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Thursday, February 21, 2008

What’s Your Damage?

Posted By on Thu, Feb 21, 2008 at 6:36 PM

Expert's Flawed Analysis: Weekly Owes Brugmann More Than the Guardian Has Made In Its Entire 40-Year History

By Andy Van De Voorde

Bay Guardian expert witness Clifford Kupperberg continued his testimony Thursday in the paper’s predatory pricing lawsuit against the Weekly, and continued to cling to his visions of huge damages for his client in the face of mounting evidence that his projections are divorced not only from market reality but from common sense.

Kupperberg is the certified public accountant hired by the Guardian to calculate how much money it should receive from the Weekly, which it accuses of wrongfully wooing advertisers with “below-cost” prices.

During cross-examination Wednesday by Weekly attorney H. Sinclair Kerr Jr., Kupperberg admitted that his wildly varying damage estimates of the Guardian's "lost profits"—they range all the way from $4.4 million to $11.8 million—represent more money than the Guardian has earned in its history.

And on Thursday Kerr continued to probe the connection between Kupperberg’s visions of giant payouts and the sober reality of the Guardian’s past financial performance.

The Weekly attorney began by asking Kupperberg to review Guardian financial statements from 1996 through 2000.

The time period was significant because Kupperberg testified yesterday that the Weekly’s alleged predatory pricing hadn’t begun to affect the Guardian at that time.

Yet despite that description of the late 1990s as a golden age when the Guardian was unstained by the Weekly’s bad behavior, the paper still performed miserably, posting profit margins that likely would have earned it an “F” it if were a Junior Achievement project.

In fact, the same newspaper that wants the jury to award it from $13 million to $35 million (Kupperberg’s figures plus treble damages) turned a net profit of only $37,309 in 2000.

That represents a net profit of four-tenths of one percent.

Sadly, the paper’s performance in the preceding years wasn’t much better.

In 1996, the Guardian earned $388,688 on total revenues of $8.9 million, or about 3 percent.

In 1997, it earned $214,383 on revenues of $10.35, or a little over 2 percent.

In 1998, a net profit of $128,802 on revenues of $10.48 million, or about 1.2 percent.

And in 1999—a banner year by Guardian standards—it earned $511,815 in net profit on revenues of $10.9 million.

Even that boom year represented a profit margin of less than 5 percent in an industry where 20 percent returns are not uncommon.

It was a performance Guardian publisher Bruce Brugmann presumably could have bested by investing in a money-market account.

However, after the stark reality of the Guardian’s financial statements came the soothing fantasy of Kupperberg’s “but for world.”

It is in that realm that the accountant calculates what profits the Guardian might have earned if not for the Weekly’s irksome capitalist behavior.

The attorney began by asking the accountant, whose résumé notes that he has worked on more than 350 legal cases during his career, or an average of ten per year, about an estimate he had prepared comparing the Guardian’s performance to percentage revenue gains achieved by a pair of smaller suburban Bay Area weeklies.

According to Kupperberg’s calculations, if not for the Weekly and its low prices, the Guardian would have earned a 6.6 percent profit margin in 2002, an 11.2 percent profit in 2003, a 16.6 percent profit in 2004, a 16.7 percent profit in 2005, a 27 percent profit in 2006 and a whopping 32.4 percent profit in 2007.

In other words, even though it had struggled to keep pace with inflation in its best years, the Guardian was arguing that it was on pace to post eye-popping profits in the years directly following the dot-com bust and the terrorist attacks of September 11, 2001.

Kerr noted that Kupperberg’s estimated profit margin for 2007 was fully eight times the Guardian’s performance from 1988 to 2000.

“And the Guardian has never had a year where they earned 32 percent, have they?” he asked.

It has not, confirmed Kupperberg.

Kerr then walked Kupperberg through the accountant’s many other damage models.

In each case, the estimates saw the Guardian earning dramatically higher profits—and profit margins--than in any year of its existence.

In some instances, those imaginary margins were not just large but astronomical.

For example, Kerr pointed to a Kupperberg model that compared the Guardian to other Bay Area weeklies, then estimated how much revenue Brugmann would have earned if not for the Weekly.

On one line, the audacious accountant assumed that, on additional revenues of $10 million, his client would have generated a 75 percent profit.

For a soft-spoken man, it would appear, Kupperberg packs a very big calculator.

“You’ve never seen a paper with a 75 percent profit margin, have you?” asked an incredulous Kerr.

No, said Kupperberg.

But the CPA wasn’t bashful about his claims. He argued that, in theory, if the Guardian’s fixed costs stayed static, millions in additional revenue could well have arrived in the form of almost pure profit.

“It could be as much as 90 percent,” he cheerfully told Guardian attorney Ralph C. Alldredge later in the day.

And he also said he had an explanation for the Guardian’s history of piddling profits: Brugmann, the man who is paying him $500-per-hour for his testimony, was simply “re-investing in the paper” all those years.

“You’re building for the future, and expecting higher profits,” he said.

The accountant did not explain why, if that was the case, those profits failed to materialize--before or after New Times came to town. He also didn’t address the Guardian’s practice of paying low salaries and employing large numbers of unpaid interns.

And Kerr remained skeptical of a business environment, imaginary or not, where 75 percent profit margins could appear nearly without accompanying costs.

“Doesn’t that ignore the actual business reality that if you have additional revenues of $10 million you’ll have costs in the 90 to 100 percent range?” asked the attorney, who earlier had presented charts that showed the Guardians revenues and costs historically have been closely linked.

“Not at all,” said Kupperberg.

“Even though that was the actual [revenue-to-expense] experience of the Guardian?”

“That’s correct.”

Kerr also returned to the fact that, in Kupperberg’s many damage models (a total of fourteen had been discussed by the end of the day), the CPA never once attempted to measure alleged Guardian losses by polling actual advertisers.

Those would be the living, breathing individuals who made the voluntary decision to take their business to the Weekly.

“I’d have to talk to the customer to do that,” said Kupperberg, as if he were describing an attempt to converse with a Yeti.

Kerr also continued to grill Kupperberg about a blunder the accountant committed when he attempted to calculate damages by using figures from an in-house survey of newspapers belonging to the Association of Alternative Newsweeklies.

Kupperberg later had to admit that those self-reported and un-audited financial figures were unreliable for purposes of making a damage estimate.

But, in an odd development, he continued to insist the information was useful for calculating average profit margins in the industry.

That assertion directly contradicts a sworn statement from Seija Goldstein, the New York-based publishing consultant who compiles the annual survey for AAN.

In a declaration filed with the court on January 11, 2008, Goldstein, who spoke with Kupperberg on January 7, left no doubt where she stands on the issue.

“[Kupperberg[ states in his declaration, ‘My discussion with Ms. Goldstein also confirmed that the AAN survey information was appropriate to use as a benchmark for profit margins earned by alternative Weekly newspapers during the damage period…,’ wrote Goldstein. “This statement is not accurate.”

Instead, she wrote, “In a typical year, the survey only covers about half of the total AAN membership, making it an inappropriate tool for measuring the alternative Weekly newspaper industry, either as a whole or for any of its segments.”

In any case, given that Kupperberg had already envisioned profit margins as high as 75 percent, the reported AAN margins of from 7.5 percent to 19 percent seemed unimpressive--especially when Kerr got Kupperberg to admit that the Guardian never posted profit margins in the AAN range to begin with.

Kupperberg’s botched AAN data also came up when the next witness took the stand.

Everett P. Harry, a San Francisco CPA who is testifying on behalf of the Weekly, said Kupperberg made a “complete mistake” when he attempted to use unverified “bracket data” from AAN to define a trend.

It was hardly surprising, suggested Harry, who noted that Kupperberg’s involvement in the case has been characterized by “him continuing to correct errors in his models.”

Harry told the jury that, in one instance, Kupperberg made a “$3 million addition error.”

He has done hundreds of lost-profit studies himself, Harry told the court, and recently wrote a paper on the subject that was quoted by the U.S. Court of Appeals.

And given his experience, he was particularly critical of his counterpart’s approach to calculating lost profits.

“It’s unreasonable, unsupported, based on unfounded assumptions, and just completely exaggerated,” said Harry, as the still-smiling Kupperberg watched from the back of the room.

Harry said Kupperberg completely ignored other factors that could have caused a decline in revenue at the Guardian, such as the economy, the advent of technological innovations associated with the Internet, competition from other print media, and the fact that large numbers of young people—the target audience of alt-weeklies--left San Francisco after the dot-com bust, leading to a 38 percent drop in the number of twenty-somethings in the city between 2000 and 2005.

But in addition to suggesting that Kupperberg exhibited willful ignorance in calculating damages based solely on the alleged bad behavior of the Weekly, he took exception with his fellow CPA’s basic methods.

Even some of Kupperberg’s more conservative estimates--which assumed a 6 percent profit margin for the Guardian--were “belied by the profits the paper actually earned,” Harry noted.

Kupperberg’s reliance on the Pacific Sun and Palo Alto Weekly as barometers by which to measure the Guardian was also a mistake, he said.

The tiny Sun, Harry said, has lost more than $750,000 since the year 2000. So though its display ad revenues may have grown over the years, that achievement hardly supports the notion that the Guardian would have earned the giant profits claimed by Kupperberg.

“It may have increased its revenue, but it’s not making any profit percentage at all,” said Harry of the Sun.

As for the Palo Alto Weekly, he said the publication earns roughly 70 percent of its revenue from classified advertising and just 30 percent from display ads. That ratio, he said, is the inverse of the Guardian, which, like the Weekly, relies mostly on display ads.

None of the evidence presented at the trial--including information about revenues, page counts, and prices--has been consistent with the idea the Weekly was slowly bleeding the Guardian dry, the CPA said.

Instead, Harry continued, the trends shown by the data suggest that both papers have risen and fallen with the overall print-media economy—up from 1995 to 2000, then slowly down ever since as the economy struggles and more advertisers flock to the much less expensive Internet.

Harry also cited sloppiness in what he called the “Kupperberg shift,” a conceptual mistake he claimed his adversary made when he failed to keep separate data involving lost pricing and lost customers.

As a result, said Harry, if one followed Kupperberg’s model to its logical conclusion, the Guardian would need to charge page rates as high as $18,000 in order for the math to come out right. Testimony at trial has referred to real-world page rates ranging from $1,000 to roughly $2,500.

But throwing around big numbers clearly doesn’t bother Kupperberg, who earlier in the day was asked by Alldredge how his $11.8 million damage figure might help the Guardian “get back to where it should have been.”

The paper could use the money to hire more salespeople, suggested the accountant, though even then it “would take some time” for the Guardian to get back to its heyday year of 2000, which was “where you would expect them to be at.”

All the talk of imaginary losses, customers who never were, and wildly escalating damage estimates seemed to amuse Kerr.

“When we look at the range of those figures, it would suggest you don’t know what the damages are,” the attorney said to Kupperberg.

Replied the smiling CPA, ““Nobody knows what the damages are.”

The trial resumes Friday morning at 8:30 a.m. with the continued testimony of Everett Harry.

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