Blues at the Gray Lady

NEW YORK (Fortune) -- The New York Times has long been the place where aspiring reporters wanted to work. The company publishes what is arguably the nation's best newspaper, thanks to the willingness of its controlling shareholders - the Sulzberger clan - to stomach lower profit margins than Gannett. The lucky journalists who made it to the Times' hallowed newsroom could also be fairly certain they had jobs for life.

Now that's unraveling. Earlier this week, the company said there weren't enough takers for its buyout plan to reduce the newsroom's headcount by 100 employees. The Times says it may be forced to lay off some of its news gatherers for the first time in its history.

Meanwhile, to avoid a potentially nasty proxy fight, the Times (NYT) recently agreed to support two outside board nominees proposed by a pair of hedge funds - Harbinger Capital Partners and Firebrand Partners - who are sitting on nearly 20% of the company's shares. The funds say they only want to work collegially with the Sulzbergers to enhance shareholder value. In such a tense climate, the Times surely would have liked to have had good news for investors on April 17. It didn't. The company said it had lost $335,000 in the first quarter as ad revenues fell 9.2%.

Janet Robinson, the company's CEO, lamented that the Times' financial results suffered because the ailing economy exacerbated "the effects of secular change in our business." She pointed out that quarterly online ad revenues soared by 16%. But that was not enough to keep the company out of the red. Nor did it appear to encourage Wall Street much. By lunchtime, the Times' share price had declined 2%.

These poor financial results mean the Times will be under even more pressure from the hedge funds to make drastic changes like more staff cuts or asset sales. The funds have publically assured the company that they will play nice. "Our effects are focused on how we can work with management and the board for the benefit of all stakeholders," Firebrand Partners founder Scott Galloway said in a letter to the company in January.

But it's unclear exactly how the funds' nominees will behave once they are elected - as presumably they will be - at the April 22 annual meeting. An analyst on the company's post-earnings conference call asked Robinson if Harbinger and Firebrand made any good suggestions. Robinson assured him there was "lot of common ground" between the Times and its activist shareholders. But she added that the Times isn't doing anything differently. "There really is nothing new here," Robinson said.

The analyst's question was reasonable enough. Harbinger is in a nasty proxy fight with Media General, a smaller, far less prestigious newspaper company based in Virginia, which reported a first quarter net loss of $20 million on April 17.

The hedge funds weren't the only outside forces looming in the background. As the Times cuts newsroom heads, New Corporation's (NWS, Fortune 500) Rupert Murdoch is hiring at the Wall Street Journal. Murdoch has made no secret that he plans to go after the Times readership with his new trophy. One analyst asked Robinson if the Times was feeling any heat. The CEO said she'd been watching as News Corporation has increased the political and international coverage in the Journal making it, well, more like the New York Times. But she said the Times had always competed with national papers like the Journal... and Gannett's (GCI, Fortune 500) USA Today. It was hard not to interpret that as a polite dig at the Journal.

There was one bit of good news, though. Robinson told the analysts that the company's flagship paper recently won two more Pulitzer Prizes. Some things haven't changed at the Times. Not yet, at least.