Sunday WSJ was profitable, so why kill it?

This announcement killing the profitable and reader-beloved Sunday WSJ is revealing about modern business think and how accounting systems often MIS-inform executives.

The Sunday WSJ makes a profit, a very good one I am told by its founding editor, the innovative David Crook, whose ideas also infuse the ad-rich Weekend Journal.

When newspaper circulation started falling 25 years ago Crook became news editor of three small Southern California dailies whose circulation SOARED because he gave readers news they wanted and needed, generating fat profits, while readership at his former paper, the LATimes, eroded.

Why do CEOs and publishers kill profitable sub-units? And what problems does this create for executives and shareholders?

The reason some profitable units get killed is that accounting systems provide highly detailed information that misleads top management. Mere accounting sometimes trumps economics because it undervalues profits from small, high margin sub-units.

We saw this a decade ago when Home Depot hired a CEO who concluded from spreadsheets that its retail floor workers cost too much. What the accounting missed was that do-it-yourselfers went to Home Depot because skilled guys and gals showed them how to install the new toilet without breaking the porcelain, how to ground the electrical circuit and myriad other tricks that require expert knowledge. So what looked in reports to top management like a cost too high to bear was in fact a profit-generator, the lure that attracted customers. You can read an account of this in a Jan. 4, 2007, Wall Street Journal story by the excellent reporter Joann S. Lublin and two colleagues.

How much damage can mere accounting do when elevated above economics? For years one of my daughters operated the only complicated machine in a small factory. On her own she figured out how to use fewer raw materials, reduce the error rate literally to zero and how to make a fat profit by selling retail the returned and unsold goods that had been broken up for scrap. She documented how her insights generated tens of thousands of dollars of annual profit and then asked for a small raise, only to be told that the accounting system did not recognize her inputs and so corporate management would never let the local factory boss pay her more. She quit. Soon one of the factory’s largest customers, unhappy with quality, invited my daughter to lunch and listened to her story. The customer switched his large orders to a competitor and months later the factory folded. Failure to recognize and reward just one employee’s value-added can kill a small business. At a big firm like Dow Jones it can reduce profitability.

Anyone who understands news economics can tell that the Sunday WSJ makes a very good profit, though just how good only Dow Jones knows.

Creating original and excellent features and posting them electronically is relatively inexpensive when your circulation base is in the millions. Add in a cost sharing arrangement in which local partners print the news and split ad revenues and you have a little money machine that hums along quite nicely generating ROI and ROE that must be eye-popping. Even if local papers demand a bigger cut a profit better than the WSJ makes overall seems likely without any knowledge of the internals.

Readers of the Sunday WSJ — a four-page insert in local papers — are fanatically loyal because its original content overseen by Crook resonates. Crook is one of the most innovative and reader-friendly editors around — and my best friend. Name another editor whose changes at a newspaper resulted in soaring circulation, which also means soaring profits, as Crook did in the early 1990s.

Profits are hard come by. When I was founding chairman of a small company I advised on how to add to profits, including how compensation effects profits and making sure we measured properly so we did not unintentionally shoot ourselves in the wallet (as with my daughter and the factory).

Here are some questions Dow Jones CEO Lewis might ask himself, variants of what I teach my graduate business and law students (in the context of regulatory law) —

How will I replace the profits generated by the Sunday WSJ? Why am I creating a hole that must be filled with other profits? How much will margins decline (in this case very lightly because of the scale of the Sunday to the rest of the operation)? Could I make more money by investing in the Sunday – and how?

Can I earn the amount of Sunday WSJ profit I am giving up for the same level of minimal risk, expense and capital investment?

What other profit-making editorial ideas does the Sunday WSJ editor have that will also burnish the most valuable asset Dow Jones has, its reputation for excellent news?