For the exclusive use of E. Pepanyan, 2021. 9-501-080 REV: JULY 30, 2002 SUSAN FOURNIER, KERRY HERMAN, LAURA WINIG, ANDREA WOJNICKI Martha Stewart Living Omnimedia (A) Aretha Jackson, president of a private investment firm, put the phone down. It was Thursday, May 4, 2000. A client had scheduled the late evening call to ask her advice on investing in Martha Stewart Living Omnimedia (MSLO), an integrated content and media company dedicated to the business of homemaking. Jackson logged onto Yahoo.com to check MSLO’s stock performance. Noting the steady downward plunge since MSLO went public in October 1999, Jackson reminded herself that this was not an unusual post-IPO pattern. Maybe the old adage “buy low, sell high” might apply. But, what if the spiral signaled some fundamental problem? Jackson downloaded a copy of MSLO’s S-1 filing from July 29, 1999, and went to the “Risk Factors” section. One paragraph looked alarming, with the first sentence set off in caps: THE LOSS OF THE SERVICES OF MARTHA STEWART . WOULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. We are highly dependent upon our founder, chairman and chief executive officer, Martha Stewart. Martha Stewart’s talents, efforts, personality and leadership have been, and continue to be, critical to our success. The diminution or loss of the services of Martha Stewart, and any negative market or industry perception arising from that diminution or loss, would have a material adverse effect on our business. Martha Stewart remains the personification of our brands as well as our senior executive and primary creative force.1 Jackson read on. In addition to the boilerplate legalese and standard qualifier noting competitive vulnerability, three other risks caught her eye: 1. Our business would be adversely affected if our licensees were to diminish the quality of our brands;2 2. The termination or impairment of our relationships with a small number of key licensing and strategic partners could adversely affect our revenues;3 1 Martha Stewart Living Omnimedia, Inc., 29 July 1999 S-1 (New York: Martha Stewart Living Omnimedia, 1999), p. 7. 2 Ibid., p. 8. 3 Martha Stewart Living Omnimedia, Inc., op. cit., p. 8. ________________________________________________________________________________________________________________ Research Associates Kerry Herman, Laura Winig and Andrea Wojnicki prepared this case under the supervision of Professor Susan Fournier. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Special thanks are extended to Grant McCracken, who helped conceptualize the material, and to the students who shared their class papers on Martha Stewart: Jinee Kim, Anna Liao, and Sandra Se. Copyright © 2001 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. This document is authorized for use only by Emilia Pepanyan in Acct 4950-Dr. Richard Lau taught by TINWAH RICHARD LAU, California State University - Los Angeles from Dec 2020 to Jun 2021. For the exclusive use of E. Pepanyan, 2021. 501-080 Martha Stewart Living Omnimedia (A) 3. If we are unable to predict, respond to and influence trends in what the public finds appealing, our revenues will be adversely affected.4 Jackson knew little about MSLO aside from its content focus on Stewart’s own homemaking advice and ideas. She realized that in order to make an investment recommendation, she’d need more information on how MSLO created and captured value in the marketplace. The S-1 implied that an understanding of the Martha Stewart brand lay at the crux of this analysis: “Our success depends on the value of our brands, and if the value of our brands were to diminish, our business would be adversely affected.”5 But the value of the Martha Stewart brand was integrally linked to Martha Stewart the person, as the S-1 plainly noted as well: “Our business would be adversely affected if Martha Stewart’s public image or reputation were to be tarnished. Our continued success and the value of our brand name therefore depends, to a large degree, on the reputation of Martha Stewart.”6 How this person-brand dynamic affected things exactly, Jackson just was not clear. She e-mailed Kate Prescott, director of Research, and asked her to come by the next day. Kate would have one week to generate the reports that would help Jackson assess the risks of investing in MSLO. The MSLO Reports Prescott delivered three reports to Jackson: one on the MSLO business model, one concerning the company’s core competitors, and one detailing consumer attitudes and behaviors. “One other thing,” Prescott said. “This may very well have no bearing on your analysis, but I kept stumbling onto stories about Martha Stewart’s personal life when conducting my research. Their sheer frequency and omnipresence suggested to me that this was something you should at least know about. I’ve included this information where it seemed appropriate throughout the reports. I’ve also prepared this,” she added, handing Jackson a chronology of events in Stewart’s life (see Exhibit 1). “I know,” she continued when she saw Jackson’s puzzled look. “It’s strange ‘data,’ isn’t it? You should also be aware that some of this source material is unusual for us: there’s data from talk shows, journalist critiques, and even an unauthorized biography. You’ll have to decide if this meets our standards, of course, but first you’ll have to settle on whether it’s even relevant to begin with.” Jackson paged through the reports and shrugged; she’d decide on that later. She pulled out Report #1 and began to read. Report #1: The MSLO Business Model On October 19, 1999, Martha Stewart Living Omnimedia (MSLO) went public (see Exhibits 2 and 3 for financials).7 Stewart served a breakfast of brioches and freshly squeezed orange juice outside the Exchange that day, and ceremoniously rang the bell to commence trading. At the close of business, shares traded at 35 9/16, up from the IPO price of $18, reaching a market value of $1.73 billion and a stake for Stewart worth $1.21 billion.8 That evening on The Charlie Rose Show, Stewart reflected on her core value proposition: 4 Ibid., p. 12. 5 Ibid., p. 7. 6 Ibid., p. 7. 7 Rewarding staff was, according to Stewart, a primary motive in going public. (Source: Diane Brady, “Martha Inc.,” Business Week, 17 January 2000, p. 66). 8 “Martha Stewart, WWF Rise in IPOs,” The Record, Northern New Jersey, 20 October 1999. 2 This document is authorized for use only by Emilia Pepanyan in Acct 4950-Dr. Richard Lau taught by TINWAH RICHARD LAU, California State University - Los Angeles from Dec 2020 to Jun 2021. For the exclusive use of E. Pepanyan, 2021. Martha Stewart Living Omnimedia (A) 501-080 I was serving a desire, not only mine, but every homemaker’s desire, to elevate that job of homemaker. It was floundering I think. We all wanted to escape it, to get out of the house, get that high-paying job and pay somebody else to do everything that we didn’t think was really worthy of our attention. And all of a sudden I realized: it was terribly worthy of our attention.9 MSLO described itself as a “branded and highly integrated content company dedicated to helping people improve the quality of living in and around the home.”10 MSLO sought “to turn dreamers into ‘doers’ by offering them the information and products they needed for do-it-yourself ingenuity ‘the Martha Stewart way.’”11 Broadening MSLO’s reach was one of the company’s primary goals, leading Stewart to define a homemaker audience of “males, females, children, and adults . the rich and not- rich,”12 and a potential market “as big as everyone who has a house.”13 MSLO produced original how-to information and related products in seven core content areas. These content areas served as the center of the MSLO business model and organizational structure:14 1. Home: decorating, restoring, renovating, collecting items for use and display in the home 2. Cooking and Entertaining: cooking, recipes, indoor and outdoor entertaining 3. Gardening: gardening, planting, landscape design and maintenance 4. Crafts: craft projects and similar family activities 5. Holidays: celebrating special occasions through food, gifts, decorating, entertaining ideas 6. Keeping: housekeeping maintenance, organization and planning, including homekeeping, petkeeping, recordkeeping and clotheskeeping 7. Weddings: all aspects of planning and celebrating a wedding According to 60 Minutes, Stewart sold “that most indefinable and ambiguous of all products: taste.”15 Stewart’s ideas for “evergreen material,” things of everlasting value, originated in exacting research and intuition.16 “I can sense a void in the culture,” Stewart said.17 ”I think I know what women really want.”18 Stewart continued: “The company bases everything we do on the way I feel about things. I don’t consider myself either above or below my readers. Something I need will also connect with what many others feel and care about at the same time. The quest is to produce things that are kind of missing from life. People are trying to master small things in areas that they know 9 Joan Didion, “Everywoman.com,” The New Yorker, 21 and 28 February 2000, p.