When Jeffrey M. Johnson steps into the publisher's office at the Los Angeles Times on June 1, he'll inherit a dizzying array of challenges: eroding circulation, a stagnant advertising market, and increasing demands for profitability from the Times' owner, Chicago-based Tribune Co.

Johnson, the Times' second publisher under Tribune ownership, also will deal with the fallout from a tax dispute between the federal government and the Times' former owner, Times Mirror Co., which could cost Tribune nearly $1 billion.

Add to that the generally tough climate for newspapers, and the 45-year-old Johnson could have one of the most difficult jobs in publishing.

"Overall the newspaper markets are in decline," said Seb Maitra, senior vice president of the national advertising buyer Hill Holliday. "Is it reversible? I doubt it."

The Tribune announced March 22 that Publisher John Puerner was leaving the Times for a "self-imposed career break" and would be replaced by Johnson, who served under Puerner as senior vice president and general manager.

Puerner had been under pressure to improve profit margins from Times Mirror averages of below 20 percent to Tribune standards of nearly 30 percent.

Puerner, through a Times spokeswoman, declined comment for this story, while Johnson's office said the incoming publisher also would not be available for an interview while he spends the next two months "getting to know all parts of the organization."

In speeches to industry groups, Tribune and Times executives have issued rosy pronouncements about the paper's future despite the problems, noting the reorganization of its circulation and marketing departments.

"The entire team in Los Angeles is committed to improving both the circulation and revenue trends," said Tribune Publishing President Scott Smith during an address at Bear Stearns Media Conference in Florida on Feb. 28. "We see opportunities to grow our share in the $6-plus billion L.A. ad market and expect to make solid progress this year and beyond."

Circulation decline
Since Tribune bought Times Mirror Co. in 2000, however, weekday circulation has declined from nearly 1.1 million to just over 900,000. Tribune executives have blamed much of the decline on a decision to drop unprofitable distribution in outlying areas such as Northern California and Nevada.

But circulation in the Times' core Southern California market also has declined, according to Audit Bureau of Circulations reports. And the problem has worsened since the national "Do Not Call" law scaled back the Times' telemarketing efforts, which outgoing Puerner blamed for much of the 5.6 percent drop in weekday circulation in 2004.

While newspaper consultant Miles Groves agreed that efforts to increase circulation have been stymied by the "Do Not Call" law, he said that newspapers are realizing that circulation does not always equate to profits, applauding Puerner's move to scale back distribution.

"In a large market like L.A., it's probably more fragmented than any other market," Groves said. "(Johnson) has a tough challenge."

In the past, the Times relied on telemarketing and deep discounts to sell subscriptions, many of which were dropped after the end of the discounted period. That phenomenon known as churn in the newspaper industry tends to afflict larger papers more. The Times has had one of the highest churn rates in the newspaper business.

Since replacing some of the telemarketing efforts with direct mail, television and radio advertising, subscriber turnover has decreased significantly.

Steven Lee, the newspaper's senior vice president of circulation and consumer marketing, told a Newspaper Association of America conference in March that the churn rate dropped more than 50 percent between October 2004 and January 2005.

Still, James Goss, a media analyst at Barrington Research in Chicago who follows Tribune, said Johnson needs to better define the Times' standing in the marketplace in order to improve circulation. Previous publishers have wrestled with whether the Times serves metropolitan Los Angeles, the state of California and even other parts of the country.

Under Puerner, the Times downsized its national edition which was primarily distributed around Washington and lost money but backed away from plans to eliminate it. "Should it be a paper for the region, for the entire state, just for Los Angeles?" Goss asked. "Being half local and half national has its challenges."

The troubles at the Times mirror those of many newspapers, where circulation has been in a protracted decline as readers' habits change. At the same time, Internet sites such as Monster.com are gobbling up shares of help-wanted and other classified advertising.

Those problems have affected advertising revenue.

Maitra, whose Boston-based firm purchases advertising in the Times, among other publications, said newspapers that are shedding circulation have found it increasingly difficult to negotiate higher advertising rates in a competitive environment.

"If you look at what's going on in the marketplace, in terms of the consolidation of banks and wireless companies, there aren't as many big advertisers," he said.

Declining advertising
Ivan Feinseth, managing director of research for Matrix USA LLC, was blunter. He said that Tribune's newspapers which include the Los Angeles Times, Chicago Tribune, Newsday on Long Island and several other papers have been a drag on the company's profit.

"Sales growth is way below the market average and the industry average," Feinseth said of Tribune. "They shouldn't really be in the publishing business. They're making money from broadcast, not publishing."

In its monthly revenue statement for February, Tribune indicated the Times was a weak spot in advertising volume, with an 8 percent decrease in full-run advertising and a 15 percent decline in zoned advertising. Most other Tribune newspapers reported modest gains.

The Times faces particular difficulties because of the merger of Federated Department Stores Inc. and May Department Stores Co., announced in early March.

Federated, which owns Macy's and Bloomingdale's, and May, which owns Robinsons-May, are both major advertisers in the Times. While newspapers nationwide face a loss in advertising as stores are closed following the merger, it's even tougher in Southern California where the chains share locations in many malls.

Todd Brownrout, the Times senior vice president for advertising, acknowledged in early March that the merger could cost the newspaper advertising revenue, although he declined to speculate how much.

On top of that, a Morgan Stanley report on Tribune Co. said that advertising at the Los Angeles Times has remained anemic despite signs of a turnaround in the Los Angeles market. In the report, Morgan Stanley analyst Douglas Arthur said movie and entertainment advertising, a major sector at the Times, has remained soft and Tribune has taken few steps to correct the problem.

On March 24, two days after announcing Puerner's departure, the Times said it was creating a multi-department team with sales, marketing, promotion, creative and customer service support for movie advertising. The Times stated in a release that the new approach would "provide far more effective and responsive service" to the motion picture industry.

Brownrout did not return calls for comment.

Tax problems
Tribune faces other potential pitfalls stemming from its $8 billion purchase of Times Mirror in 2000.

The Internal Revenue Service claims that Tribune owes it $915 million in tax liability on two publishing units that Times Mirror sold in 1998. The IRS contends that the divestiture of the two units should be taxed as sales, while Tribune argues that Times Mirror received shares in two specially created corporations rather than cash for the sale, which should exempt it from taxes.

The case went to trial last year in federal tax court and a ruling is expected next year.

Tribune's strategy of media synergy owning newspaper and television properties in the same markets and sharing resources also carries risks. In Los Angeles, Tribune owns KTLA (Channel 5) television, as well as the Times.

In March, the Federal Communications Commission ordered Tribune to sell a television station in Waterbury, Conn., because the company acquired a nearby newspaper, the Hartford Courant, as part of the Times Mirror purchase. FCC officials said the arrangement violated rules on cross-ownership.

Tribune officials downplayed the ruling, saying it would not affect cross-ownership deals in Los Angeles or other markets because the Connecticut case was heard in an appeals court for a New England circuit that does not create precedent for the rest of the country.

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