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Friday, February 15, 2008

Weekly Publisher: Stand By For Profits

Posted By on Fri, Feb 15, 2008 at 6:20 PM

Plus: Salt and lime with that tequila?

By Andy Van De Voorde

SF Weekly publisher Josh Fromson took the stand Friday in the Bay Guardian’s predatory pricing lawsuit against his publication, and answered a key question: Just why does the Weekly’s parent company continue to invest so heavily in a city where it has lost millions of dollars?

Guardian attorneys have repeatedly posed that question during the trial, and have suggested that the only plausible explanation is a plot to drive their client out of business with below-cost pricing.

But Fromson told the jury recent positive trends at the paper have it on line for profitability next year.

“Down the road we believe our revenues will increase, as they have since I got here,” said Fromson, who took the helm at the Weekly in 2006.

One reason he’s so confident, said Fromson, is the paper’s positive on-line growth. His paper received $80,000 in Web sales revenue in 2006, he said. That grew to $285,000 in 2007, and is projected to hit $420,000 this year.

“But we’re creaming it,” Fromson added. “We’re way ahead of that.”

The paper’s on-line efforts also shed light on another issue that has had Guardian attorneys speaking of conspiracies: Why the Weekly’s costs have continued to exceed its revenues.

The Guardian has argued that those financial shortfalls show that the Weekly isn’t willing to “live within its means” and is consistent with a scheme to injure its Weekly competitor.

But Fromson noted that capital spending on the paper’s Web site is one of the main reasons it has paid out more than it has taken in.

“We invest heavily on-line because we believe it will be very profitable down the road,” he explained to Weekly attorney Ivo Labar.

The two later spent several minutes showing the jury the paper’s Web site and explaining how such features as allowing readers to buy movie tickets at has added value for advertisers.

But on-line expenditures weren’t the only items adding to the “cost” side of the company ledger, Fromson noted. Others have included rising print bills, rent, and the exploding price of health benefits for employees.

In the editorial department alone, the Weekly employs far more full-time employees than the Guardian, which has typically relied heavily on unpaid interns to perform editorial tasks.

Fromson was one of several Weekly witnesses to testify that the paper and its parent company New Times, now known as Village Voice Media, hires full-time reporters as part of its overall strategy.

It wasn’t the only example of the two papers’ divergent cultures.

Evidence of the ideological gulf between the Weekly and the Guardian also came when Fromson described his hands-on involvement in day-to-day ad sales, an approach which contrasted sharply with his Guardian counterparts.

That paper’s publishers, the husband-and-wife team of Bruce Brugmann and Jean Dibble, testified earlier in the trial that they are detached from the sales process. Dibble admitted she hadn’t been on a sales call in 35 years, and Brugmann claimed he didn’t go on sales calls because he thought New Times executive editor Michael Lacey might “blast him for it.”

Fromson, on the other hand, described spending three to four hours a day on sales calls, “even during this lawsuit.”

“There’s no other way to run a business,” he said. “Second-hand knowledge is completely useless.”

That attitude appeared to characterize his hard-driving career with New Times, which began after he attended the University of Arizona in Tucson.

“I started as a courier,” noted Fromson, a job that involved picking up checks and dropping off ads to clients.

“Was that an entry level job?” asked Labar.

“It was the lowest job in the building,” Fromson replied.

Fromson quickly worked his way up in the company sales force, book-ending two intense stints in Phoenix—“I spent 50 percent of my time in the car,” he noted--around a tour in St. Louis before being sent to San Francisco to take the reins at the Weekly.

“I liked having the opportunity to come back closer to home,” the Merced native said.

However, Fromson described being struck by the high level of competition in the Bay Area.

“It’s the most competitive market I’ve been in,” he told Labar.

“What do you base that on?” asked the attorney.

“Walk outside,” said Fromson. “There must be sixty news racks without turning your head.”

The new publisher also testified that he was initially hamstrung by high turnover at the paper, along with the need to hire a new business manager and restructure the sales staff. That made it hard to generate growth right away, he said.

Fromson also described cost-cutting measures that included reducing sales positions, consolidating the classified and marketing departments of the Weekly and the East Bay Express (which New Times sold last year).

“Ironically I had to cut my old job, the courier,” he noted.

Fromson’s descriptions of cutbacks didn’t jibe with the Guardian’s theory that New Times threw money at the Weekly in a spending spree designed to weaken the Guardian.

And his description of Guardian rates was also a far cry from the plaintiff’s vision of reality.

“Did you face price competition from competitors?” asked Labar.

“Fierce,” replied Fromson.

“Did you face price competition from the Guardian?”

“Yes,” said Fromson. “Its rates were almost always lower.”

To illustrate the point, Labar produced for the jury copies of Weekly and Guardian advertising contracts for the same customer, the Temple nightclub.

The Weekly’s rates were “significantly” higher, Fromson observed.

“How did you convince Temple to pay more?” asked Labar.

The owner of the club “liked our (young) demographics,” said Fromson, and also appreciated the service provided by the Weekly’s “Street Team,” a group of young workers who go to nightclubs and events to distribute “schwag bags” of fliers, T-shirts, and other giveaways that help promote advertisers.

The Weekly pays its Street Team members. Guardian witnesses have described employing a Street Team only when the paper has enough unpaid interns on hand.

Labar also asked Fromson whether publications other than the Guardian exert pricing pressure on the Weekly. The publisher cited several customers who have attempted to negotiate lower rates by noting that publications such as The Onion charge less.

The Guardian has argued that the only significant pricing pressure it receives is from the Weekly, and has accused New Times of intentionally selling ads below cost.

In fact, one of the primary planks of the Guardian’s lawsuit was a claim that the Weekly offered a “secret rebate” to Bill Graham Presents when it cut a sponsorship deal regarding the Warfield Theater in 2005.

The Warfield claim was part of the Guardian’s suit when it was filed in October 2004, but was dropped shortly before trial.

Guardian attorneys may have been glad they bailed out on the claim.

Under questioning from Labar, Fromson told the jury that, far from representing a costly “unearned discount,” the Warfield deal has been lucrative for the Weekly, generating income of from $400,000 to $500,000 versus annual expenditures of about $170,000.

Guardian attorney Richard P. Hill spent about half an hour cross-examining Fromson before Superior Court Judge Marla J. Miller called the day’s session to a close.

As has become common in the Guardian’s questioning of defense witnesses, Hill’s main line of inquiry centered on reminding the jury that the Weekly is owned by a chain—and that the goliath regards the Guardian as an extra-special competitor.

Hill began by asking Fromson if investing in Web site development is expensive.

Of course, said Fromson.

“There’s always been money from somewhere for the Weekly to invest on its Web site, hasn’t there?” Hill asked, emphasizing the word “somewhere.”

In fact, the attorney continued, in a point that already been made several times during the trial, the Weekly has cost the parent company $16 million more than it has brought in, including the original purchase price.

“Was some of that money used to develop the Web site?” asked Hill.

Fromson said he presumed so.

“If you’re going to compete in this market, you need the money to invest, right?” Hill asked.

Sure, said Fromson.

“And the Bay Guardian also needs the money to invest, doesn’t it?”

The implication of Hill’s questions seemed to turn certain fundamental economic notions on their head, not to mention subverting the notion of a domestic American economy that occasionally may involve Interstate commerce.

The proper action for New Times, the attorney seemed to suggest, would have been to refuse to spend any money on the Weekly’s Web site that wasn’t generated in San Francisco.

The argument also was consistent with the Guardian’s strategy of asking the jury to reject core capitalistic principles such as the notion that no business has an inherent “right” to survive.

Earlier in the trial, for instance, Hill asked Brugmann why he even bothered to keep his paper open if he couldn’t “completely control his own survival.”

Hill’s arguments are important because the Guardian not only is asking the court to force New Times to pay it millions of dollars, but also wants the government to monitor the Weekly’s pricing policies in order to ensure that it never again sells an ad “below cost.”

Whether the Guardian will succeed in its effort to bring about government regulation of the newspaper industry remains to be seen, but latent Soviet-style rhetoric also reared its head in the morning when Hill continued his cross-examination of former Weekly publisher Troy Larkin.

The ebullient Larkin proved a far more carefree witness than the high-energy Fromson.

When he took the stand, the former publisher tapped the microphone, asked “Is this thing on?” and then proceeded to serenade the gallery with a brief operatic interlude.

Later, Larkin drew a reprimand from Miller when he volunteered a piece of advice to the jury following a discussion of the Weekly’s sponsorship agreements with the Sauza tequila brand.

“If you haven’t had Sauza, I highly recommend it,” said Larkin, turning toward the panel members, whose jury box is directly adjacent to the witness stand. “It’s great tequila.”

That drew a sharp response from Miller, who informed Larkin, “This is a formal proceeding.”

But Larkin’s good humor wasn’t enough to block a familiar fusillade of rhetoric from Hill.

Among other things, the Guardian attorney seemed offended by a reference Larkin made to “aggressive deals.”

“How many ‘aggressive deals,’ as you have just used that phrase, did you approve as publisher?” Hill asked, in a tone that suggested Larkin had just uttered an obscenity.

“I’m sure there were many,” said Larkin.

Hill also trotted out a 1998 “publisher’s letter” in which Larkin noted, “We feel we are making the strongest run at the Bay Guardian ever.” Added the then-publisher, “In most cases, the increased ad size for us has meant dollars out of the BG.”

“Is that a phrase you remember, the notion of focusing on taking dollars out of the Guardian?” asked Hill.

No, said Larkin, the focus was to get ads into the Weekly.

In another publisher’s letter, Larkin commented again on the Weekly’s success relative to the Guardian.

“We continue to beat the Guardian in ad count,” he wrote. “They are desperate and continue to discount rates and provide free up-sizes just to keep up.”

Didn’t this mean his paper was “hurting” the Guardian? Hill wanted to know.

“That had nothing to do with us,” said Larkin. “Except for the fact we were better at earning peoples’ business.”

Hill quickly asked Miller to strike Larkin’s assessment of his sales teams’ superiority.

The judge complied.

Another publisher’s letter shown to the jury by Hill noted that the Weekly was paying its salespeople bonuses for “BG accounts we land in our paper.”

Hill interpreted the phrase to mean the Weekly would only pay off if the advertiser stopped buying ads from the Guardian.

But, as before, Larkin said the goal was to get business, not to take it away from someone else.

“[That bonus] would hurt the Guardian, wouldn’t it?” demanded Hill.

Larkin’s answer seemed a lesson in free-market realities.

“That would be the client’s decision, not ours,” replied the former publisher.

The observation was significant because the Guardian has not called a single advertiser to testify on its behalf.

Hill kept it up for more than an hour, bringing up emails or publishers’ letters that included comments about the Guardian, then asking Larkin if they didn’t provide evidence of a wrongful intent to “injure” his client.

However, not all the documents were critical of the Guardian. Some simply expressed incredulity at the competitor’s unpredictable behavior.

For example, Hill brought up an email from March 2, 2004 which Larkin titled “Another One Bites the Dust” on the subject line.

“Yet another top rep from the BG…has given notice,” the email noted. “This to go along with recent firings and running smaller books (last week 96 pages). One has to wonder what is going on over there.”

So, Hill asked, things appeared to be deteriorating at the Guardian?

The implication was that the Weekly was taking credit for the phenomenon.

“Things didn’t appear to be deteriorating, they were deteriorating,” replied Larkin. “These guys were giving it away.”

The confrontational tenor of the cross-examination was summed up by an exchange in which Hill grilled Larkin on why he wrote a number of optimistic comments in his publisher’s letters at a time when the Weekly was losing money.

When Hill put up a chart of Weekly losses to drive home his point, Larkin balked.

“Is this a Guardian report?” he asked.

It is, acknowledged Hill.

“I wouldn’t trust it then,” replied the witness.

“The data was derived from the Weekly’s financial statements,” responded Hill. “Does that make you trust it anymore?”

Apparently not.

“Show me the statements,” said Larkin.

A third witness also testified for the defense Friday, though his appearance was much quicker and less colorful than Larkin’s or Fromson’s.

Former Weekly associate publisher Todd Korab, who now works for a company that sells text ads on Google and Yahoo, took the stand and told the court his New Times bosses never told him to target the Guardian or intentionally sell below cost.

Rather, like Fromson, he described an aggressive sales culture that runs counter to a Guardian culture that might best be described as “mañana.”

“How were you trained to sell at the Weekly?” asked Labar.

“You made a lead list and start calling them,” said Korab. “If they want to buy, you sign them up. If not, you keep calling them.”

Korab added that he was encouraged not to discount ads unless it was necessary to match a competitor’s prices, and that bonuses provided for salespeople created a natural incentive to sell ads for much as they could get for them.

In an apparent attempt to help the jury understand the constantly shifting nature of competition for local advertising, Labar spent several minutes asking Korab about the business model of his new company. That firm, noted Korab, has proprietary software that allows it to give customers such as restaurants highly detailed information about customers directed to them by online ads.

Korab wasn’t asked if his new employer is profitable, though he noted it has received tens of millions of dollars in venture-capital infusions.

The final witness Friday appeared via videotape.

The Weekly played brief excerpts from the deposition of Guardian saleswoman Mary Samson which appeared to sum up the newspaper’s stance on the question of competition—which appears to be that, aside from the Weekly, there isn’t any competition to speak of.

“Is the Internet competition?” Labar asked Samson.

“I don’t know,” she replied.

“Is Google?”

“I don’t think Google would be a competitor,” the saleswoman said, laughing at the prospect that the world’s leading expert on monetizing Internet advertising could possibly represent a threat.

“The Yellow Pages?”



“I don’t know.”

The trial will take Monday off for President’s Day and will resume at 8:30 a.m. Tuesday at the courthouse on McAllister Street with Fromson’s continued cross-examination.

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