Washington Post CEO Offers Up the Secrets Behind a Successful Media Company (page 2 of 2)

Experimentation takes time to show results, and not all attempts will be successful. Thus, a fixation on quarterly earnings is out of sync with the dynamic that is driving the media industry.

For Graham, however, the virtue in eschewing quarterly score-keeping is not specific to the media industry, but rather broadly applicable to public companies. He stopped short of advocating that other companies do as the Washington Post Company does. But he doesn't see many good reasons for them to do otherwise. "I've no quarrel with what analysts do and with what other companies do," he said. But he then quickly pointed out that the ubiquitous round-ups of analysts' estimates are no longer called a "consensus" because they are, in fact, only "a mathematical average of wise and stupid estimates of what doesn't matter in the first place."

His view of the quality of estimates aside, Graham has another, overarching reason for blowing off quarterly numbers: "Analysts won't live with consequences of good or bad decisions; shareholders will," he said. So decisions should be made based on shareholder needs, not analysts' expectations. In other words, the drive to meet or beat analysts' quarterly estimates each quarter is at odds with the long-term task of building shareholder value.

Going the Distance
Graham is persuasive, in large part because the Post Company's results bear out a long-term growth strategy: Over the past five years the stock of the Washington Post Company was up 61.8%, versus 41.61% for the Dow Jones Publishing Index and 32.8% for newspaper publisher Gannett Co., Inc.

To illustrate the power of ignoring quarterly pressures, Graham points to Kaplan, the test preparation and career services company. Currently the Post's fastest growing business, Kaplan's revenue increased by 35% last year to $838 million, accounting for much of the Post's overall growth, even though Kaplan reported an operating loss of $11.7 million. To compare, when the company acquired Kaplan in 1984, revenues were $75 million, it had lost money for six years in a row and chewed up and spit out four CEOs in quick succession. "If we had [been required] to make quarters, we would not have this business today," Graham noted.

To drive his point home to the MBA students at the conference, Graham proposed a flight of fancy. Assume you own 100% of a business. Imagine your goals - whether to make the most money, grow the biggest business, have the most inventions, employ family and friends - anything. "One thing for sure wouldn't be to call Merrill Lynch and say, 'How much do you think we should make in the next three months?'" he said. "That doesn't make sense if you own 100% of a company, and it doesn't make sense for us."

Still, Graham concedes, the absence of quarterly performance pressure could be harmful if companies papered over poor management by claiming they were focused on the long term. Indeed, the tendency of companies to do just that led in large part to the development of the analyst industry, as Wall Street tried to prevent bad managers from hiding behind a future that never seemed to arrive. To avoid that trap at the Washington Post Company, Graham said he relies on having "famously tough graders" on the board of directors, such as Barry Diller, the media and interactivity mogul, and Alice Rivlin, a former vice-chair of the Federal Reserve and director of the Office of Management and Budget in the Clinton Administration. "Sloppy management doesn't get by them," said Graham.

Passion and Shareholder Value
Listening to Graham, one gets the impression that another reason he ignores quarterly expectations is to free up time to concentrate on what he cares about most: the news. "I never said to myself, 'Why am I doing this?'" Graham noted, adding that news is also the reason for owning television stations. "Local television is great if you're first or tied for first in news. Television stations are built around the quality and acceptability of their newscasts."

Graham also said that while newspaper circulation is declining at the rate of about .08% a year, the readership of the Washington Post is higher than it's ever been due to the number of online readers. Washingtonpost.Newsweek Interactive (WPNI), formed in 1993, is an online version of the Washington Post and Newsweek updated with breaking news and other features. It is advertiser supported although not profitable. According to its website, "Washingtonpost.com ranks as both a top national news site and the nation's most dominant site in its home market. While the site reaches almost 40% of web users in the Washington region, 80% of its six million monthly visitors come from outside the Washington region."