Thursday, February 10, 2005

A Magazine Editor Pumps Stock in His Own Company, at the Expense of the New York Times

The outgoing CEO of a faltering company, perpetually on the edge of bankruptcy for several years, could expect no more effusive coverage than David Talbot received from David Carr in the New York Times on Thursday:

"David Talbot, a pioneer of online journalism who founded Salon magazine in 1995, will announce today that he is stepping down as the magazine's editor in chief, chief executive and relentless cheerleader. He will be replaced by as editor, he said, by Joan Walsh, his longtime deputy.

"Salon will also announce its first profitable quarter in its history, Mr. Talbot added, a profit of $400,00 on revenues of $2.2 million."

This profitable first quarter, Carr concludes, coupled with "revenues from a combination of subscribers" and "a share of the growing Internet advertising market" indicate that the predictions of Salon's demise have been grossly exaggerated.

Carr concludes: "The future of one of the Web's premier brands that was perpetually in danger of ending up in the recycle bin seems assured."

How accurate is that assessment?

An editor (or perhaps Carr's own common sense) should have said not so fast:

Carr appears to have been snookered. A gifted stylist and hardworking reporter, Carr should have simply reviewed for a few minutes Salon's latest SEC filings, or even Salon's own press release on the P.R. newswire, regarding its new earning report, before filing his story. They were available only a click of the mouse away for Carr (or anyone else for the matter), thanks to the Internet.

In announcing that the company was able to report $400,000 in profits for the quarter ending Dec. 31, 2004, the SEC filings also firmly made clear that Salon's first and only profitable quarter was most likely an aberration, and that there was little reason to believe that there was going to be another profitable quarter anytime soon.

Here is exactly what Salon's SEC filing says:

"Salon anticipates a net loss for its [next] quarter ending March 31, 2005 and cannot predict when it will reach net profit in future quarters. Due to seasonality, Salon estimates that total revenues for its quarter ending March 31, 2005 will be $1.3 -$1.4 million, with advertising sales comprising [$600,000 to $700,00] of the total. Salon cannot predict total revenues after March 31. 2005 owing to the relatively short time frame in which advertising orders are secured and when they run on our Website and the lack of significant long-term advertising orders."

In short, the magazine's estimated total revenues will fall from $2.2 million to $1.4 million in the next quarter, with advertising revenues alone falling from $1.3 million to $600,000 to $700,00. The company will almost certainly become even more mired in debt by the next quarter.

Even though Carr's article appeared in the Times' Arts Section, those who appreciate culture also play the stock market. And more than a few readers of the Times probably bought some more stock in Salon as a result.

At the close of the market, before the Times article appeared, Salon's stock was being traded at $.15 a share. By the time the stock market opened the following morning, the stock was trading at $.19 a share, and climbed as high as $.29, before eventually falling to $.22 at the close of the market. In the world of penny stocks, that ordinarily does not count for much. However, that still was an increase of the stock's value of close to 47% in a single day. And at one point during the trading day, Salon's stock actually doubled from its closing price the day before.

The price of the stock would have almost certainly rose substantially solely on its news of its new earnings report and the news of the turnover of management. But many investors rely on the Times for their information regarding a stock's value.

The next quarter's earning report for Salon's stock might also be a difficult for the company because it is required to pay a $100,000 security deposit to rent different offices. In and of itself, that is almost certainly not going to lessen most companies' profit margins for its next quarter. But an added $100,00 expense at a company whose net gains and losses are routinely in the range of the low hundreds of thousands of dollars does make significant difference for a quarterly earnings report. The new lease agreement requiring the $100,000 security deposit was signed on Jan. 13, 2005, not that long after the favorable Dec. 31, 2004 earnings report, but still long enough not to drag down profits for that quarter.

Further, two current employees of the company also told me that editorial costs were purposely kept low during the last quarter to increase that particular quarter's profits, only to be raised back to a normal level virtually the moment the quarter was over. These two people said that new editorial hirings were deferred until after the quarterly report, and that the freelance budget of the magazine had been reduced well below normal during the quarter as well. One of them told me: "We knew we weren't going to have a quarter like this for a long time. This was our one chance to show a profit." One senior staffer told me that an editor of the magazine joked to them: "We figured out a way to just put enough lipstick on this pig," referring to the machinations to inflate profits as much as possible for the one quarter.

Another bad sign for the future profitability of the magazine is that the increase in paid subscriptions to the website- another potential source of income-- has been sluggish in the last year. The number of paid subscribers at the end of this last reported quarter was 89,100, as compared to 73,700 a year ago. As one former editor at the magazine told me: "You cut back the editorial staff. You cut back your budget for your editorial product. You have to do that to show a profit-- even a nominal one. But in the process you do not grow your circulation-- and more importantly grow your circulation with those who will pay for content." This person said the effort to turn a profit for one quarter-- to send a message to the media and potential new investors that it was possible-- was a "gimmick": "You shoot yourself in the leg for the longterm and you pay for it in your next several quarters."

Both David Talbot, and Elizabeth Hambrecht, the recently named CEO of the Salon Media Group, did not respond to inquiries for this post.

CEOs of large companies, of course, inevitably hype their own companies to raise their stock prices. Talbot is no different, although perhaps a bit more zealous than most. As David Carr wrote in his Times piece: "[J]ust because he is stepping down as the editor in chief and chief executive, Mr. Talbot is not relinquishing his pompons."

But journalists who are also CEOs should be held to a higher standard. And in this post-Enron/Worldcom era, there should be even less tolerance for misleading the investing public.

It is one thing to promote your company, but it is quite another thing to purposely mislead one's investors and readers. More than one of Salon's editorial employees has privately complained over the years that they have been asked to promote the company's brand and stock in addition to their editorial duties-- and in a way they did not believe to be honest. They are right that this is not a proper role for journalists.

Being asked to promote your company's stock while knowing it is not as potentially profitable as it appears is not just a mere breach of faith with stockholders. It is a breach of faith with one's readers. Many of Salon's stockholders are also the Internet magazine's loyal readers who have viewed their purchasing of its stock as a means to support its journalism.

In the end, journalists have been asked to mislead their own readers. And they have done so not only at the expense of their readers, but also at the expense to their own editorial integrity. At a minimum, they should require their corporate bosses-- in this case complicated by the fact that their outgoing editor-in-chief was also their CEO-- to tell their readers the absolute truth.

In terms of full disclosure for this post, please see the bottom of my post of two days ago on controversialism.

Another disclosure of potential bias in regards to this post: David Carr had been a personal and professional acquaintance of mine of many years. Among his many acts of generosity towards me, occured when I was stood up by a date at the last minute on New Year's eve; he invited me to spend the evening with him and his family.

An update: An Associated Press article, posted on the Times website last night, provides some perspective regarding Salon's "bright prospects", not contained in Carr's article.

The A.P. dispatch stated: "The company said it expects to post a net loss for the quarter ending March 31, as seasonal factors drop advertising sales to an estimated $600,000 to $700,00."

The article also noted: "Leading up to its earning breakthrough, Salon had lost a total of $91.1 million." Needless to say, the losses will almost certainly continue for some time.

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