interviewed, was apparently dissatisfied with American City management. Russell confirmed that Bridges has been “more hands-on” than anticipated.

Keough, meanwhile, arrived on the scene from the San Francisco Business Times last year. He had founded the San Francisco paper himself--using his equity stake in American City as collateral--but ran out of money and was forced to cede a large stake back to American City in return for $2 million in loans. As part of that deal, he also agreed to move to Los Angeles and become group publisher for the disgruntled Bridges. Keough retains a majority ownership and a management role in the San Francisco paper, but he now works for Bridges and CBJ. American City and CBJ announced Friday that they had agreed on a buyout of the management contract held by American City, but the price to be paid by CBJ was not disclosed.

Although none of the California papers are now owned by American City, all are still part of the company’s national advertising network. But the high hopes Russell once had for combining local weeklies into a national advertising buy have been disappointed.

“This is not nearly as important as everyone thought it would be at the beginning,” said Dennis Hudson, director of research at George K. Baum & Co., a Kansas City brokerage.

The network includes 53 publications: some owned by American City, some formerly owned by American City and others that have always been independently owned. It has increased its revenues by 20% this year, said network chief George Conley, but it appears to account for only a very minor portion of revenues at most member publications.

Keough concedes that even in markets as closely integrated as Los Angeles, Orange County and San Diego, the amount of multiple-publication advertising is likely to be limited. “If it were 10% of revenues, I’d be surprised,” he said.

And while owning all three papers will allow some economies of management and purchasing, the real appeal of Orange County is the dynamism of its business community, Keough said.

Diverse L.A. Market

The Los Angeles market, Keough believes, is too diverse to be properly covered by one publication. “Where there is a community doing business with itself, as in Orange County, it’s best served by an individual paper,” he said. “The Long Beach-South Bay area, and San Bernardino-Riverside, they’re not far enough along yet in their development. But they will be.”

In the meantime, Keough is seeking the elusive “added value” that he believes lies in having a string of publications. As an example of the possible benefits, he cites the savings and loan crisis. “Several years ago, every local business paper had stories about a savings and loan that was in trouble. If you were collating that into a data base, it would have emerged as a national trend” long before the S&L; crisis hit the mass-media limelight.

On a less grandiose level, Keough points to the potential of spinoff products, such as the L.A. Business Journal’s New Business Survival Guide, which is sent out to the enterprises that are catalogued in the paper’s weekly list of start-ups. Through the guide, the paper also conducted a survey of small businesses, and that information is of obvious interest to companies selling business services, Keough said.

The paper has already begun selling a computer application called “Instant Prospects” that utilizes much of the data collected in the course of putting out the publication. These kinds of spinoffs are very profitable because “you’ve already spent the money” to collect the information, Keough said. And the value of the data could be greatly enhanced if it covers a broader geographical area.

The L.A. Business Journal, with 15,500 paid subscribers out of a total circulation of 56,000, already collects about 20% of its revenues--which Keough said were somewhere between $7 million and $10 million annually--from spinoff products. And as the paper matures and more subscriptions are converted to paid circulation, that will be the biggest revenue growth area, he added.

Still, the most important advantage of operating as a chain remains the most basic: a large company can bring strong management and financial resources to struggling local enterprises. In Orange County, Keough hired Charles Heschmeyer, a veteran of several American City start-ups, as publisher, and Heschmeyer said the company is investing heavily to convert to weekly publication, expand the editorial staff and drastically increase the number of paid or “requested” subscriptions, which now total just 3,500 out of a circulation of 20,000.

Editorial Exodus

Ironically, the local focus that makes these business journals succeed does not appear to require local people or a unique local approach. Most of the editorial staff at the Orange County Business Journal left after the purchase, and the former editor, Cathy Semar, spoke derisively of the fact that the new editors were still “trying to figure out how many cities there are in Orange County.”

Marsha Marengo, the former owner of the paper, was also critical of the standardized approach, saying: “They took my newspaper and made it look like their other ones. We had a lot of good ideas, and I think they were wrong to take them out.” But Keough said it was far more important to have people with experience in his way of doing things than people who know the area.

American City, under its new ownership, is also counting on strong central management to improve profitability. Ray Shaw, the new controlling shareholder and chief executive, has not disclosed his strategy, but people close to the company characterized his management style as “deliberative” and suggested that he would move slowly and focus on improving performance at individual papers rather than implementing a grand plan.

And Crain Communications Inc., whose Chicago Business is widely considered the best weekly business paper in the country, has been content to focus on just four markets--Chicago, New York, Cleveland and Detroit. “We have a lot of papers offered to us, but generally our corporate management has not been that interested in the secondary markets,” said Joseph Cappo, group publisher at Crain.

Keough has an idea as to why some big publishing companies have shied away from city business journals. “These things are not very easy to run--they require a lot of attention,” he said. “If you can make it work, it can be very lucrative: 25% to 30% pretax margins. But the level of management skill required might be the same as for a $50-million enterprise. So it’s not worth it” to the big companies.

But if Keough can succeed in developing a strong and profitable mini-chain of business journals in Southern California--and possibly, later, in all of California--then it will certainly be worth it to him.