Post Now an 'Education and Media' Company

By Frank Ahrens
Washington Post Staff Writer
Thursday, December 6, 2007

Donald E. Graham rebranded The Washington Post Co. as an "education and media company" at a meeting with Wall Street analysts and shareholders yesterday, reflecting the rise of Kaplan Inc. within the company and the the decline of its flagship newspaper.

Kaplan, which The Post Co. purchased in 1984, now accounts for 50 cents of every dollar of company revenue, by far the top earner, according to the third-quarter earnings report released last month.

The change in description will likely have little short-term effect on the company's day-to-day operations, how it is viewed on Wall Street or among investors, analysts and company officials say. It simply was time to call the company what it is, Graham said.

"In the past 10 years, there has been quite a dramatic change in the composition of our company," Graham, the Post Co. chairman, said in an interview yesterday. "Most people who care about the company know that, but I wanted to make it clear."

Graham said he was waiting until Kaplan passed the 50 percent threshold to make the change. The newspaper division, primarily The Post, accounts for 21 cents of every dollar.

In recent years, The Post has lost subscribers and revenue as readers have turned to other media -- chiefly, the Internet -- for their news and information and advertisers have followed. Though washingtonpost.com is among the most popular news sites, and is profitable, it generates only about one-fifth of the ad revenue generated by the newspaper.

Kaplan is growing at about a 20 percent annual clip, as the company has diversified far beyond SAT test-preparation. When Graham took over The Post Co. from his mother, Katharine Graham, in 1991, Kaplan reported $78 million in annual revenue. This year, that figure is projected to exceed $2 billion; The Post Co.'s newspaper division revenue is likely to be less than half that.

The Post Co. also owns Cable One, a small cable television system with customers primarily in the South and Northwest that generates 15 cents of every dollar of company income; six television stations (8 cents of every dollar), Newsweek magazine and Arthur Frommer's Budget Travel magazines (6 cents), the Web magazine Slate and several smaller newspapers and publications.

"In 2008 and going forward, The Washington Post is really going to be an education and media company," Graham said yesterday at the 35th annual UBS global media and communications conference. "I don't say this for cosmetic reasons because I don't care about cosmetics. I do not say it to de-emphasize the importance to me or the importance to our results and to our shareholders of the media properties in the company. And this absolutely does not mean and will not mean in the future that The Washington Post and Newsweek mean less to me or the people running the company than they did."

The Graham family controls The Post Co. through a dual-class stock system.

Company officials believe The Post Co. will not be viewed differently by Wall Street, partly because Kaplan's rise within the company has been recognized for some time. Also, The Post Co. is more diversified than other education companies and may not be covered by the same analysts. Graham said yesterday he did not believe the rebranding would hurt the company's access to money.

Deutsche Bank noted that about 80 percent of The Post Co.'s profit-creating businesses -- almost everything but the newspaper -- have not been affected by the economic slowdown.

"I just think it's a recognition of what's already happened," Deutsche Bank analyst Paul Ginocchio said of the company's rebranding. Ginocchio has a buy rating on Post Co. stock and a target price of $910 per share -- more than $100 higher than yesterday's close.

"The company probably ought to be identified as an education company and get The Washington Post name out of the title," added newspaper industry analyst John Morton.

Indeed, the long-term purpose of the rebranding is clear: "It is likely that The Washington Post Co. of the future will be more an education company and a little less a media company every year," Graham said in his speech.

"It's factually true, so why not make the statement and move on?" Jonathan Grayer, the chairman and chief executive of Kaplan, said of the decision to rebrand.

"It has been amazing to me that, despite our size and our impact on the company, because of the fame of The Washington Post name and brand, the company is still described in the media as a newspaper publisher," he said.

Grayer, 42, came to Kaplan from Newsweek in 1990, became chief executive in 1994 and added the chairman's title in 2002.

Asked whether Kaplan would or could support The Post newspaper or Newsweek if the publications began to lose money, Grayer said: "The Washington Post Co. is a holding company, and in that role it decides how to use all the free cash flow its assets generate. That decision remains with the chairman and the board."

Graham said, "Kaplan is a great company on its own terms, but it does not answer to the business issues of The Post or Newsweek. They have serious issues to address and great people to address them."

Kaplan has grown near in size to its chief rivals in the education sector. The largest, Phoenix-based Apollo Group, has more than 250 campuses and learning centers across the country and reported $2.5 billion in revenue during the past fiscal year.

"This is a smart move by The Post, especially given the convergence in new media," said John G. Sperling, Apollo's executive chairman of the board. "The Washington Post Co. has discerned the profound link between publishing and education," a connection Sperling said Apollo also exploits.

Graham said that the company will continue to cut costs at The Post newspaper, but added that it may spend more than similar media companies to improve its news operations.

"I don't think we or anyone else have produced a kind of definitive 21st-century news site in the sense that Amazon has produced a pretty damned definitive book-buying site," Graham said. "But that's our aim."

Post Co. stock is up about 6 percent since the beginning of the year but it has fluctuated with the market since summer. It closed down nearly 1 percent yesterday, at $792.50 per share. Graham has resisted calls to split the stock, preferring to maintain the high price to keep out casual investors seeking short-term returns.

The Post newspaper's average daily circulation peaked at 832,232 in 1993. It now sells an average of 638,800 papers Monday through Saturday. Operating income for the company's newspaper division, primarily The Post, plummeted 50 percent during the third quarter this year, compared with the third quarter of 2006. The paper's income has been ravaged by a sharp drop in real estate advertising and the continued defection of classified and employment advertising to the Internet.

In 2006, the newspaper division reported $63 million in operating income, and it looks to be on pace to approximate that number this year. By comparison, in 1989, the newspaper division had $176 million in operating income.

Kaplan, meanwhile, showed a 21 percent revenue gain through the first nine months of this year, compared with the similar period in 2006, though the company recorded a 12 percent operating loss, owing to problems with its Score tutoring business for younger students and the high cost of its stock compensation to such executives as Grayer. The company is shutting down about 75 poorly performing Score centers around the country and revamping the curriculum.

Kaplan, which was launched by Stanley Kaplan in 1938 as a tutoring business in Brooklyn, now gets more than two-thirds of its revenue from education services other than test-prep, chiefly higher education. Kaplan courses range from pre-K to professional training and law -- the company offers a three-year, online law degree accredited in California. It has about 11,000 full-time and 17,000 part-time employees.

Kaplan has grown on its own and through aggressive acquisition. Over the past two years, Kaplan has purchased, or bought into, education businesses in the United States, Canada, Australia, England, Ireland, Hong Kong and China.

"If you look financially, this is the new reality and seemingly the future," said Lee C. Bollinger, a Post Co. director and president of Columbia University. "But if you look in terms of the emotional core of the company, not just the financial realities, I think Don has always represented that the Washington Post newspaper is the lead institution."

Staff writer David Cho contributed to this report.