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Thursday, February 14, 2008

Harvard Professor: Guardian’s Theory “Irrational”

Posted By on Thu, Feb 14, 2008 at 7:21 PM

Plus: More evidence of Brugmann’s “brain vomit”

By Andy Van De Voorde

The Bay Guardian ’s predatory pricing lawsuit against the Weekly makes no sense, a Harvard professor testified Thursday.

Dr. Joseph P. Kalt, appearing as an expert witness for the Weekly, said the very idea a newspaper company would price its ads below cost for years on end in an effort to injure a competitor struck him as ludicrous.

“The basic claim is not consistent with a rational, profit-seeking business,” said Kalt, who specializes in analyzing market pricing.

The professor, who has a doctorate from UCLA, told the jury there are three basic conditions under which a below-cost-pricing scheme would work.

First, he said, a business would have to succeed in driving its competitor out of business.

Obviously, he noted, that hasn’t happened here.

Second, once they’ve driven that competitor out of the market, the predator would have to be able to take control of pricing in the market—in part by ensuring that no new competition would spring up.

That struck Kalt as a highly illogical expectation.

“There are so many competitors [in the Bay Area] that it wouldn’t be rational for a business to adopt this strategy,” he said. “You wouldn’t have a prayer of recouping your losses.”

That ability to recoup the money lost from selling below cost was the third leg necessary for a successful predation scheme.

In addition to such an effort being irrational, said Kalt, he simply saw no evidence of it in any of the data he had studied.

Instead, the professor said that his measurements of the Weekly’s and the Guardian’s performance suggest a less ominous explanation: Both papers were subject to general economic disruptions and the flow of advertisers to the Internet.

For instance, Kalt noted that the Weekly cut its circulation following the dot-com bust and the terrorist attacks of September 11, 2001.

“From an economic perspective, what does that tell you?” asked Weekly attorney H. Sinclair Kerr Jr.

“It provides some indication that this claim isn’t going to make sense and isn’t taking place,” said Kalt.


Because if the predator was taking away business from its target, its circulation should have gone up as it got more of that business, said Kalt.

Advertising volume—the number of ads in the paper—followed a similar pattern, said Kalt. As with circulation, it rose steadily until the dot-com bust of 2000 and terrorist attacks of 2001, then declined, especially in the past two years.

Again, reasoned Kalt, if the Weekly was taking away the business of the Guardian, that line should be rising as it stole volume from its competitor.

Revenue followed suit, noted the professor. Cash flow for both papers rose between 1995 and 2000, then dropped consistently through 2007, by which point the Guardian had $6.4 million in revenue to the Weekly’s $6.1 million.

“If this made sense as a strategy for the Weekly, you would expect to see rising revenues as it took the business away from its competition,” explained Kalt.

Something else argued against the Guardian’s claim that the Weekly intended to lose money for as long as necessary to put the larger paper out of business, noted Kalt: The fact that the Weekly’s parent company, New Times (now Village Voice Media) sold the East Bay Express last year at a loss of more than $4 million.

“Again, it’s not consistent with trying to drive a competitor out of business,” said Kalt. “Because you’re essentially letting your paper be a competitor and come back into the market.”

What Kalt didn’t know was just what sort of competitor the Express might be: At least one Guardian witness has testified that the paper is open to forming a “partnership” with the Express that would pit the two papers against the Weekly.

Kalt saw a pattern in the fact that revenues at both the Guardian and the Weekly continued to decline even after the economy recovered slightly in 2003 and 2004.

The reason, the professor said, was simple: A host of Internet sites had become established as competition for advertising. So, even as hotel-occupancy rates in San Francisco rose, and technology stocks climbed, he noted, “the growth in the market was being taken up by competition.

“We see the recovery in the marketplace, but we don’t see recovery in the revenues of the Bay Guardian and the SF Weekly,” added Kalt. “That’s telling you that there are strong competitors out there capturing the business.”

That also means that it wouldn’t be rational for New Times to think it could possibly monopolize media advertising in the Bay Area, said the professor, noting that in spot checks of two advertisers who buy space in both the Weekly and the Guardian, he found that the customers were placing ads in at least 25 other media competitors.

Kalt’s testimony directly contradicts one of the Guardian’s most persistent claims: That the Weekly’s low prices, not outside forces, are responsible for its sagging finances. Guardian witnesses have claimed that 9/11 and the dot-com bust “didn’t really” affect their bottom line, which may qualify the paper as the only print publication in the U.S. to make such a claim.

When he began his cross-examination, Guardian attorney Ralph C. Alldredge mostly abandoned his habit of questioning the integrity of Weekly witnesses.

But that’s not to say he gave it up completely.

Alldredge began by quizzing Kalt about how many hours he had spent reviewing data for the case—an obvious ploy to mention for the second time the fact that the professor charges more than $1,000 per hour for his services.

Alldredge also briefly attempted to raise doubts about Kalt’s status as an expert witness.

Was he really “an expert on the economics of newspapers?” Alldredge demanded.

Kalt replied by noting he had quite a bit of experience in the field, and had actually taught journalists about economics. Those lessons included helping them understand the market pressures that were affecting their employers, he said.

“If I wanted to study all the schools in the United States, you’re the best expert?” responded a skeptical Alldredge.

Actually, said Kalt, “that would be one of my students,” whom, he noted, is now teaching at Duke University.

That seemed to put an end to any scrutiny of the professor’s credentials, and also opened up one of the more remarkable bits of cross-examination thus far in the trial.

As the jury looked on, Alldredge began asking a series of increasingly hypothetical questions. The queries were clearly designed to suggest that just because the Guardian’s theory may be economically irrational doesn’t mean it couldn’t be true.

“If someone made a decision to sell below cost to drive the Bay Guardian out of business when they bought [the Weekly], they wouldn’t have known about the dot-com bust then, would they?” he asked.

New Times bought the Weekly in 1995.

Presumably not, said Kalt.

“And they couldn’t have known about 9/11, could they?” the attorney continued.

“I hope not,” said Kalt.

“Do you think that someone sitting there in 1995 would have known about the growth of the Internet?” Alldredge asked.

It was a question only a time-traveling mind-reader could have answered.

But Alldredge wasn’t done testing the limits of the space-time continuum.

“Suppose [New Times executive editor Michael] Lacey came to you in 1995 and said, ‘I’m going to buy the SF Weekly and drive the Bay Guardian out of business because we have deep pockets and they’re a small family business?’” he asked.

“I would have said that’s not a profitable strategy,” said Kalt.

“Suppose Mr. Lacey said to you, ‘You’re an economist and I’m a newspaper man, and one thing we’ve found is that when we have direct Weekly competition we lose money or maybe break even and in other markets we make very good money?’” said Alldredge. “Are you still going to tell me not to do it?”

Absolutely, said Kalt.

This courthouse correspondent believes it’s important to note that Alldredge’s rhetorical double-blinds weren’t based on evidence. Not even the Guardian has ever claimed that Lacey said anything remotely close to the statements the attorney was conjuring.

Yet as the questioning progressed, Alldredge seemed to drift even further into the spirit world.

For reasons that remain unclear, Lacey, who watched Thursday’s proceedings from the gallery, again starred as the object of his fantasies.

“Suppose Mr. Lacey said to you, ‘We’re confident no one will come in and directly compete with us because anyone who did that would know what we did to the Bay Guardian in order to get this niche?’” Alldredge said.

“I don’t think your description is a rational description of the market,” replied Kalt. “[Alternative Weekly newspaper advertising] is not a niche.”

But Alldredge still took one more lap on the Lacey hobby horse.

“Suppose Mr. Lacey said, ‘I’m a newspaperman and I live in this niche?’” he asked.

“I would say he’s on his way to where a lot of people ended up,” said Kalt. “Going out of business.”

Alldredge’s fixation on Lacey was palpable—as was Guardian publisher Bruce Brugmann’s during his testimony last week.

When Brugmann was on the stand, he brought up Lacey’s name at oddly inappropriate moments, once suggesting that he didn’t go on sales calls because “Lacey would blast me for it, I know he would.”

But in all of Alldredge’s imagined scenarios, the implication was that New Times is obsessed with his client, not the other way around.

“Do you have any doubt in this case that if New Times set out to do it, they have the resources to put the Bay Guardian out of business?” the attorney later asked Kalt.

“There is some doubt,” said Kalt, who noted that such a scheme would be incredibly expensive. The professor also felt compelled to note that the Guardian is in fact still in business.

And Alldredge had still another theory to run past the professor: Perhaps, he suggested, New Times was just plumb crazy.

“It’s true that people don’t always do the rational thing, isn’t it” he asked.

“That’s possible,” said Kalt.

Alldredge shot back, “It’s not just possible, it’s true, right?”

“The market tends to weed out that sort of thing,” said Kalt, ever the economist.

Alldredge then proceeded to suggest another hypothetical possibility: The Weekly set out to destroy the Guardian, but altered course after the Guardian sued it in October 2004.

“People might start doing something irrational and then change their mind, right?” he asked.

The question was startling because the Guardian has argued for the past two weeks that the Weekly has brazenly continued its seek-and-destroy mission despite being dragged into court. In fact, later on Thursday, Guardian attorney Richard P. Hill even suggested to former Weekly publisher Troy Larkin that he had attempted to hide evidence of ongoing predatory behavior after receiving a threatening letter from the Guardian as early as 2002.

Kalt, however, said he simply saw no evidence of a plot to harm the Guardian at any time.

(Or, he might have added, in any alternate reality.)

“Both of you,” he told Alldredge, “are profit-seeking businesses. You’re here fighting over money.”

Most of the aforementioned Larkin’s time on the stand Thursday was spent under direct examination from the Weekly’s Ivo Labar.

The son of New Times chief executive officer Jim Larkin described working as a waiter after graduating from the University of Arizona, then starting with his father’s company as a “runner” for the company’s Denver paper, Westword.

“I knew if I was going to get an opportunity, I’d need to start at the bottom,” he said.

Larkin said he arrived in San Francisco in 1995 after working as a salesman in Dallas and Houston, and recalled being struck by the competitive Bay Area market.

“It was a very intense, in-your-face competition I hadn’t seen before,” he noted.

(It was equally difficult having to testify, Larkin noted. At one point, the admittedly nervous witness turned to the jury and said, “It’s tense getting up here. I don’t know if you guys have ever done this before, but it’s not easy.”)

Larkin quickly settled in on the stand, though, just as he had at the Weekly, where he quickly moved up the ladder, receiving a promotion to ad director in 1997 and ultimately landing the publisher’s job in 1999.

He described the paper’s growth during that period, and noted that the Weekly raised both its ad rates and its circulation each year. He also made a point of complimenting the paper’s editorial department, telling the court he felt Weekly reporters were a step up from the Guardian crew.

“That’s what in my opinion was lacking in San Francisco,” he said. “Good journalism.”

The Guardian also has accused the Weekly of slashing ad prices in an effort to bleed it dry. But Larkin made several references to the Guardian “undercutting” the Weekly on price. And several exhibits produced by Labar showed he had made the same allegations—in writing—during his days as publisher.

In the paper’s “Retail Industry Sales Plan” for fiscal year 2000, for instance, Larkin noted that the Guardian was dominating the market for movie advertising. “It’s largely because they give away more promo space and command a higher inch rate on the front end before the heavy discount,” he wrote.

That same document noted the Weekly had raised its overall industry rate by 4 percent in the past three months, one of numerous written references to Weekly rate increases shown to the jury by Labar.

In a publisher’s letter dated April 11, 2000, Larkin made another reference to rate pressure from the Guardian.

“The Guardian published its usual 168-180 (page) paper with special advertising supplements,” he noted in the report to his corporate bosses. “Lots of fluff and now undercutting us on price across the board.”

At the time, he noted, the Weekly was publishing far fewer overall pages than its competitor.

The same pattern was noted in a publisher’s letter dated June 9, 2000. “The Guardian is slashing and burning their rates to keep volume up to run the big page counts,” Larkin wrote.

He explained to Labar that he had a theory about why the Guardian would engage in such a strategy: To maintain the perception that it was the dominant paper, it needed to print more pages than the Weekly. “In order to do that, they had to cut their rates to keep the volume high,” he noted.

Other documents presented by Labar suggested that, if there was a long-term conspiracy to destroy the Guardian, it was so complex and carefully planned out that Larkin and other employees were whitewashing any reference to it in emails and company reports long before there was any suggestion the Guardian might file suit.

“We’ve built a solid base of business by selling the value of SF Weekly and not blowing out our rate with unnecessary deals,” Larkin noted in his publisher’s letter of July 11, 2000. That same report included a note about rate: It had grown from “$16.40 to just under $18.”

It was one of several written references to increased rates or efforts to increase them, as well as numerous comments about competitors ranging from TV and radio the daily papers and nascent Internet sites.

“With restaurants there has been increased rate competition from the Bay Guardian and online competition from CitySearch and OpenTable,” noted Larkin’s publisher’s letter of September 2004.

Larkin’s recognition of the growing threat posed by on-line specialty sites stood in contrast to last week’s testimony from Brugmann. The Guardian boss has scoffed at the suggestion the Internet has taken significant business away from his paper. But when the Weekly’s Kerr ran down a list of more than a dozen on-line restaurant sites, including OpenTable, and asked if Brugmann had ever seen them, he admitted he hadn’t.

The Guardian ’s Hill had just begun his cross-examination when Miller called the day’s proceedings to an end. The questioning may not have gone the way Hill intended, however.

His last question was about an email, already shown in court at least twice before, in which a newly hired sales manager effuses to Larkin about his excitement at getting the job.

“I will work my ass off to make you look good,” wrote DeWitt Mosby. “The Bay Guardian is ripe for the picking and I’m excited for the opportunity to lead the charge.”

Had Larkin talked with Moseby about targeting the Guardian? Hill asked.

“We discussed a lot of competition,” said Larkin. “The Guardian may have come up."

“It may have come up,” Hill repeated sarcastically.

But Larkin then provided a bit of context the Guardian attorney didn’t appear to have seen coming.

Moseby had worked at another alternative paper, the Nashville Scene, Larkin noted. There, he, along with his co-workers, had received several unsolicited emails from Brugmann in which the Guardian spammer “made it quite clear that he wanted to drive [theWeekly] out of town.”

Larkin was just beginning to note that “everyone at AAN” (the Association of Alternative Newspapers) knew about Brugmann’s dislike of New Times when Hill objected and court was called to a close.

The third defense witness to testify Thursday drew far fewer fireworks than Kalt or Larkin.

John Morton, an industry consultant who writes a column for the American Journalism Review, told the jury the newspaper industry has been under siege for years and that San Francisco has been the eye of the storm.

The price of newsprint has risen, Internet sites have stolen business, and young people simply don’t read newspapers like they once did, Morton said.

His testimony was intended to rebut the Guardian’s claim that it somehow managed to remain unscathed by the ill winds blowing across print media and its financial problems were all the Weekly’s fault.

Morton noted that the stock prices of publicly traded newspaper companies plummeted last year, as long-established firms lost from 60 percent of 90 percent of their market value. When Morton noted that the San Francisco Chronicle has reported losing up to $1 million per week in recent years, Alldredge objected.

The attorney also objected when Morton was asked his opinion of theGuardian’s response to the question of who its competition is. Judge Miller upheld the objection, so the jury never got to find out.

But it was clear Morton had come with few compliments for the Guardian. Among other things, he noted that newspapers that fire reporters in an effort to lessen expenses just wind up destroying the quality of their publications.

The comment appeared to be a reference to the fact the Guardian has fired large numbers of editorial staff, and then cited that fact as proof of its willingness to “live within its means.”

During his cross-examination, Alldredge mainly stayed away from the industry trends Morton had described. Instead, he worked to cast doubt on Morton’s statement that weeklies like the Guardian face competition from “nearly every publication that seeks advertising.”

Guardian witnesses have testified that the Weekly is their only “real” competitor—another claim integral to their theory that the Weekly alone accounts for their difficulties.

Would a publication in, say, faraway Livermore really serve as a competitor to the Weekly or the Guardian? Alldredge asked.

“Not unless there’s someone in Livermore who’s running some sort of a topless club,” answered Morton.

The trial resumes at 8:30 Friday morning with the continued cross-examination of Troy Larkin.

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