U.S. News & World Report Inc.

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U.S. News & World Report Inc.

450 West 33rd Street, 11th Floor
New York, New York 10001
U.S.A.
Telephone: (212) 716-6800
Fax: (212) 643-7842
Web site: http://www.usnews.com

Private Company
Incorporated: 1933 as United States News
Employees: 500
Sales: $56.1 million (2007 est.)
NAIC: 511120 Periodical Publishers

BEGINNINGS

DIVERSIFICATION AND CHANGE: 1983–84

EMPLOYEE-OWNED COMPANY: 1984–89

NEW WAYS TO DELIVER INFORMATION

RELYING ON RANKINGS

PRINCIPAL OPERATING UNITS

PRINCIPAL COMPETITORS

BEGINNINGS

In 1933 journalist David Lawrence founded a weekly newspaper he called United States News. As the title implied, it was devoted to domestic news. It was the successor to the newspaper the United States Daily, which Lawrence had founded in 1926. In 1940 United States News was recast as a magazine. Following the end of World War II, Lawrence founded a new magazine in 1946 called World Report, which covered international affairs. As domestic and world affairs became more intertwined in the post–World War II years, the two magazines United States News and World Report were merged to create U.S. News & World Report in 1948. Lawrence served as editor of the magazine until his death at 84 in 1973.

In 1962 USN&WR became an employee-owned company, developing a family atmosphere for its workforce. The magazine, however, retained its no-nonsense, analytical approach to the news and did not offer entertainment features like its competitors.

In the early 1980s USN&WR diversified into computer-based publishing and a satellite transmission network. The magazine considered itself a pioneer in the technology of magazine production and distribution. It helped fund the Atex editorial computer system and led the industry in the use of digital scanning and satellite transmission of copy to printing plants around the country.

In 1981 USN&WR entered into a $200 million joint venture with Boston Properties, Inc., to develop 3.5 acres of land in Washington, D.C., originally owned by founder David Lawrence. Under the terms of the 50-50 venture, USN&WR would supply the land and Boston Properties the development. Boston Properties was headed by Morton Zuckerman, who had purchased the Atlantic Monthly in 1980. By 1984 a new 160,000-square-foot headquarters had been built for USN&WR on the property, with plans calling for such developments as a new Hyatt hotel, condominiums, and more office space.

USN&WR ended 1983 with a paid circulation of 2.1 million, making it the third most widely circulated weekly newsmagazine behind Time (4.6 million paid circulation) and Newsweek (3.0 million paid circulation). Revenues for 1983 were estimated to be $150 million, up 10 percent from 1982.

DIVERSIFICATION AND CHANGE: 1983–84

In December 1983 an unidentified bidder offered $100 million to purchase the magazine, four times the appraised equity value. With 60,000 shares outstanding, the employee-owned company had seen the value of its shares increase in the prior three years to $420 per share. A subsequent appraisal in early 1984 put the value at $625 a share, or a total of $38 million (1980 shares had been valued at $152 a share).

In February 1984 the directors announced the company was for sale and bids would be considered. In addition to the magazine and real estate, the company operated a typesetting service, newsletters, and a radio programming business. As financial information about USN&WR became public, it appeared the company was in weak financial condition and burdened by its Washington, D.C., real estate venture. Instead of earning net income between $5 million and $8 million, it appeared that USN&WR’s pretax profits were about $4 million before extraordinary items or profit-sharing, and net income was around $2 million. One analyst had pegged net income at $7.5 million early in the bidding process.

Investment banker Morgan Stanley & Co. was hired to advise management on the sale. It set a minimum bid of $100 million for the company. Morgan Stanley also screened potential bidders by examining their financial condition. Final offers were due by May 11, 1984.

By June 1984 it was announced USN&WR would be acquired by Mort Zuckerman. In acquiring the magazine, Zuckerman outbid nine other competitors, who reportedly included United Marine Publishing Inc. (publisher of Inc. and High Technology ), Hearst Corporation, Family Media Publishers (publisher of Ladies’ Home Journal ), and Gannett Company, among others. (Zuckerman later acquired the Daily News in 1993.)

Zuckerman’s previous dealings with USN&WR, through his Boston Properties, may have helped secure his winning bid. Many of the other publishers who considered purchasing USN&WR were not experienced with real estate development. Zuckerman graduated from Harvard Law School and taught for nine years at Harvard Graduate School of Business. At the time of the acquisition Zuckerman said he had no plans to radically change the magazine’s editorial direction. The sale was completed in October 1984 for a purchase price of $176.3 million.

EMPLOYEE-OWNED COMPANY: 1984–89

As a result of the acquisition, employee shareholders received $2,842 a share for their holdings. Less than ten years earlier, in 1975, an employee retired and sold his stock back to the company for $65 a share. At the time he and other employees were satisfied with the price, but following the sale of the company in 1984, some 220 former USN&WR employees filed a $100 million lawsuit against the company, several former directors, and the magazine’s appraisers, American Appraisal Associates Inc. The plaintiffs claimed they were entitled to almost $100 million from USN&WR and its profit-sharing plan, which represented their share of the proceeds of the sale.

COMPANY PERSPECTIVES

Founded in 1933, U.S. News & World Report delivers a unique brand of weekly magazine journalism. The magazine has built editorial franchises around four key content categories: Personal Finance, Science & Technology, Education, and Health & Medicine. The centerpieces of each editorial franchise are the Guides and/or Special Issues.

At USN&WR, most of the employee-owned stock was held in a profit sharing plan, with the remainder held by individual employees through a stock bonus plan. Technically, the employee ownership structure was not an employee stock ownership plan (ESOP), but the same valuation methods could be applied to both. Appraisers could choose to value employee-owned stock using a minority basis, which would be the value of the stock if only a minority interest in the company were available, or a control basis, the value of a controlling interest. At issue was whether employees who sold back their minority shares should receive the same price a purchaser would pay for control of the company.

While the U.S. District judge’s opinion on a pretrial motion indicated he thought some defendants may have run afoul of legal requirements, in June 1987 he ruled the company’s directors acted “in an entirely appropriate manner” and the appraisals were “perfectly reasonable and acceptable.”

After the sale to Zuckerman, USN&WR hired several top editors to improve its senior editorial staff. Zuckerman commissioned Harold Evans, former editor of the Times of London, England, to develop an editorial plan for the magazine. Richard C. Thompson was hired away from Business Week and named publisher, while James C. Mason was also lured from Business Week and named associate publisher. Mason would leave the magazine in 1986, and Thompson assumed a part-time schedule in 1991.

In March 1985 Zuckerman selected Shelby Coffey of the Washington Post to succeed Marvin Stone, who had been associated with USN&WR for more than 25 years, as editor of USN&WR. Stone had resigned in January 1985 and was expected to be appointed to a position with the U.S. Information Agency. Within a year Coffey stepped down and was replaced by David Gergen. In July 1986 Michael Ruby was named to the new position of executive editor to assist Gergen. Ruby was formerly assistant managing editor of Newsweek.

In August 1988 senior writer Roger Rosenblatt was named to replace David Gergen as editor. After two years at USN&WR, Gergen wanted to expand his horizons. Among other things, he had been appearing as a regular analyst on The MacNeil-Lehrer News Hour on public television. Under Gergen USN&WR’s circulation rose to 2.36 million, the highest in the magazine’s history. By comparison, Time had a circulation of 4.7 million and Newsweek 3.2 million.

NEW WAYS TO DELIVER INFORMATION

In 1991 USN&WR created a new section, “Outlook,” to provide a new look and a faster review of the week’s news in the magazine. In May 1991 USN&WR launched a new magazine, Family Fun, in association with Jake Winebaum, a former senior executive.Family Fun was aimed at parents with children from ages 3 to 15 and focused on family activities such as vacations, entertainment, and at-home education. Winebaum was the magazine’s publisher, and USN&WR provided production and advertising sales support. Within a year, Family Fun was sold to Walt Disney Company, with Winebaum continuing as the magazine’s editor and publisher.

USN&WR spun off several book publications from its news pages. In 1991 a team of USN&WR reporters wrote Triumph Without Victory: The Unreported History of the Persian Gulf War, co-published by Random House and Times Books. Other books included America’s Best Hospitals, published by John Wiley & Sons, and Letters for Our Children: Fifty Americans Share Lessons in Living, based on a 1994 magazine feature and published by Random House in 1996.

KEY DATES

1933:: David Lawrence founds a weekly newspaper, United States News.
1946:: Lawrence covers international affairs in World Report.
1948:: The two publications merge into U.S. News & World Report.
1962:: USN&WR becomes employee-owned.
1984:: Tycoon Morton B. Zuckerman, owner of the Atlantic Monthly, purchases USN&WR for $176.3 million.
1992:: USN&WR, for the first and only time, surpasses Time and Newsweek in ad pages.
1995:: Fast Company and usnews.com are launched.
1997:: USN&WR business operations are moved from Washington to New York.
1999:: Zuckerman sells the Atlantic Monthly to theNational Journal Group.
2000:: Fast Company is sold to Gruner + Jahr for$350 million.
2001:: Low advertising sales force staff reductions and cost cutting.
2006:: The magazine’s popular rankings come under scrutiny.
2007:: Brian Kelly becomes magazine’s ninth editor since 1984.

In 1992 USN&WR beat Time and Newsweek for the most ad pages for the year; USN&WR had 2,170 ad pages compared to 2,100 each for Time and Newsweek. USN&WR publisher Thomas R. Evans boasted USN&WR had a 34 percent share of the news weekly ad market, up from 23 percent in 1985 when USN&WR was acquired by Zuckerman.

In 1993 USN&WR celebrated its 60th anniversary. With electronic delivery of information the apparent wave of the future, the magazine became available on CompuServe Information Service. It had negotiated to be on America Online, but lost out to Time. After two years on the CompuServe Information Service, USN&WR introduced in 1995 a comprehensive web site (www.usnews.com) that included a digital version of the magazine. The web site also featured video and sound feeds, hotlinks to other sites, daily live sound bites, regular news updates, interactive educational games, and more. In 1994 USN&WR had created a new video and multimedia production division, U.S. News New Vision. It also experimented with a new cover wrap to boost single-copy sales, which had fallen 14.5 percent between comparable periods in 1993 and 1994. Overall circulation remained 2.28 million.

Capitalizing on the reputation of its popular annual guide to colleges, USN&WR launched its first CDROM product, The U.S. News Complete College Adviser in 1995, designed to help students select a college and guide them through admissions applications and financial aid forms. USN&WR’s Colleges and Careers Center web site was introduced in January 1997, followed by the U.S. News Getting into College Kit in 1998, which included a video, a guidebook, and a CD-ROM.

Fast Company, a new business magazine aimed at an audience younger than Business Week, was launched under the auspices of USN&WR in 1995. It was overseen by Zuckerman, Fred Drasner (president and CEO of USN&WR), and two former editors of the Harvard Business Review.

The late 1990s were marked by several top editorial changes at USN&WR and a move of its business operations, including personnel, finance, and circulation, from Washington, D.C., offices to New York City. The magazine’s editorial, however, remained in Washington, D.C. The move reflected Zuckerman’s desire to run all of his media holdings from the Daily News building on West 33rd Street in Manhattan. In 1998, Ira Ellenthal became CEO and group publisher for USN&WR, Atlantic Monthly, and Fast Company, and Stephen Smith replaced James Fallows as editor of USN&WR. When Smith, a veteran of both Time and Newsweek, took charge, he rehired many of the editorial staff who had departed when Fallows was hired.

In 1999 Zuckerman made several changes in a move to ensure USN&WR’s future in publishing, dispelling rumors that the magazine would soon fold. First, he sold the 140-year-old Atlantic Monthly to Washington, D.C., millionaire David G. Bradley, owner of the National Journal Group. For the two decades Zuckerman owned the Atlantic Monthly, demand for its serious, intellectually stimulating content decreased, and it earned little profit. In addition to selling the venerable magazine, Zuckerman hoped to increase USN&WR profits by lowering its rate base (the amount of circulation guaranteed to advertisers) from 2.15 million to 2.0 million. While industry analysts considered this a controversial move because advertisers would still pay the same rates for lower guaranteed circulation, proponents of the plan said USN&WR could save up to $5 million annually. Second, to increase readership, Zuckerman hired Deutsch, New York, to design a new advertisement campaign. Finally, with the sale of Atlantic Monthly, the magazine strengthened its focus on the rankings of colleges, graduate schools, and hospitals.

At the same time of its redesign, USN&WR was plagued with more turmoil in the executive ranks. In November 1999, COO Kimberly Jensen was questioned about missing company funds, which CEO Ira Ellenthal believed were used to cover Jensen’s personal expenses and finance the management of a rock band she represented. Nine days after the accusation, Jensen was found dead in an Ocean City, Maryland, hotel room, an apparent suicide. Several months later in January 2000, Zuckerman hoped to boost ad sales by reorganizing USN&WR management, moving Ellenthal from the magazine’s CEO position to executive vice-president/associate publisher of the Daily News. Overall circulation of USN&WR was 2.07 million, a decrease of 5.7 percent from the year before. Also in 2000, Zuckerman sold Fast Company to Gruner + Jahr for $350 million.

RELYING ON RANKINGS

By 2001 USN&WR was looking for more ways to stay competitive in a media-drenched market. Increasing cable channels, web news outlets, and changing newspapers threatened the traditional delivery of hard news. The magazine ran more feature articles such as “The Adoption Maze,” “Secrets of the Stutter,” and “Alcohol and the Brain” in 2001. In addition to the change in focus, a new editor took the helm. Brian Duffy moved from the second position of executive editor to first in command, replacing Stephen Smith.

One of Duffy’s primary responsibilities was to institute cost-saving measures to offset the industry-wide decline of advertising sales. As a result, USN&WR laid off 13 staff members and cut salaries by 10 percent. In addition, two double issues were published in early 2002, reducing the total number of issues from 50 to 47.Time and Newsweek still published 51 issues each that year.

The one thing that continually set USN&WR apart from its competitors was the enviable position of being in the heart of the beltway. With most of its editorial staff in Washington while Time and Newsweek were primarily based in New York, USN&WR reporters were in constant command of political gossip and breaking news. A popular section for readers interested in politics was “Washington Whispers,” written by Paul Bedard. ABC News Radio contracted with USN&WR to run one-minute weekly radio segments called News You Can Use, featuring Bedard.

Nevertheless, proximity to the nation’s capital was not enough to save the magazine from imminent decline. For most of the early 2000s, USN&WR fought through dropping ad sales and controversy. In September 2002 USN&WR and Zuckerman angered President George W. Bush and his wife when the magazine printed a cover story about the Secret Service, mentioning a pull-back of security coverage for the Bushes’ 20-year-old twin daughters. White House officials contended the first family’s safety was placed in jeopardy and felt misled by the prepublication conversations with Zuckerman.

Several months later, in February 2003, because of the magazine’s Friday-night deadline USN&WR was forced to print a special “late” issue about a crash of the space shuttle Columbia, which occurred on a Saturday. Time and Newsweek reported the tragic story two days earlier than USN&WR. By June, USN&WR was experiencing a sustained drop in advertising sales and was forced to lay off 12 editorial employees from its Washington, D.C., Silicon Valley, Los Angeles, and Philadelphia bureaus. Circulation in 2003 was 2 million for USN&WR, compared with Time ’s 4.1 million and Newsweek ’s 3.2 million.

To stay competitive, USN&WR relied heavily on its special publications, which annually ranked the nation’s colleges, graduate schools, and hospitals, and placed less emphasis on its print edition and more investment in its web site. As part of this repositioning, the magazine again reduced its editorial staff in 2005, laying off nine employees, including its chief political correspondent, Roger Simon.

The rankings, however, while popular with the magazine’s readers, encountered broad criticism. In 2006 the Joint Commission on Accreditation of Health-care Organizations (JCAHO) completed their own hospital rankings and disagreed with USN&WR. JCAHO said 13 heart and surgery hospitals performed better than 80 percent of the hospitals on USN&WR’s list of the 50 best hospitals and contended their process approach was a more accurate evaluation than the magazine’s measures. In response, Avery Comarow, USN&WR editor of its America’s Best Hospitals, defended USN&WR’s comprehensive approach, telling Modern Healthcare in an August 28, 2006, article, “The unstated implication is that if a hospital can’t do these basic things, they can’t be trusted with complicated operations and that’s a dubious proposition.”

In addition, the magazine had to defend its popular America’s Best Colleges reports when in 2007 presidents from dozens of colleges said they would no longer participate. The intentions were made public following an annual meeting of the Annapolis Group whose membership included more than 120 liberal arts colleges. The dissenting universities, such as Barnard, Sarah Lawrence, and Kenyon, expressed concern over the section of the rankings where colleges were asked to rate the reputations of each other. They also questioned the rigor in compiling the data.

With hopes of renewing confidence from its reader-ship, the magazine was faced with another new editor. Brian Duffy resigned his six-year post, saying he was leaving to complete a book on the American Revolution. His successor, Brian Kelly, had been executive editor for four years and was a magazine employee for nearly a decade. Prior to USN&WR, Kelly worked for the Washington Post. In an interview with MediaWeek (June 25, 2007), Kelly explained the magazine’s plans to continue its rankings service, expanding to children’s hospitals and consumer products. In response to the colleges’ criticisms, Kelly said they were designing plans to improve their systems for collecting data and added, “The rankings are for students and parents, not for college presidents.”