This story appears in the 2/27/12 issue of FORBES.
In the next few months Facebook will go public at a rumored valuation of up to $100 billion, one of the most keenly anticipated business events ever. The instant that trading opens, Mark Zuckerberg and a handful of his cofounders and earliest backers will reap billions in new paper wealth. And leaders of the Washington Post Co. will watch, melancholy, knowing that their many pressing financial problems could have been magically solved with the ringing of that bell.
In early 2005 Chairman and CEO Donald E. Graham, tipped off to the then embryonic social networking site by an employee whose daughter was at Harvard, approached Zuckerberg about making an equity investment. Within days the two had a handshake deal for a $6 million infusion. But when Silicon Valley venture firm Accel Partners offered to buy in at a higher valuation, Zuckerberg got cold feet. Graham could have pressed him to honor his verbal contract or at least made a counteroffer. Instead, he encouraged the 20-year-old to follow his heart. Zuckerberg went with Accel.
To those who know him, this anecdote, related in The Facebook Effect (Simon & Schuster, 2010) by FORBES contributor David Kirkpatrick, is classic Don Graham. “He’s an incredibly nice person,” says Goli Sheikholeslami, a former Post vice president who headed up digital development at the paper before leaving in 2010. “He’s always willing to give advice, especially to young businesspeople.” “He’s sort of an amazing human being,” adds a former business-side lieutenant. “A lovely, lovely man,” echoes a former Newsweek editor.
In fact, throughout the newspaper industry Graham, 66, enjoys a reputation as one of the good guys of American journalism, the rare mogul who puts principles and people ahead of profits. In the 20 years since he took over the CEO title from his mother, the legendary Katharine Graham, the Post has won 32 Pulitzer Prizes, more than any other paper except the New York Times. As papers across the country slashed payroll in the face of tumbling readership and advertising, the Post managed its own downsizing largely through generous buyouts. At a time when cost-cutting pressure has pitted management against labor in newsrooms everywhere, Graham is regarded by his employees as a benevolent figure, a throwback to an earlier era of corporate paternalism. “From my point of view he’s been an absolutely model media owner,” says Jacob Weisberg, editor-in-chief of the Slate Group, a part of the digital publishing division. “Don never tells you what to do. He’s been a huge supporter.”
Graham’s Dudley Do-Right attitude, however, has proved a liability lately. The woes of the company’s namesake newspaper—circulation has steadily dropped 40%, to 507,000, since 1995 and revenue 30%, to $680 million, just in the past five years—might have been predictable given the battered state of the newspaper industry. But missed opportunities (Politico, in addition to Facebook) and misplaced loyalties (Newsweek) abound. And, more ominously, Graham’s diversification forays, into everything from education services to new media, failed to pan out—or, worse, turned into millstones.
In the most recent quarter the Post, which also operates a cable system and a string of TV stations, turned in “the worst performance of any of the public newspaper companies,” according to analyst Ken Doctor. After rising steadily for more than a decade the Post Co.’s overall revenues fell 10%, to $3.15 billion, through the first three quarters of 2011. Profits dropped 72% to $55 million. Twice last year Standard & Poor’s downgraded its debt rating, citing profitability concerns. Its stock price has fallen from an alltime high of $942 per share in December 2004—weeks before Graham’s fateful conversation with Zuckerberg—to under $400. Its current market cap is $3 billion.
If he’d played hardball (or even just asked Zuckerberg to honor their agreement or let him co-invest with Accel), none of this would matter. That stake in Facebook it doesn’t own? It could be worth $7 billion, according to PrivCo, a firm that tracks private companies.
Meanwhile, the Post has purchased almost $10 million worth of advertising on Facebook in the last three years. And, according to paperwork Facebook recently filed for its IPO, it has paid Graham’s daughter Molly more than $420,000 plus an undisclosed amount of restricted stock for her services in the area of “culture branding.” Molly Graham joined Facebook in 2008*—a few months before her father joined the board.
If all this coziness hasn’t elicited more resentment, it may be because Graham has never been anyone’s idea of a spoiled heir or fat-cat media tycoon. His path to prominence was marked by tragedy: In 1963, when he was 18, his father, Philip Graham, committed suicide. The elder Graham had inherited control of the Post Co. from his father-in-law, Eugene Meyer, who had acquired it out of bankruptcy in 1933. His death left his wife, Katharine, in charge of a company she was utterly unprepared to run, yet she eventually flourished in the role with the aid of advice from Warren Buffett, among others.
Don Graham was prepared for a life in newspapers, having served as president of the Harvard Crimson as an undergraduate. Yet rather than enter the family business upon graduating in 1966, he surprised his mother by entering the Army, telling her, “The rich are staying in school and the poor are being drafted. I can’t live with that.” After his tour of duty ended he became a policeman in Washington, D.C., saying he needed “to learn about the city.” It was only after 18 months as a cop that he allowed himself to take a job with the Post Co. and then only as a lowly reporter. By the time he was named publisher in 1979, he had held a variety of jobs on both the business and the editorial sides.
If the point of all this self-inflicted humility was to keep Graham in touch with the common man, it worked. “Down-to-earth” is a phrase that gets used a lot to describe him—not something that’s often said of people worth half a billion dollars.
In 2008, when Katharine Weymouth, Graham’s niece and heir apparent, was named publisher of the paper, the Post Co. remained the envy of the newspaper industry, insulated as it was from the concerns confronting other publishers by a pair of unique circumstances. The first was the longstanding patronage of Buffett. Through his investment firm, Berkshire Hathaway, Buffett has been the largest shareholder outside the Graham family since 1974, when he took an 11% stake, and its lead director for most of that time. (Thanks to periodic buybacks, Berkshire’s holding has since swelled to 24%.)
Buffett’s philosophies are evident in practically every aspect of the Post’s operations, from its executive structure to its controversial decision not to charge readers for the online edition of the Washington Post. His investment advice has left the Post with a permanently overfunded pension plan, a luxury that underwrote all those generous buyouts. Graham regards Buffett as a mentor and frequently quotes from his precepts, especially his advice to ignore stock price and focus on a company’s intrinsic value. (That’s one Graham has had a lot of use for lately.)
Although Buffett stepped down from the board of the Post Co. a year ago, saying he no longer had time to travel to the meetings, he has promised never to sell his shares. Graham still relies heavily on his guidance. “Warren’s role as advisor, as we said at the time he left the board, is unchanged,” he says. “I continue to talk with him about important developments at the company.”
The other unique circumstance sheltering the Post is, or was, the success of its education division, Kaplan. Founded as a test-prep business, in 2000 Kaplan entered the burgeoning sector of for-profit higher education. In 2004 it surpassed the Post as the company’s chief contributor to operating income; by 2010 it was responsible for 61% of the company’s total revenues and the Post Co. was describing itself as “an education and media company” rather than the other way around.
As the long-term gradual decline of the newspaper industry gave way to an allout free fall in 2008 and 2009, Kaplan was the perfect parachute. “It masked the downturn at the Post and gave them room to maneuver that the New York Times, for instance, didn’t have,” says Doctor.
Then the chute ripped. In 2009 the Department of Education started cracking down on the for-profit education industry, accusing it of pushing low-income students with poor risk profiles to take on loans they too often couldn’t repay, resulting in high default rates reminiscent of the mortgage crisis. Much of the harshest scrutiny was directed at Kaplan, whose growth had been overwhelmingly fueled by taxpayer dollars and whose employees had been recorded using unethical tactics to enroll new customers. In the face of new federal regulations, investigations by state attorneys general and whistleblower lawsuits, in 2010 Kaplan enacted reforms, including a new policy under which students can withdraw from courses without being charged.
The results have been dramatic. New enrollments at Kaplan schools were down 30% in the most recent quarter. Since college-degree programs are multiyear commitments, the effects will continue to be felt for many quarters to come even if enrollments bounce back. Other for-profit education companies have also been hit but in most cases not as hard.
Chalk that up to Don Graham. While his hands-off executive style may have allowed things at Kaplan to get out of hand in the first place, his commitment to upholding the family legacy ultimately ensured a rigorous response. “My take on it is the Washington Post wants to do things right,” says Standard & Poor’s analyst Hal Diamond. “They care a lot about their reputation, and they’ve gone further than others in trying to restructure their education business.” Still, some observers believe the risk of taint from the Kaplan mess figured into Buffett’s decision to leave the board. (Buffett declined to be interviewed for this article.)
With Kaplan sidelined, cable television has emerged as the Post Co.’s most profitable division. But its Cable One subsidiary, too, faces “serious long-term issues,” including stiff competition driving down prices and the consumer trend of “cord-cutting,” says analyst Brad Safalow of PAA Research. In fact, Cable One’s operating income was down 9% in the first nine months of 2011, to $115 million.
And the prospects for the Post Co.’s broadcast television station groups aren’t much sunnier, although heavy ad spending around the Olympics and the presidential election should buoy them somewhat in 2012. “When I look at the company I see a series of assets, all of which face tremendous secular headwinds,” says Safalow. “Can we get to a scenario where there’s upside to the stock? Not based on our assumptions.”
If you’re thinking that other owners might see more value in any of these businesses than the Post Co. is getting out of them, you can forget about it. In keeping with the Buffett doctrine, Graham holds the view that the market will come to recognize the proper value of the Post’s assets sooner or later. “Generally we do not spin off or sell our businesses,” he says. “If investors are looking for companies that do, there are plenty of them available.”
If upside is to be found, it may have to come from the unlikeliest of places: publishing. Formerly a reliable source of profits, in each of the past four years the Post’s publishing group has lost money.
In an effort to stanch at least some of the bleeding, the company sold Newsweek in 2010 for the symbolic price of $1 to audio equipment manufacturer Sidney Harman. (Harman died shortly after entering into a pact with IAC to merge the magazine with the Daily Beast website.) In the two years before the sale Newsweek lost $40 million. Among Post and Newsweek insiders the consensus is that Graham should have recognized the need to sell years earlier—or at least cut down its larded cost structure—but was blinded by a concern for legacy and sentimentality.
That Graham would sell or close the Post itself is all but unimaginable. “The newspaper is the basic foundation not only of the company but of the family,” says analyst John Morton. “The only family that would be less likely to sell its principal asset would be the Sulzbergers at the New York Times.”
Yet the Sulzberger family has a substantially easier task. While the migration of readers and advertisers from print to Internet—and the substitution of “digital dimes for analog dollars”—has hurt all newspapers, it has been crueler to some than others. Huge national or international papers like the Times and the Wall Street Journal can attract elite brand advertising with their reach and prestige; meanwhile, tiny local papers have an exclusive lock on retail ad spending in their underserved communities. Midsize metro dailies like the Post enjoy neither advantage.
Over the years the Post has flirted with the idea of going national on the theory that what happens in Washington is of interest to the whole country. Rather than commit, the paper simply nursed an ongoing identity crisis. “That question framed everything we did for the entire time I was there,” says Jim Brady, who ran the Post’s website from 2004 through 2008. “They’re kind of stuck between those worlds.”
Paralysis proved costly in 2006 when two Post editors, Jim VandeHei and John Harris, pitched the idea for a spinoff website that would focus exclusively on politics. Although Graham was open to the idea, it was Allbritton Communications that recognized its full potential and persuaded them that it shared their visions. The resulting site, Politico, was profitable within two years and has arguably eclipsed the Post as a source of national political scoops. The $40 million Graham wasted on Newsweek’s last two years could have easily funded Politico’s launch—and then some.
That’s not to say the Post has remained frozen in time. Among big newspapers it was relatively early in embracing the Web and was ahead of its peers in adopting such innovations as blogs and reader-generated comments. It continues to have the second-most Web traffic of any U.S. newspaper, after only the New York Times.
Yet, inside the paper and across the industry, there’s a sense that the Post has fallen behind in the innovation race, particularly on the business side. Digital ad revenue, rather than rising to offset the inevitable loss of print sales, actually fell 14% in the most recent quarter. While an increasing number of papers, including the New York Times, are starting to see some success from charging for access to their websites and mobile versions, the Post continues to cling to the dogma that the best strategy is the one that attracts the biggest audience, even if those readers aren’t paying. “The old business is cratering even faster for the Post than for other papers, and they’re not finding new digital business models to replace that downturn,” says Doctor.
In 2009 the Post Co. started WaPo Labs, an in-house team of developers and engineers inspired by the skunkworks at tech firms like Google and Amazon. By far the most promising product to come out of the lab is Social Reader, a Facebook-based app that lets users read the paper from within their profiles and recommends articles based on what their friends are reading and sharing. While other papers, including the Wall Street Journal and the Guardian, have their own Facebook editions, Social Reader boasts an additional layer of sophistication thanks to a recommendation engine called Trove, another product of the lab.
Social Reader has proved popular, with some 9.5 million users signing up for it, nearly two-thirds of whom qualify as active. “We’re absolutely delighted by the audience we’ve been able to gain,” says Vijay Ravindran, who oversees the lab in his role as chief digital officer.
Crucially, those users are overwhelmingly exactly the sorts of young consumers who have otherwise turned away from newspapers: More than 80% of them are under age 35. In other words, if it continues to gain in popularity, Social Reader or something like it could be a funnel that brings a new generation of customers into the Post franchise.
For now, however, its benefits are strictly notional. The Washington Post isn’t selling ads within the Social Reader, and it has no immediate plans to. “Monetization absolutely has a place in the product down the line,” says Ravindran. “It’s not something we’re going to do tomorrow or next week. We’re really just focused on building the best product possible.”
Sound familiar? It might, if you’ve seen The Social Network. Intense focus on product paired with a go-slow approach to monetization is pure Mark Zuckerberg. While Graham is the one Zuckerberg turned to for advice on how to be a CEO, in some ways the mentorship has flowed in the other direction. Beyond all that potential personal cash flow from the Facebook IPO, those that know him say he’s learned a lot from his new friends out west. All that time Graham has spent hanging out with Zuckerberg, Marc Andreessen and Reed Hastings at Facebook board meetings has shaped his approach, says Ravindran. “He has a surprisingly Silicon Valley view of how innovation should be fostered and the challenges a business has in trying to reinvent itself,” he says. That sounds particularly useful right about now.
*Correction: The original version of this sentence inaccurately described the Post Co.'s ownership structure. The super-voting shares are A shares, not B shares. They represent the vast majority, but not all, of the votes; common shares do have some voting power. And it's the Graham family rather than Don Graham himself who wields control of the A shares.
**Correction: The original version of this sentence misstated the timing of Molly Graham's hiring. She joined Facebook in 2008, not 2009.
