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Death by Proxy

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They've been suspended in recessionary limbo for a couple of years now. Circuit City Stores Inc. -- does anyone remember 2000, when its stock last hit above $60? — and Media General Inc., the poster child of stodgy old newspapers and their recent problems, are fighting off proxy battles and hostile takeovers.

To many, the problems at these two companies are so old hat that they're easy to dismiss. After all, Richmond's corporate graveyard is chock-full of once-great companies that were gobbled up or killed off by other, more-nimble competitors that reacted to changing industry patterns more efficiently. R.I.P. Heilig-Meyers, Reynolds Metals, Best Products and all the Richmond banks. It may be too early to get the shovels out for Circuit City and Media General, but history suggests their time is running out.

Circuit City may survive the hostile $1.35 billion bid from Blockbuster if only because the movie-rental chain is as much a dog as the Richmond retailer. It's become the latest joke on Wall Street, with columnists and business analysts laughing off what one newspaper called a "marriage of losers": The smaller Blockbuster is still reeling from an outdated business model and trying to figure out how to compete with Netflix, cable-box rentals and the low retail cost of DVDs. Circuit City, meanwhile, is ceding business and territory to Best Buy for the last eight years or so, struggling to convert its own outdated business by remodeling stores and firing thousands of salespeople it deems unnecessary only to lose millions in a proverbial game of catch-up. Circuit City lost $300 million last year alone; Blockbuster lost a cool $74 million. A perfect match.

It should be no surprise that the editorial board at the Richmond Times-Dispatch boldly came out in support of Circuit City amid last week's takeover news. They are inclined, naturally, to "root for the home team." And isn't losing money and market share without a coherent vision for the future always more prudent than buying into wild schemes and inexperience? Trust in the bow-ties. They have this Internet thing figured out.

Despite posting a whopping $10.7 million profit on $932 million in revenue in 2007 — a 1.1 percent margin in an industry once accustomed to 20 percent — Media General's top brass have been on an active campaign condemning attempts by Harbinger Capital Partners to replace three board members on Media General's board of directors. It doesn't really matter, of course, because the Bryan family still controls the class-A stock, and hence the company, no matter what happens in the proxy fight. But their seemingly aggressive attempts to sway public opinion in their own pages — no one else has cared enough to cover any of this beyond a passing mention — smacks of desperation. The score will be settled April 24, at Media General's annual shareholders' meeting in Richmond.

Media General, with its newspapers, television stations and other properties concentrated in the Southeast, has been hit especially hard in its Florida and Richmond markets, explains John Morton, a veteran newspaper analyst based in Silver Spring, Md. Particularly as it pertains to the real-estate market.

Most of Media General's bloodletting has been on the newspaper side of the company, which has seen its lucrative classified-advertising revenue take significant hits. There's also the migration of those ad dollars and eyeballs to the Internet, Morton says.

"All newspaper companies are all suffering from the same things," he says. "It happens that Media General has two markets, Richmond and Tampa, [Fla.,] that have suffered more greatly than other markets."

All this explains the aggressive cost cutting and newsroom depletion — it's always easier to cut the "non-revenue-generating" employees, in other words, reporters and editors — and the push to Web portals and videos and all that newfangled Internet stuff. (Full disclosure: Style Weekly is owned by the other big media company in Virginia, Landmark Communications Inc., which has experienced similar problems, and announced in January it was opening itself — and us — up for sale.)

The other problem: In the push to move news to the Web, no one really figured out how to transition the advertising business there. In essence, advertisers pay for eyeballs, eyeballs that are increasingly getting their news online. But almost all of the big-revenue streams still come from actual newspapers. Eventually, something gives — and in this case it's Media General.

Media General, for the most part, is in the unenviable position of peddling newspapers in the digital age of YouTube, teenage girl catfights and "American Idol" (We'll never forget you, Elliott!). At least Circuit City sells something that people really want — electronics and plasma TVs. It's just that Circuit City isn't as good at selling TVs as Best Buy and Wal-Mart. Sam Wurtzel founded what eventually became Circuit City in 1949 after learning that the South's first television station (Richmond's WTVR) was about to launch (which it did in 1948). He opened his store, called Wards Co., in downtown Richmond.

Circuit City managed to stay ahead of the curve for years, but somewhere in the 1990s lost its focus, analysts and company watchers say. "They got bored with the electronics business," says a former executive with the company. Circuit City's brightest minds spent millions investing in new ventures — concepts such as CarMax and more than $200 million in something called Digital Video Express, or DIVX. CarMax eventually paid off, but DIVX — a business that would have allowed customers to purchase encrypted DVDs for less than $5 — was a bold attempt to put the video-rental chains out of business — in particular Blockbuster and Hollywood Video.

The business failed when the movie-rental industry began aggressively lobbying Hollywood producers and movie studios — which also stood to lose money on DVD sales if DIVX succeeded. They beat down DIVX by refusing to release movie titles to Circuit City until long after they showed up on Blockbuster's shelves.

The irony shouldn't be lost, even if Blockbuster fails in its takeover attempt. Circuit City's time may soon be up anyhow. After all, posits the former exec: "How many 50-year-old retailers are still at the top of their game?"

Wal-Mart would be the glaring exception, but Sam Walton's company is 46. This year, Wurtzel's business turns 59. S



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