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Is Washington Post website imploding?

Posted By Paul Sperry On 03/14/2000 @ 1:00 am In Front Page | Comments Disabled

Build it and they will come. Four years ago the Washington Post Co.
built a website version of its world-famous newspaper and people did
come. By the hundreds of thousands each day, and the tens of millions
each month.

But as popular as its online newspaper is, the company hasn’t found a
way to make money with it.

In fact, it has sunk at least $100 million into
WashingtonPost.com, as well as
other online ventures, Post insiders say, and it’s still not profitable.
That means the parent company has lost an eye-popping one-tenth of a
billion dollars so far in cyberspace.

And the Internet site’s losses are acting as a drag on the company’s
profitable newspaper, which enjoys a virtual monopoly in the Washington
market. The company’s overall earnings growth in 1999 was flat, despite
fat retailer ad budgets and lower newsprint prices. Its stock, traded on
the New York Stock Exchange, is testing earlier lows.

And in another blow, Alan Spoon, the company’s long-time president
and chief operating officer, announced Friday that he’s quitting.

The news comes as a shock, insiders say. Spoon, an 18-year veteran,
has been Post Chairman Donald Graham’s right hand for the past seven
years.

The company hasn’t named anyone to replace Spoon, 47, credited with
helping launch the Post’s Internet venture.

His exit comes on the heels of several other recent high-level
departures. Last month,
WashingtonPost.com’s publisher left. And the Internet paper’s editor and
managing editor left before him. They’ve all since been replaced.

Analysts say the Post’s woes serve as an example of how hard and
costly it is to run a traditional newspaper while at the same time
starting up an electronic edition, which begs for separate operations,
buildings and staff.

But the old press has no choice but to make such forays, they say.
Publishers can see that the Internet is on its way to becoming the top
medium for distributing news and information.

“So many people already are accessing information that way; you have
to be a part of it,” said Kevin Lavalla, managing director of Veronis
Suhler & Associates, a New York-based consulting firm for the
communications industry. “If you aren’t a part of it, you’ll lose out.”

John Morton of Silver Spring, Md.-based Morton Research Inc. says
that newspapers in general, and not just the Post, are losing money on
their Internet sites.

“It’s very early on,” Morton said, “and there’s a lot of investment
involved.”

Still, the size of the Post’s losses are alarming — and puzzling.

WashingtonPost.com, which like other news sites bears no printing or
delivery costs, at the same time boasts more traffic than any other
netpaper, according to PCDataOnline, a website traffic tracker that’s
viewed as one of several Nielsen-style ratings services for the
Internet.

In February, the Post attracted more eyeballs to its site — and kept
them there longer — than any other newspaper.

Readers viewed a total of more than 108 million pages on
washingtonpost.com last month, each sticking on the site an average of
more than two hours, according to PCDataOnline. (See table.) Also, 1.5
million people visited the site for the first time in February.
Advertisers watch such unique-visitor traffic very closely.

But at the same time, two newspaper sites with less traffic (in terms
of total page views per month) — USAToday.com and RealCities.com, Knight Ridder’s network of regional news
sites — have managed to turn a profit, Morton says.

Some analysts say the Post is finding out the hard way that its
long-held local monopoly — the venerable newspaper’s market penetration
figures are higher than those of any metro paper in the country –
doesn’t transfer to cyberspace.

On the Internet, which has no boundaries, the Post has to fight for
audience and advertisers with hundreds of other news sites, run by both
print and broadcast corporations, as well as a new breed of independent
competitors, such as DrudgeReport.com
(No. 9 in traffic) and WorldNetDaily.com (No. 17).

In addition, Washington.Sidewalk.com, a
recent joint venture of Microsoft Corp. and Ticketmaster, has been
cutting into the Post’s online advertising, especially among area
restaurants and theaters.

Over-investing

WashingtonPost.com was launched June 19, 1996. After nearly four
years of scaring up new advertising, the site, which is free to users,
is generating revenue seen by some weekly newspapers. Last year, it
posted $17 million in sales.

“Pretty small potatoes,” Morton said. “But even the biggest companies
are estimating this year that web revenues may run in the $30 million or
$40 million range — which is what you can get at a 30,000-circulation
newspaper. It’s not very much money so far.”

That’s within the range of what the WashingtonPost.com is projecting
for its 2000 sales, insiders say. But even if it can double sales to
about $35 million, it’s a drop in the bucket for a $2.2 billion-in-sales
company like the Post, which also owns Newsweek and cable TV and
educational-services properties.

Both analysts and company insiders agree that, low as they are for
such a media giant, the Post news site’s sales aren’t really the cause
of its massive losses. It’s runaway spending.

“They are investing at a more rapid rate than either Gannett (which
owns USAToday.com) or Knight Ridder,” Morton said. (Gannett’s site is
basically a carbon copy of its USA Today newspaper, and is run by a
staff about a quarter of the size of WashingtonPost.com’s.)

Some say the Post broke the cardinal rule of starting a new business:
Don’t try to look successful before you are successful.

The company poured money into stylish offices across the Potomac in
Rosslyn, Va., for the news site operation. The new digs, decorated to
look hip and high-tech, take up two floors.

Cha-ching.

In 1996, roughly 50 staffers worked there. The company’s since
doubled the payroll.

Cha-ching.

It also hasn’t spared outlays on the website itself. It’s well
designed and offers an impressive archive that includes speech
transcripts, government reports and other documents.

Cha-ching.

“We’ve redesigned two or three times,” said WashingtonPost.com editor
Doug Feaver.

Cha-ching, cha-ching, cha-ching.

In September, the Post added a mid-day online edition, which updates
news that’s posted on the site in the morning. That of course required
more staffing.

Cha-ching.

Total? Insiders who wish to go unnamed say spending on the site,
combined with spending on other online ventures, has climbed to at
least
$100 million over the past four years.

The Post’s front office refuses to break out financial results for
the news site operation separately.

(Even though his company is publicly traded, CEO Graham can get away
with keeping such numbers close to his vest. He and his family own all
of the Class A shares of the company stock, which insulates them from
stockholder pressure. Even a Wall Street analyst found that “they’re not
very open and can be evasive” about sharing sensitive data.)

Officers did cough up some numbers at a recent investors conference
in New York, though. They said the company — in 1999 alone — made
about $85 million in investments in WashingtonPost.com and
Newsweek.com, as well as its
education-and-career services segment — which includes
kaplan.com, a test-prep website, and
eScore!com, a resource for parents to help
kids with their schooling.

At the same December event, which was sponsored by Donaldson Lufkin &
Jenrette, the officers noted that ad revenue for both the Post newspaper
and Newsweek magazine were up in 1999. And the newspaper unit benefited
from a 19 percent drop in newsprint costs, which helped boost operating
income (earnings before depreciation, interest, taxes and nonrecurring
items) by 13 percent. The magazine unit’s operating income jumped an
even stronger 39 percent.

Only, the gains were offset by increased spending for
“Internet-related operations” in 1999. How much of an increase? A
whopping $34 million over 1998′s investment.

Meanwhile, all the Post’s “Internet-related operations” have lost
money.

So is Graham pouring money down a digital black hole?

“Some would argue they’re over-investing,” one former Post executive
said. “But if you’re the Washington Post and you have 60 percent market
share as a newspaper, you better over-invest and own the Internet,
because you’ve got something pretty big to protect.”

He expects the company to be in the black by 2002, although he thinks
it could be profitable this year — if it wanted to grow the new
business that way.

“There are a number of ways to turn a profit. If you wanted that
division to be profitable, you could rescale it and be profitable by the
end of the year,” said the former officer who requested his name be
withheld. “It’s really the company’s decision on how it gets there. Does
it want to be profitable at $30 million in revenue, or $100 million?”

He adds that the company is less worried about making profits in the
near term than it is about dominating the local market for the long
haul. It also wants to “build a national and world brand position,” he
said.

Among all news sites, WashingtonPost.com ranks No. 6 in so-called
Internet “reach,” PCDataOnline says. In February, it had a 2.2 percent
rating, behind USAToday.com and NYTimes.com, meaning that over 2 percent of the total
estimated population surfing the Internet in February landed at least
once on the Post’s site.

Signs Of Trouble

Though the company won’t put a total figure on its Internet loss,
Graham has never hidden the fact it’s losing money.

“While WashingtonPost.com has exceeded our wildest expectations in
terms of audience, its future profitability continues to look murky,” he
admitted in the Post’s 1996 annual report.

It’s anyone’s guess what he’ll say in 1999′s annual report, which
isn’t out yet. But three years later, the profit picture is still murky
– and not just for the Internet unit. Losses are starting to eat into
the parent company’s bottom line.

Last year the Washington Post Co. earned $22.30 a share, down 46
percent from $41.10 a share in 1998. The 1998 results, however, reflect
a one-time gain of $194 million, or $19.20 a share, from the sale of a
media property.

So if you back that out, the restated per-share profit for 1998 was
$21.90. Which means the Post actually reported a slight gain in 1999 of
1.8 percent (reversing a 16 percent drop in 1998).

Even so, the growth is anemic, especially given the booming economy.

“Most of the other media companies had very strong earnings growth in
1999, and they (the Post) of course didn’t,” Morton said. “A lot of it
is because of these investments in these websites.”

The Post’s stock has been reflecting the poor results. It had a
healthy run in 1997 and the first half of 1998. But shares have been
limping along ever since. And even though the company bought back
744,000 Class B shares last year, its stock has cratered this year and
recently undercut its previous low reached in late 1998.

But there are signs the company is starting to rein in spending and
control costs.

  • WashingtonPost.com recently hooked up with MSNBC.com, the No.
    1 news site overall. The deal lets MSNBC.com display the Post’s lead
    story in exchange for MSNBC’s content, namely video of live events like
    White House news conferences. Besides the co-branding benefits, the move
    will save the Post money.

  • Last month the company installed Christopher Schroeder as CEO and
    publisher of WashingtonPost.com. Schroeder, who used to work in the
    Post’s Washington headquarters as treasurer and head of cash management,
    will be looking for fat to trim in the operation.

  • Instead of hiring new staffers for the news site, the Post is
    cannibalizing its main newsroom. It’s brought over several veterans to
    help run the site.

Also, the Post’s ad sales force has recently been deputized to
sell ads for the Internet site, insiders say. That should help the site
reach its goal of doubling ad sales this year, and thereby slow the flow
of red ink.

It’s no doubt a good move for the Internet site, but maybe not so
great for the newspaper, as sales reps spend less time on their old
accounts.

Are newspaper ad sales slipping? Hard to know. Just in the last two
months, the company has stopped providing Post ad linage figures to Wall
Street.



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