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‘Check out this whopper:The IT staff’s ability to make fixes now exceeds the number of bugs being detected, a sign that the system is nearing stability.

Information Week, Sept. 26, 2005

You might guess—and rightly so—that the “IT staff” referred to in the above quote is that of Overstock.com, seeing as how Overstock is one of the few internet retailers I am aware of that is still having problems getting a handle on this whole IT thing.

The problems arose as Overstock was preparing to go live with Oracle financial and order-management apps designed to reduce the load of the company’s proprietary shopping engine.

Information Week, Sept. 26, 2005

And you might guess that I am prepared to make plenty of sarcastic references to Overstock’s CEO Patrick Byrne and how he said the following in his second quarter 2004 shareholder letter:

Shawn Schwegman (VP, Technology) remains a star. This year Shawn has assembled a team of mature, experienced Database Administrators (DBA’s). Our network has become quite stable… By the end of July, I think I will be able to say, “I could not be happier with the IT team nor the level of understanding between it and its internal customers.”

And you might guess I am prepared to show how different a picture from that soft-hued-Monet-style-watercolor of Overstock’s IT system is painted by this week’s InformationWeek article:

Before the Oracle deployment, Overstock relied on its homegrown system to route orders to the appropriate distribution facility. But Schwegman says it wasn’t good at detecting and correcting order and delivery errors, a problem that required a great deal of manual oversight and one the growing company could no longer live with.

Information Week, Sept. 26, 2005

And you might expect even more sarcastic comments about the August 3, 2005 earnings call (not quite two months ago), when Byrne said this to investors:

But this is the architecture and we’re putting the finishing touches on it now, and it’s cost us $35 million. But I think it has been brilliant, I think our CIO, Shawn Schwegman, has done – is the best CIO in America. I think he’s done a fantastic job over two years taking us from really a rinky dink arrangement into this architecture. And what’s beautiful about it is not only heavy duty, it’s so scalable. It’s scalable at each layer.

And you might expect me to question why, regarding the very same IT system described as “brilliant” and “scalable” and “beautiful” on August 3, we read in the September 26 InformationWeek that:

The IT staff’s ability to make fixes now exceeds the number of bugs being detected, a sign that the system is nearing stability.

But I’ve had it with this one. There’s nothing more to say.

Oh, I know I’ve said the same thing once before…and kept writing. But in my own defense, that was before Byrne kicked it up a notch, what with Sith Lords and Master Manipulators and all that Conspiracy nonsense, followed by the Friday-after-the-close oops-we-had-a-five-week-$30 million-inventory-upload-problem press release.

I think Schwegman’s frank admissions, in contrast to Byrne’s well documented public pronouncements on the “brilliant” IT strategy at Overstock.com, tell any observor everything that observor needs to know.And whoever doesn’t know it by now doesn’t want to know, and never will…which is, of course, their right. After all, as Paul Simon wrote, “a man hears what he wants to hear and disregards the rest.”

So, you have just read my second to last piece on Overstock.com.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

The best energy industry research firm I know is Petrie Parkman, run by oil research veteran Tom Petrie—a man I interviewed with 25 years ago when I was first looking for work on Wall Street, although he wouldn’t remember me from the Sith Lord.

And from their morning research notes comes the following comment regarding Rowan Companies, a large operator of jack-up drilling rigs in the Gulf of Mexico:

Rowan has its own planes and were thus one of the first on the scene to witness the impact. They say that the rig devastation is quite significant and the pilots reported that in an area where they previously would see about 15 jack-ups there were none visible.

“None visible.”

Of course, while Rowan was flying planes over the area where there were no rigs “visible,” the stock market had already decided the impact of Hurricane Rita was not too severe, based largely, I gather, on the fact that Fox and CNN TV reporters in rain gear were able to walk around parking lots in Galveston shortly after the storm passed and could see no visible damage to the infrastructure miles out in the Gulf of Mexico.

By the end of yesterday, however, the oil markets had corrected the market’s misinterpretation of the Talking Heads’ somber yet relieved reports, and bid oil prices back up—while natural gas never even bothered to head-fake anybody, and just stayed strong.

Meanwhile, Rowan sees a more significant impact on their business besides the loss of a few of their own rigs, thanks to the apparent disappearance of so many other rigs in that region: drilling rates in the Gulf should “sky rocket,” according to the Petrie Parkman note.

No inflation indeed!


Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Well now we know where Patrick got his affidavits.

The affidavits I’m referring to are the documents Overstock.com CEO Patrick Byrne brandished Joe McCarthy-like during his “Sith Lord” appearance CNBC, claiming proof of a conspiracy between short-sellers and a research firm called Gradient Analytics before reading selective bits from the so-called proof of the so-called conspiracy.

According to today’s New York Post, of the three ex-employees at Gradient who apparently provided the affidavits, two were “dismissed for violations of Gradient’s corporate policy.”

Furthermore, the two worked in “customer-relationship management” at Gradient—which is not exactly the guts of a research shop, where conspiracies of the scale alleged by Byrne might be hatched.

And one of the two “customer-relationship” ex-employees was, according to the Post, fired for “forwarding Gradient’s client list to his personal e-mail account,” and has “filed and lost repeated appeals to claim unemployment benefits.”

Not exactly an Andy Fastow-type eye-witness, if you ask me.

Now that I think of it, when Patrick read from his “Sith Lord” papers on CNBC (I don’t know about you, but I kept waiting for him to say he had in his hand the names of 57 communists now working in the State Department), the phrase that jumped out was the qualifier “it appeared,” which was placed before an allegation of conspiracy between the shorts, Gradient and reporter Herb Greenberg.

There was no first-person “and then I did this” eye-witness account from somebody at the epicenter of the so-called conspiracy—the kind of testimony that put Bernie Ebbers in jail. At least as far as I could tell. And today’s article explains why.

Stay tuned, and read the Post.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Walking towards the skating rink at Rockefeller Center on this quiet Sunday morning, I noticed an unusual flurry of birds in the plantings along the water fountains lining the middle of the walkway connecting Fifth Avenue and John D. Rockefeller’s masterpiece of urban renewal.

The birds were sparrows—the scavengers of the city—and nothing particularly nice to look at, except they were having such a great time feeding off the unusual tall grasses and birch trees planted by the pools of water.

Looking closer, I found the sparrows were busy picking seeds that had budded on the tips of the ripe grass, and they seemed extremely jazzed about the whole experience, most likely because it wasn’t at all like the half-empty, ketchup-smeared McDonald’s bag they usually pick apart for their lunch.

This time it was the real deal.

But there was an odd sound—a non-sparrow sound—and an odder flutter among the plants, and I noticed that one of the birds was not a plain old brownish speckled dust-grimed New York City sparrow, but a female Yellowthroat…tiny, delicate and olive-brown with a dull yellow throat.

She was doing the usual warbler thing—hopping around among the lower branches of the birch tree and the clumps of grass, chirping and acting generally like a 7 year old boy on a sugar high.

Yellowthroats come from as near as Florida and as far as Argentina in the spring to nest and hatch fledglings and hop around the lower branches of trees while they look for insects and seeds to eat…and by now they would have returned south. But this one was clearly enjoying the little ecosystem set up there right in the middle of Manhattan.

It was a nice, if temporary, affirmation that, try as the human race might, we haven’t yet killed off every last vestige of nature.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Chuck Schumer is, in my opinion, a blow-hard, a media hound and a showboat…pretty much your basic U.S. Senator.

But he does mix it up pretty good whenever he finds a cause that gets him publicity—which is more or less every morning—and here in San Francisco, at the BankAmerica conference, I came across a cause that’s tailor-made for Chuck: it is timely, easy to grasp and begs for righteous indignation.

I call it “Why We Have an Oil Crisis.”

The British Petroleum investor relations person presented yesterday at the BankAmerica conference, and during the breakout session she defended the fact that BP uses a $20 per barrel oil price to “test” its spending projects—i.e. to decide whether to go ahead with drilling for oil.

When reminded that oil currently sells for about three-times that figure, the BP investor relations person vigorously defended this $20 “test” price, noting that BP sees oil trading in a $20 to $35 a barrel range over the long haul.

Since it takes five to seven years to bring a big project on stream, “it is reckless to be investing (based) on (today’s) oil price.”

That is true enough, I suppose…but when asked if $20 a barrel was not a little on the low side of recklessness, she noted that at the $20 per barrel “test” price, BP has enough exploration and production projects “to grow production 5% per year.”

And since world oil production is growing “at half” that rate—i.e. around 2.5%—then “we are doing more than our fair share.”

Now, this is where the numbers get easy to follow, even for a U.S. Senator.

How much of its cash flow is BP actually spending to explore for and produce oil this year, you might wonder?

“$9.5 to $10 billion,” according to the investor relations person.

And how much of its cash flow is BP “returning to shareholders” in the form of dividends and share repurchase, you might wonder?

$17 billion.

Therefore, British So-Called Petroleum is giving back to its shareholders 70% more of the cash flow it makes thanks to $65 oil prices than it is spending to find new sources of oil supply.

Perhaps they should change the company’s name to “British Dividends & Share Repurchases.”

Of course, as this blog has noted previously, BP is not alone when it comes to capital allocation weighted to shareholders at the expense of a resource we are rapidly exhausting: ExxonMobil likewise spends more on dividends and share repurchases than on wildcatting, as they used to call it.

Which is why—along with a ridiculously low gasoline tax that Chuck and his colleagues don’t have the guts to increase—we have an oil crisis, Senator.

Go get ‘em.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

I’ll keep this one brief so that even bond traders can focus on it.

CS First Boston analysts today lowered earnings estimates for 20 companies, mostly due to lower margins owing to higher energy prices and higher related materials prices.

And the firm’s analysts raised estimates for three companies, due entirely to higher margins owing to higher energy prices.

Good thing there’s no inflation.


Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

On Friday at 4:01 PM, Overstock.com issued the following press release, in bold italics, with commentary from the author of this blog.

Overstock.com Overstocked With Bargains
Friday September 16, 4:01 pm ET

Interesting timing—4:01 Eastern Standard Time on the Friday of September options expiration. Did the facts really not come to light sooner than the market close at 4:00 PM on option expiration day?

Is there a disclosure here?

SALT LAKE CITY, Sept. 16 /PRNewswire-FirstCall/ — Popular online retailer Overstock.com® (Nasdaq: OSTK – News) today announced a mass upload of new inventory for sale on its website.

Quite a bland way to begin a press release that announces (later in the text) “sharply” slowed sales, “inefficiencies” and “downward pressure on gross margins.”

Is there a disclosure issue here?

The $30 million (retail value) upload of jewelry, apparel, home, electronic and other products far exceeds any single upload in Overstock.com’s corporate history (by a large multiple). As always, these products will be priced to move and will sell out on a first-come first-serve basis.

Inventory glitches are, generally speaking, not a good thing for a retailer.

Indeed, just the day before this release, Tad Martin (Overstock’s own SVP of Merchandising) noted on a conference call with investors that “Inventory is not like wine—it does not get better with age.”

Martin made no reference to the $30 million “mass upload” of inventory that would be announced on September 16th, the very next day.

Is there a disclosure issue here?

As previously announced, Overstock.com is completing a massive upgrade to its IT infrastructure. In working through the implementation of these new systems, the company has not loaded new products from its warehouse and fulfillment partners onto the website for nearly five weeks, several weeks longer than the company had anticipated.

On conference calls and in shareholder letters, Overstock CEO Patrick Byrne has given the impression—at least to Wall Street’s Finest, none of whom raised any red flags—that the IT upgrade was largely complete.

But don’t take my word for it. This is the way Byrne describes the situation to shareholders in his August 3rd letter to investors:

I believe we have found a healthy balance among the three (growth, infrastructure, and new programs), and am particularly glad that we have super-sized our systems over the last three quarters, as it gives them a quarter to harden before the next holiday wave hits.

No word about the problems that stopped five weeks worth of inventory from being “uploaded.”

Is there a disclosure issue here?

“This upgrade was the equivalent of a heart, lung and kidney transplant,” said Patrick Byrne, president of Overstock.com. “The replacement of the core technology infrastructure, which I have discussed at length in my quarterly letters, prevented us from uploading new items to the website for the past five weeks.”

Patrick did indeed discuss “at length” the infrastructure replacement, especially in the second quarter letter. Here’s a sample:

Oracle 10g — Over the course of May and June, all components with the exception of the B2C shopping site itself rolled from Oracle 9i to 10g running on our new IBM P5’s AIX. We expect to do this last piece in August (and will be down for 30-120 minutes some night as we do it).

This transition has been remarkably smooth.

From a “remarkably smooth” transition on August 3rd to a five week inventory “uploading” disruption disclosed on September 16th.

Is there a disclosure issue here?

However, while the operation was going on, our buyers, copywriters and warehouse staff continued to make purchases, prepare postings and stock our warehouse — which is now stuffed to the gills. This presents our customers with a huge opportunity to find great selection and bargains, but when they’re gone they’re gone.”

Disregarding, for the moment, the question of why “copywriters” and “warehouse staff” are making inventory purchases, the day before this press release—September 15th—Overstock’s Tad Martin had the following conversation with Stanford Group analyst Rebecca Jones Kujawa on her conference call with clients:

Rebecca: “What’s going on with the holiday season?”

Tad Martin: “We’re ready for the holidays. We made a decision earlier this year that with the amount of cash we had in the bank and the direction we were heading we’d rather be a little over-inventoried going into the Christmas season than under-inventoried, which all it means is we’re building inventory a little ahead of where we had the previous year. And what that allows us to do is to find some greater marketing opportunities—if the opportunity of a lifetime came in marketing, we’re not gonna be inventory constrained.”

Rebecca: “Is that inventory already up on the web site or are you kind of holding that back…”

Tad Martin: “No, no, no. As much as possible we try and flow our inventories through to the web site at the time [emphasis added]. There’s no reason to hold inventory in your warehouse. Inventory is not like wine—it does not get better with age.”

From “we’re building inventory a little ahead of where we had the previous year” and “there’s no reason to hold inventory in your warehouse” on September 15th to “our warehouse…is now stuffed to he gills” on September 16th.

From “we try and flow our inventories through to the web site at the time” on September 15th to “the replacement…prevented us from uploading new items to the website for the past five weeks” on September 16th.

Are there disclosure issues here?

“These investments in technology, while incredibly expensive, are providing a foundation for the next five years, and will, I believe, generate huge dividends in customer satisfaction and loyalty. However, by preventing the posting of fresh inventory since early August, this transplant did shock our system.”

Let’s consider the public appearances Patrick Byrne made, beginning in “early August” when, according to Byrne, the “transplant” began to “shock” the Overstock inventory system:

On August 3rd, Patrick Byrne holds an 85 minute earnings conference call with investors. He says “we should be able to do somewhere around 1.5 billion or more [sales] next year.”

On August 12th, Patrick Byrne holds a one hour “Sith Lord” conspiracy conference call with investors. He does not discuss revenue or earnings, but does mention Al Qaeda, cocaine, and Wayne and Garth.

On August 12th, Patrick Byrne appears for 15 minutes on CNBC discussing his “naked short-selling” conspiracy theory. In response to a question about Overstock’s profitability, he says “…what you’re gonna see us do is basically double on the top line…”

On August 16th, Patrick Byrne appears for 18 minutes on CNBC to debate his “Sith Lord” conspiracy theory and says “Somehow, in the face of all this poor performance we’ve grown from $2 million to basically a billion [in sales] this year…”

According to Friday’s press release, however, Overstock’s sales slowed “sharply” as a result
of the failure to “upload” inventory starting in “early August.”

Yet even on August 16th Byrne was telling CNBC viewers Overstock was growing to “basically a billion” in sales in 2005.

Is there a disclosure issue here?

“Investors should note that our restricted ability to post fresh inventory slowed sales sharply, a caesura from which we are now rebounding. In addition, the upgrade also caused inefficiencies that, when combined with our extended dollar shipping promotion, has put downward pressure on gross margins this quarter. However, my goal of growing 60% to 100% for the year at break even GAAP, +/- 1%, stands.”

Fancy Latin words aside, the fact that “the upgrade also caused inefficiencies” had not, to my knowledge, been previously disclosed—either on the August 3rd call, the August 12th call, the August 12th CNBC appearance, or the August 16th CNBC appearance.

Not even on Tad Martin’s September 15th conference call.

One more time: is there a disclosure issue here?

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

Well, Patrick has done it again.

With a just-after-the-Friday-close press release headlined “Overstock.com Overstocked With Bargains,” CEO Patrick Byrne has come up with another very amusing spin on his company’s latest change in fortune, which includes “sharply” slowed sales and “downward pressure on gross margins.”

Once again, the CEO who bills himself as “one of the most transparent CEOs” in the world has painted a beautiful face on one dog of an announcement, blaming the whole thing on an IT infrastructure “transplant.”

And keeping in style, Patrick uses an elegant, erudite word (“caesura”) to suggest his company’s latest SNAFU is merely a pause that refreshes…and that everything now is, as they say, up-and-to-the-right.

(Unfortunately, “caesura” is not the correct word, for it implies a pause in a conversation or a break in a line of poetry…and not even Allen Ginsberg’s “Howl” would begin to describe Overstock’s “caesura.”)

Poor word-selection aside, this latest of missives from Overstock.com’s “Humble Servant” merely extends the long line of excuses (recall, and I am not making this up, that he mentioned the death of Pope John Paul II after last spring’s “caesura”) that never admit to an actual problem for which Overstock.com management might bear responsibility.

It’s always something, isn’t it?

We’ll take a closer look at the whole thing on Monday.


Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

We face significant competition from Microsoft… Microsoft recently introduced a new search engine and has announced plans to develop features that make web search a more integrated part of its Windows operating system or other desktop software products. We expect that Microsoft will increasingly use its financial and engineering resources to compete with us.

In addition, advertising and other fees generated from one Google Network member, America Online, Inc…accounted for approximately 12% and 11% of our revenues in 2004 and in the six months ended June 30, 2005…—Google prospectus, 9/9/05.


Demonstrating its growing concern about Google Inc., Microsoft Corp. has entered talks with Time Warner Inc. about taking a substantial stake in the media giant’s America Online unit, said people familiar with the matter.

The conversations have centered on whether AOL would switch to using Microsoft’s search engine instead of Google’s, these people said, as well as other areas of potential cooperation. AOL and Google shared about $380 million in revenue last year derived from displaying ads on AOL’s search results.—Wall Street Journal, 9/16/05.

I apologize up front to those of you who, based on the title of this piece, expected commentary about Sith Lords and Master Puppeteers and other fantasies of a certain CEO who sees conspiracies to ruin his share price where others merely see what they believe to be a lousy business model and poor corporate governance.

The “Evil Empire” referred to in the title is, of course, Microsoft, whose own CEO—the brilliant and irascible and monopoly-spoiled Bill Gates—has decided to target Google after letting two Stanford grads undermine his hold on the hearts and minds of millions of Windows users around the world, and, ultimately, threaten that very monopoly by making the software underlying the search platform irrelevant to the user.

And now we see one thrust of Bill’s attack plan: pick up in a single, quick move the biggest piece of Google’s business—that portion of its revenues generated by AOL users who do Google searches from the AOL web site.

The timing couldn’t be better.

Google just priced its secondary offering of 4-plus million shares at $295 a share, after management road shows that included meetings with some of the biggest funds on the planet and a luncheon at the top of the St. Regis in New York—the main feature of which was co-founder Sergey Brin, young and scary-smart, looking for all the world like a high school sophomore dressed for his first prom in a new and very uncomfortable suit and tie.

For the record, as readers have gleaned, I own shares of Google, because I think the earnings power of the business is much higher than Wall Street thinks. But I could very well be wrong and change my mind in a minute, and I don’t recommend anyone go near the stock.

Why point out a very large potential short-term negative to Google—i.e. the Evil Empire’s courtship of a damaged AOL and the one trump card in its otherwise weak hand?

Well, because it’s right there on the front page of the Wall Street Journal, and because we all knew this day was coming.

In previous posts, I’ve argued that “you can’t under-price free”—meaning that Microsoft’s disadvantage in the search wars is that users don’t pay for search, and, therefore, Microsoft couldn’t undercut Google the way it undercut Borland and Lotus and WordPerfect and Novell and all the dozens of other software companies it destroyed by selling under-priced software subsidized by its desktop operating system monopoly.

But, here, at least, is an example of where Microsoft might be able to simply buy outright more than one-tenth of Google’s current search revenues by cutting a deal at the source—the AOL web site.

I do not know details of the AOL/Google contract, but today’s WSJ reports that “people close to AOL say the company has the option to walk away.”

If I was Bill Gates and had $40 billion of cash in the bank, my “negotiation” with Dick Parsons of Time-Warner (parent company of AOL) would go something like this:

Gates: “We want to buy an equity stake in AOL in return for AOL walking away from Google and giving that business to MSN.”

Parsons: “Okay. We’re willing to sell—”

Gates: “Done.”

Parsons: “I haven’t told you what we’re willing to sell to you, or the price.”

Gates: “Sorry. Hurry up.”

Parsons: “We’re willing to sell 49% of AOL for twenty—”

Gates: “Done.”

Parsons: “I haven’t told you the whole price.”

Gates: “Sorry. Hurry up.”

Parsons: “For twenty-five—”

Gates: “Done.”

Parsons: “I’m not finished. For twenty-five HUNDRED billion—”

Gates: “Here’s the check—fill in the blanks.”

But that’s just me. However this supposed deal works out, if at all, one thing is certain: Darth Vader is looking for blood.

I’m rooting for Luke.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.

BED, BATH MAY BUY LINENS & THINGS—NO SHEET!
–New York Post, September 15, 2005

I’m going to miss those New York Post and Daily News headline writers.

You see, the August numbers are in, and the newspaper industry is looking increasingly like the “dead-tree press” as it was dismissively dubbed by the Yahoos of the world during the Internet Bubble days.

Total ad revenue among the big three—Gannett, Knight-Ridder and Tribune—ranged from up 1.2% to down 0.6%…during a period of strong economic growth and record consumer spending.

In the old days—i.e. the last economic cycle—ad revenues would have been up 5% or more in this environment.

Most ominous was the collapse in so-called “national” advertising—those ridiculous Microsoft ads, for example, showing office-workers wearing dinosaur heads and muttering about Dilbert-type office-worker concerns such as getting their Power Point slides to the Big Meeting on time—which tanked 5.5% at Tribune and 8.2% at Gannett.

Advertising aside, the other key to a newspaper’s health—circulation—continued its unhealthy trend, from barely flat, to down a couple percent, depending on the paper…about in line with the rate at which readers are dying off.

(Tribune’s circulation revenues were down 8.6%, demonstrating that you can both cut price and lose volume at the same time.)

I do not mean to dance on anybody’s grave. If anything, I root for the newspaper industry because, a) I grew up reading the papers (and remember the Daily News headline, FORD TO NY: DROP DEAD, upon which the title to this piece is based), and b) I have a longstanding investment in one of the smaller, better run newspaper chains.

The paradox is that poor revenue trends aside, the newspaper business is still blessed with huge cash flow margins and low capital needs.

At the end of the day I suspect most of the chains—especially those that are controlled by families such as the New York Times and Dow Jones—will go private…either slowly via share repurchases as management disinvests in the business, or all at once as the families see more value in their heritage than Wall Street’s Finest are willing to give them.

In the meantime, we still need a healthy newspaper industry, if for no other reasons than to keep the headline writers at the New York Post and the Daily News busy.

Jeff Matthews
I Am Not Making This Up

P.S. To “FrmrOSTKGrunt”: shoot me an email at the address posted above and we can talk off-line.

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.