Detroit papers wait for bell in final round. Meese to decide if monopoly is justified

Like weary prizefighters, Detroit's two big newspapers have staggered off to their corners to let United States Attorney General Edwin Meese decide who wins, who loses. For the past seven years the corporate parents of the Detroit News and the Detroit Free Press have poured millions of dollars into a cut-throat battle to win the hearts and minds of readers.

The strategy of both papers was to dominate the nation's fifth-largest newspaper market, but the result has been stalemate and huge financial losses on both sides. Now, the nation's second-largest newspaper chain, Knight-Ridder, says it is tired of heavy losses and will close the Free Press unless Mr. Meese allows it to stop competing and join forces with the rival Detroit News.

``There's no known procedure that we can follow to make the Detroit Free Press operate at a profit,'' said Alvah Chapman, chief executive officer and chairman of Knight-Ridder, in a recent phone interview. ``We have spent over $100 million since 1979 and we don't intend to spend anymore.''

Knight-Ridder wants a proposed joint operating agreement, or JOA, which would merge News and Free Press advertising and circulation operations, keeping editorial and reporting functions separate. The result would be a newspaper monopoly in Detroit.

But the question Meese faces is difficult, not only because Detroit would be the largest newspaper market ever granted a newspaper monopoly, but because two legal advisers have challenged the claim that the Free Press is failing.

One of Meese's legal advisers, Judge Morton Needelman, reviewed the case and concluded that the Free Press was not failing, and that losses at both papers were ``attributable to their strategies of seeking market dominance and future profitability at any cost.''

Much hangs on Meese's decision, because ratification of the business strategies that brought the News and the Free Press to this precipice could powerfully, yet subtly, undermine the resolve of newspaper owners in cities where newspapers still compete, journalism critics and industry analysts say.

``There are 27 other cities with competing newspapers,'' says John Kelly, a state senator from Detroit with experience in antitrust law. ``If this goes through, there is no other city in the US that could not, by these standards, be granted a monopoly. You could be seeing the end of newspaper competition in America.''

A JOA is an exception to US antitrust laws permissible under the Newspaper Preservation Act of 1970. The intent is to retain distinct editorial voices by permitting a merger when one newspaper is failing or appears likely to fail.

There are 19 JOAs uniting 38 newspapers around the country. In recent years, US attorneys general have approved each of four JOAs involving papers in Anchorage, Alaska; Cincinnati; Chattanooga, Tenn.; and Seattle. The JOA in Anchorage has long since been dissolved.

Assessing the `failure' claim

Knight-Ridder's JOA application to Meese in April 1986 included the Gannett Company, the new owner of the Detroit News and the nation's largest newspaper chain. Gannett, based in Arlington, Va., and publisher of USA Today and more than 100 other newspapers, agreed in August 1985 to purchase the News from the Evening News Association, a local company. Gannett has declined all comment, pending Meese's decision, which could come at any time.

The two newspaper chains said their Detroit newspapers were both losing money, and had fought to ``a virtual draw,'' but that the Free Press would surely fail without a JOA. Profits under the agreement would be split 50-50.

The first blow to the Detroit JOA came from the Justice Department's antitrust division last fall, when it reported the Free Press ``was not in the downward spiral'' that had characterized other failing newspapers.

Future Reagan Supreme Court nominee Douglas Ginsburg, who then headed the antitrust division, approved the division report that said: ``The applicants exaggerate both the News' dominance of the Detroit market and the bleakness of the Free Press' prospects.'' Detroit, the report said, ``is not incapable of supporting two competitive newspapers.''

The second blow came Dec. 29 when Judge Needelman, an administrative law judge, reviewed evidence in the case on behalf of Meese and concluded that the $300 million Detroit newspaper market was ``a choice plum.''

Needelman said the two newspaper owners had deliberately chosen to spend millions of dollars battling for supremacy, secure in the belief that if neither could win a clear victory in Detroit, the government would grant a JOA because of the massive losses that were incurred. The newspaper owners, he said, had set aside their normal conservative business strategies to embark on a money-losing dogfight for circulation in ``the belief that failure, too, has its reward.''

But the Newspaper Preservation Act was never intended to permit competitive, healthy business organizations to batter each other into deep financial red ink with a JOA tucked away in the back of their minds, says Steven Barnett, a law professor at the University of California at Berkeley.

``Detroit is such a large city, with papers there so well matched,'' says Professor Barnett, that if the Free Press-News JOA is approved, ``there is virtually no city left in which the competing papers could not spend a lot of money trying to dominate, and if they failed, simply ask for a JOA.''

Gannett joins the fray

In August 1985, before Gannett purchased the Detroit News from the Evening News Association, the giant chain was weighing whether it was worth the considerable risk to corporate profits to step into one of the most hotly contested newspaper battles in the country.

An Aug. 21, 1985, report by Gannett's chief financial officer, Douglas McCorkindale, to Gannett chairman Allen Neuharth - days before Gannett agreed to purchase the News - shows that the prospective acquisition had ``a positive JOA outlook, though it was not up to our normal JOA standards and probably wouldn't be for many years, if ever. It does suggest, however, that under the right terms and understandings the risk-reward ratio isn't bad.''

Gannett agreed to buy the News on Aug. 29 after two meetings with Knight-Ridder officials, who acknowledged their interest in a JOA. Eight months and 14 meetings later, Knight-Ridder and Gannett had filed a JOA request with Meese's office.

`Would we dare raise prices?'

Documents presented as evidence before Needelman show that after Gannett had agreed to buy the News, senior managers were worried about raising prices, because profitability might jeopardize the JOA application. Wrote Larry Miller, Gannett vice-president for financial planning and control, in his notes: ``Would we dare raise prices in the interim if that put both entities into black - will it put us in the black?''

A Jan. 31, 1986, document shows that during JOA negotiations, Knight-Ridder and Gannett managers were worried about making a profit and considered that an ``economic window of opportunity'' for a JOA might disappear if both papers became marginally profitable.

Which would claim `failure'?

Needelman also found that during JOA negotiations the question was raised as to which newspaper would be presented as the ``failing'' one, and managements considered the possibility of having both newspapers claim they were failing.

Says Mr. Chapman, the decision as to which paper would be cited in the JOA application as failing ``was a matter both Gannett and Knight-Ridder decided we'd leave to our attorneys. Both papers were losing money. It's a matter of record.''

Internal documents presented as evidence in the case show Knight-Ridder's management felt that because the News might be profitable in 1985, the Free Press was probably the only feasible candidate to be cited as ``failing.''

``I think we must be ready to hold ourselves out as the `failing company' and develop all of the rationale necessary to soothe our people and to be sure that, while we might be willing to accept this position (if we have to), it certainly should not reduce our negotiating strength with Gannett,'' wrote Robert F. Singleton, Knight-Ridder's senior vice-president of finance on Sept. 5, 1985, to Chapman.

The Free Press might have been failing, but that was not the message contained in a Jan. 20, 1986, letter in which Knight-Ridder said its newspaper had a number of competitive advantages over the Detroit News, including leadership in the critically important morning field, higher overall readership, dramatic improvement in Free Press circulation, and new printing presses.

Knight-Ridder officials, however, contend the letter was optimistic. ``You've got to portray yourself as the winning team,'' says Frank Hawkins, Knight-Ridder vice-president for corporate relations. ``When you're in a competitive situation, you can't portray yourself as a loser and be competitive.''

The JOA campaign gets into gear

Needelman's negative ruling was unexpected. It catalyzed Knight-Ridder, which had the most to lose without a JOA, to mount its last-ditch public relations campaign. Its new strategy included turning to well-connected Washington lobbyists, a public relations agency, and a barrage of emotional editorials and appeals in the Free Press.

Observers say that it is not only an attempt to gain support for the JOA, but to nullify opposition to it. The goal is to lower barriers to a favorable JOA decision from Meese, says Richard Wright, a journalism professor at Wayne State University in Detroit. ``They are putting pressure on the mayor, unions, and business leaders to just shut up, not to oppose, not to intervene,'' he says.

According to accounts in the Free Press, the public relations campaign planning began in earnest on Jan. 4, and continued all week. A Jan. 14 strategy session included lobbyists William Timmons, Clark Clifford, and management of Knight-Ridder. Gannett was to be kept apart from the campaign, but Mr. Neuharth would be kept informed.

The campaign, chronicled in detail in the pages of the Free Press, identifies a three-pronged strategy to:

``Persuade [Detroit Mayor Coleman] Young and the [six newspaper] unions to drop their opposition, thus removing an obstacle the company had seriously underestimated.

``Drum up enough support for the JOA - partly by underscoring the consequences of denial - that approval will become a more attractive alternative than denial for Meese.

``Dramatize the company's contention that the Free Press will close without a JOA.''

The Free Press article cited a Jan. 7 strategy session involving Chapman, which produced the cornerstone of the strategy. This was to hold a special meeting of the company's board of directors in Detroit. There, the board voted to shut the Free Press if a JOA is denied. Meese can make his decision at any time.

Powers of persuasion

Since the board vote, politicians of all stripes have come around to support the JOA proposal. Knight-Ridder has in the past two months successfully lobbied two US senators, 15 of 18 Michigan congressmen, about 200 area businessmen including General Motors chairman Roger Smith, and former President Gerald Ford.

Political opposition has crumbled under the campaign. Several staunch opponents of the JOA have reversed field, including Michigan Gov. James Blanchard. In a Jan. 12 interview published in the Detroit News, Governor Blanchard told reporters, ``I think we can support two newspapers. It's hogwash that the Detroit market won't support two. I don't believe that.''

But the next day - following a phone call from Free Press publisher David Lawrence - another interview was arranged. The Free Press quoted Blanchard retracting many remarks. ``I haven't studied the financial and market structures of the newspapers,'' Blanchard said. ``I'll take the word of David Lawrence that the Free Press won't survive.''

Mayor Young and five newspaper unions have also done pirouettes. Young, who opposed the JOA, supports it now as a lesser evil, the greater one being that the Free Press might close.

A recent News article pointed up the problem of appearing to favor a politician after newspapers lobby for support. The article said Young withdrew his opposition to the JOA after meetings with and phone calls from Mr. Lawrence. Young backed off two days after a Free Press editorial endorsed his reelection.

``Whether or not a news organization really intends to do this, most public officials, when asked to support something like this, will believe that their future treatment in the news will depend on their answer,'' says Ben Bagdikian, a journalism professor at the University of California at Berkeley.

Only one legal opponent, the Newspaper Guild, remains. Legal experts say if the Guild remains opposed, it could challenge in federal court any Meese decision in favor of a JOA.

Journalism critics have expressed concern about Knight-Ridder's tactics, which included an emotional front-page appeal by Lawrence urging Michigan residents to write in saying what they would miss if the Free Press closed.

One reader recently sent a sad letter calling the threat of the Free Press closing ``a great crisis hanging over our heads,'' while another wrote how she had recently placed a copy of the Free Press in a coffin alongside her departed father.

Lawrence says the publicity effort makes sense for a newspaper on the ropes. ``It seemed such an enormous tragedy that the paper was going to die and the community wasn't aware,'' he says. ``My job then and now was to make sure the people were aware of the realities.''

To charges that the Free Press has been used as a corporate propaganda tool, Lawrence says, ``I am confident that what was done has been done with integrity and with ethics. I value nothing more than the integrity of my own newspaper.''

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