At the 2004 MBA Media and Entertainment Conference on February 20 in New York City, keynote speaker Donald E. Graham, chairman and CEO of the Washington Post Company, quickly gave two reasons why he was an odd choice to deliver the address.
A self-described “third generation inheritor of a 19th century business,” his professional trajectory was surely not a workable model for the audience members whose education, he felt, stressed entrepreneurship. (The conference was organized by Columbia Business School, Fuqua School of Business at Duke, MIT Sloan, NYU Stern and Wharton.) Graham’s maternal grandfather bought the Washington Post at a bankruptcy sale in 1933; his father was its publisher from 1946 until his death in 1963 when his mother, the legendary publisher Katharine Graham, took over. Starting in 1971, he was groomed for leadership in various positions within the company, leapfrogging from a reporter’s job at the Washington Post at age 26 to executive vice president and general manager of the newspaper at 31, publisher at 34 and so on.
And as for what he had to tell the audience about media today, he said at the outset: “There are several trends in the media industry, of which the Washington Post Company participates in zero.”
But opting out, it turns out, was Graham’s point.
The other conference participants – representing broadcast, cable, satellite, and the internet; film, music, sports and advertising; and investment banking, media consulting and corporate finance – were all preoccupied with three broad themes: international expansion, industry consolidation and multiplication of mediums.
Graham’s focus was elsewhere. A key to the success of the Washington Post Company, he said, is management’s refusal to join most of corporate America in its obsession to meet or beat Wall Street analysts’ quarterly earnings estimates. “We don’t do quarters,” he said. “Quarterly earnings are not in the top 100 things you should care about if you want to value the company.” Putting his money where his mouth is – he owns about 37% of the company – he added, “If you care about that sort of thing, you shouldn’t own our stock.”
The Buffett Way
The Washington Post Company adopted its “no quarters” stance under the guidance of Warren Buffett, who bought $10 million of stock in the company during the recession of 1974 and joined the company’s board that same year. “My mother realized that he was the smartest businessman she had ever met,” said Graham. Buffett’s input “has been worth billions to the company.”
Buffett’s influence is also evident in the conservative and coherent group of companies that comprise the Washington Post Company: In addition to the Washington Post newspaper, the company also owns Newsweek, as well as interactive versions of both publications, six local television stations devoted to local news and information programming, Cable One (“the nation’s smallest cable company,” says Graham, proudly) and Kaplan, Inc., the educational and career services company. On revenues of $2.8 billion for the 2003 fiscal year – a 10% increase over 2002 – the company had net income of $241 million, up from $204 million in 2002.
Half jokingly, Graham said that the way the Washington Post Company did business was “so unusual, I’m not sure any lessons can be drawn from what we do.” And yet, in the overall context of the conference, Graham’s resistance to “doing quarters” took on added resonance.
The reason: A common message from virtually all the conference panelists is that MBAs who enter the media industry, in whatever capacity, will need to place bets on new technologies and business models. 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.”