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Monday, February 11, 2008

New Times CFO: Our Rates Went Up, Not Down

Posted By on Mon, Feb 11, 2008 at 6:43 PM

Plus: Guardian’s attempts to wash its “unclean hands”

By Andy Van De Voorde

New Times chief financial officer Jed Brunst took the stand Monday as the Weekly continued its defense in the predatory-pricing lawsuit filed against it by the Bay Guardian.

Despite having been the larger, more profitable paper in San Francisco over time, the Guardian is alleging that the Weekly and its former parent company, New Times, now known as Village Voice Media, tried to drive it out of business by intentionally selling ads below cost.

But the New Times CFO's testimony suggested that financial losses suffered by the Weekly have been caused by a difficult economy, competition from the Internet, and the New Times tradition of investing heavily in its editorial operations.

Under questioning from Weekly attorney H. Sinclair Kerr Jr., he also offered evidence that Weekly rates have been going up over time, a trend that flies in the face of the Guardian’s theory.

Brunst’s data showed that the Weekly’s rates for local display advertising rose from an average of $12.21 per inch in 1996 to an average of $19.16 per inch in 2007. They rose each year after New Times bought the Weekly in 1995, dropped following the dot-com bust and the terrorist attacks of 2001, then rose again.

A similar pattern characterized Weekly classified rates, which according to Brunt’s data rose from an average of $17.66 per inch in 1996 to $22.67 in 2007. They followed the same pattern as the retail prices, rising to a peak of $30.07 per inch in the dot-com boom year of 2000, dropping after the boom went bust and Craigslist began offering free ads via the Internet, and then slowly creeping back up.

Also appearing to refute the Guardian’s theory that New Times wanted to drive it out of business with low ad prices was Brunst’s testimony about the Weekly’s editorial spending. The CFO told the jury the paper was spending a total of $287,000 on editorial salaries and expenses when it was purchased by New Times. That spending more than doubled the next year and continued to a high of $1,304,000 in 2004 before dropping to $1,045,000 in 2006.

The Guardian has provided no specific figures about its own editorial spending to the jury, but has acknowledged it laid off reporters at the same time its owners bought a $5 million office building and spent hundreds of thousands of dollars suing the Weekly.

Kerr’s questioning underscored a simple point: If a paper wanted to sell bargain basement ads in an effort to injure its competitor, quadrupling its own editorial expenses would hardly seem a logical part of the plan.

When Guardian attorney Ralph C. Alldredge began his cross-examination, he followed a pattern that is becoming familiar in his treatment of defense witnesses. Rather than focusing on the alleged pricing conspiracy, he implied that a New Times witness was hiding something.

In fact, the first question Alldredge asked Brunst was whether it was true that his calculations of average Weekly ad rates had left out a six-month period from July 2005 to June 2006. Brunst had already explained to Kerr that New Times switched from a fiscal-year accounting system to a calendar-year system at that time, so he had skipped that period in order to be able to provide twelve-month slices for his report. But Alldredge wanted to know more about the statistical blip.

Couldn’t Brunst have included it if he’d wanted to? he asked.

Sure, replied Brunst.

Alldredge also demanded to know why Brunst hadn’t included national advertising when he had calculated the volume of Weekly advertising for one chart.

“I don’t think that national advertising reflects the local economy,” said Brunst, an observation that drew sarcastic snickers from a group of Guardian backers sitting in the gallery.

Alldredge even made an issue of the fact that Brunst had left out a single month’s worth of information when he prepared a chart tracking ad volume for 2007. That month was December, and Brunst pointed out that he didn’t have the information when he was asked to prepare the analysis.

When did he get the information? Alldredge wanted to know.

Maybe thirty days ago, said Brunst.

And he could have added the data in the meantime, if he’d so chosen? Alldredge demanded. (The Guardian lawyer even asked Brunst to estimate how many minutes the process would have taken.)

“Yes,” said a clearly exasperated Brunst. “If that’s all I had to do, and if that’s all the people who work for me had to do.”

Kerr later asked Brunst whether adding the information would have changed the critical point made by his chart: that the Weekly’s 2007 ad volume was less than it was in 2006.

Not a bit, said Brunst.

Alldredge displayed an equally detailed interest in New Times board meetings.

"Isn’t it true that financial statements are distributed at those meetings?" Alldredge asked.

Sometimes, said Brunst.

"And didn’t New Times executive editor Michael Lacey attend board meetings?"

Sometimes, said Brunst.

Alldredge then asked Brunst to tell the jury how far his office at the company’s Phoenix headquarters was from Lacey’s office. Maybe 150 feet, replied a quizzical Brunst.

Whether Lacey ever looked at a financial statement has no bearing whatsoever on whether the Weekly engaged in an unlawful pricing scheme. But last week Lacey testified that he doesn’t read the documents. And Alldredge appeared eager to catch Lacey in a lie.

Brunst, however, insisted Lacey was telling the truth.

“It’s just not Mike’s world,” Brunst later told Kerr. “You could put a science book in front of him and it would have the same effect.”

In an ensuing series of combative exchanges, Alldredge sidestepped the Weekly’s editorial spending and regular rate increases. Instead, he chose to focus on a set of by-now-familiar set of themes: the fact that the Weekly prepared “Guardian Reports” tracking ad count in its competitor; the fact that it lost money over time; and the notion that the Weekly, not Internet competition, recessions, terrorist attacks or dot-com busts, was responsible for the Guardian’s self-described monetary woes.

For instance, Alldredge showed Brunst a 1998 “publisher’s report” from former Weekly publisher Jim Rizzi which included a reference to the Guardian. “BG fired [a former business manager]; we are taking this as a sign they are beginning to crack and are showing increased signs of disarray due to our continued growth and progress,” Rizzi wrote.

Alldredge tried to get Brunst to acknowledge that the Guardian has suffered as a direct result of the Weekly’s growth, but the CFO didn’t bite.

“Do you think the actions the Guardian takes have an adverse affect on the Weekly?” Alldredge began.

“I don’t know,” said Brunst. “I don’t care. That’s not our focus.”

“Whether or not you care, have you seen the Bay Guardian has shrunk as the SF Weekly has grown?” Alldredge continued.

“No, I haven’t seen that,” replied Brunst. “I think the charts and graphs are clear that we share the same fate.”

Brunst was referring to earlier exhibits suggesting that the combined revenues of the Guardian and Weekly have fallen from a high of $20 million in 2000 to $12.5 million in 2007.

The Guardian has argued that the Weekly destroyed the local market for alternative-Weekly print advertising with its low prices (again, an odd goal for a paper allegedly bent on monopolizing that same market).

Brunst and other New Times witnesses have suggested a more modest explanation for the revenue slump: that both weeklies are subject to the same negative forces that have buffeted thousands of other American newspapers, a widely discussed trend reported most recently last week by The New York Times.

That front-page business section story described huge losses at daily newspapers as advertisers migrate to the Internet, where, according to the Times, they only have to spend a nickel to reach readers who would cost them a dollar in print. Interestingly, the first specific reference in the article was to the San Francisco Chronicle, which has reported losing more than $300 million in recent years — a remarkable $1 million per week.

Just as it has pooh-poohed the notion that its own difficulties may be Internet-related, the Guardian, through its owner and publisher Bruce Brugmann, has suggested that Chronicle managers are “whiners” for reporting those losses. (In a bizarre aside, Brugmann suggested during his testimony that New Times’s Lacey was the source of the information about the Chron’s well-known financial problems, which have been documented in many newspapers including the Guardian.)

Later in his cross-examination, Alldredge returned to yet another well-trodden theme: the idea that New Times was able to prop up the Weekly with its “corporate bank account.”

Earlier in the trial, Guardian executive editor Tim Redmond brought up the same subject, bemoaning the fact that he couldn’t “just wire Phoenix and tell them to send me a million dollars.”

Alldredge had already shown the jury a chart indicating that, while the Weekly had a net loss of about $13 million since being purchased by New Times, the company’s Denver paper, Westword, had earned more than $48 million.

Brunst didn’t appear to appreciate the suggestion that it was an amorphous “corporate bank account” that had allowed the Weekly to survive when the Guardian preferred to see it die.

“The ‘corporate bank account’ is the personal money of the four principals of New Times,” said the CFO.

Alldredge wasn’t done.

“But you at least know this much, Mr. Brunst,” said Alldredge: “That if both papers are losing money, the Guardian would run out of money first, isn’t that right?”

“I don’t know that,” answered Brunst. “You’re making a presumption.”

Following Brunst’s testimony, the Weekly called its former publisher, Chris Keating, to the stand.

Keating, who initially went to work for New Times in Florida, described his rise through the company, moving from supervising the business offices in Miami and Fort Lauderdale, to becoming vice president of financial operations at the Phoenix headquarters.

Sent to San Francisco in 2003 to assist the “struggling” Weekly and the East Bay Express, which New Times bought in 2001 and sold last year, Keating said he was immediately struck by the huge number of competitors in the Bay Area. “It was overwhelming,” he said. “It was significantly more than I had seen in my travels to the other papers.”

“What effect did that competition have on rates?” asked Kerr.

“It made it very difficult to raise rates,” replied Keating.

Keating also described the catastrophic effect Craigslist had on the paper’s classified advertising, as well as the price pressure put on the paper by other Web-based competitors.

He further noted that one of the New Times deals that has most gotten under the Guardian’s skin — the Weekly’s sponsorship deal with the Warfield Theater — came about because the theater’s concert promoter, Clear Channel/Bill Graham Presents, approached the Weekly, not the other way around.

The deal was a great opportunity, said Keating, because it allowed the Weekly to get signage at the popular facility and also the ability to promote itself and its advertisers on a series of plasma screens. However, the arrangement also included a promise by BGP to buy the great majority of its Weekly advertising from the Weekly. It was that fact that inspired a loud tirade from Brugmann during his testimony last week, during which he shouted and pounded on the witness box.

Kerr also asked Keating about another aspect of the Weekly: That under the New Times system, advertising salespeople had an incentive to sell ads for more money, not less. They not only got a commission for selling the ad, he noted, but received an additional bonus if the ad sold for a higher rate.

By contrast, there was testimony during the Guardian’s case that its salespeople were specifically instructed to seek out instances of low Weekly prices that had hurt the Guardian and to then provide “written testimonials” that could be used against New Times in court. That dynamic appeared more geared toward gaining incriminating evidence than gaining business.

Keating’s examination by Kerr ended with the former publisher explaining that the stresses of the newspaper business eventually led him to make “make a lifestyle change.” He left the Weekly, he noted, to work for St. Vincent de Paul, a charity that runs local homeless shelters, domestic violence shelters, and low-income housing.

But Keating’s good works did him little good with Alldredge, who got in a few questions before Superior Court Judge Marla J. Miller called the day’s proceedings to a close.

As with Lacey (whom he accused of attempting to manipulate the jury) and Brunst (whom he implied had withheld vital data), his very first line of questioning was intended to suggest that Keating was sneaky.

Noting that the Guardian sued the Weekly shortly after Keating became the publisher, Alldredge asked the former New Times employee if he had removed references to competition with the Guardian from the regular “Guardian Reports” he sent to headquarters as a result.

The implication was that Keating had tried to whitewash a pattern of wrongdoing.

Keating, who has been gone from the Weekly for two years, told Alldredge that he had no recollection of the “competition” section, let alone any memory of taking it out.

It is unclear whether Alldredge’s continued emphasis on the fact that the Weekly kept tabs on its competitor will play with the jury. Equally unsure is whether the panel will buy the Guardian theory that, because the Weekly sold some ads below cost and lost money over time, it must have intended to injure the Guardian—and no one else.

Evidence has already been presented at trial to show that the Guardian itself tracked the Weekly with regular reports, made derogatory comments more insulting than anything uncovered in the Weekly documents (one referred to a “fuck the Weekly” campaign), and selling large numbers of ads below cost.

What the jury doesn’t know, however, is that the Guardian tried ardently to prevent them from receiving that information.

In a pre-trial motion filed on December 6, 2007, the Guardian asked the judge then handling the case, Richard Kramer, to prohibit the Weekly from offering any evidence that the Guardian had violated the same law it is now accusing the Weekly of violating — or, in fact, offering evidence that it had done anything improper that might suggest to the jury it had “unclean hands.”

In the motion, the Guardian even quoted from an earlier U.S. Supreme Court decision in which the justices made the ironic observation that “the plaintiff who reaps the reward of treble damages may be no less morally reprehensible than the defendant,” but should still be able to “recover a windfall gain.”

The reference was ironic not only because of the Guardian’s willingness to be lumped in with “morally reprehensible” players if it results in a payoff, but because the ruling came from the federal courts.

Despite his history of cooperating with the feds in efforts to sic them on his competitors, Brugmann chose to file this latest lawsuit in state court for the simple reason that California’s Unfair Practices Act has a much lower standard of proof than does the federal law.

U.S law insists that a plaintiff in a predatory pricing suit must show that the defendant has a reasonable chance of recouping the cost of such a scheme — in other words, a common-sense test of whether the alleged conspirator could ever hope to get his or her money back. Brunst’s testimony alone provided ample evidence that it would be absurd for the Weekly to think that, after driving the Guardian into the sea, it could ever hope to jack its prices up enough to recover its millions in losses.

Kramer ultimately ruled that Weekly attorneys could mention the Guardian’s actions, if only to show that its own actions were not taken for “anti-competitive” reasons.

The judge’s ruling suggests that, for now, tracking the competition and offering customers good deals in an effort to gain their business are still part of the free-enterprise system in California.

The trial takes a day off Tuesday for Lincoln’s birthday, but will resume with the continuation of Keating’s cross examination Wednesday at 8:30 a.m. at the courthouse on McAllister.

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