Imagine No Martha

No one knows what the future holds for Martha Stewart in the ImClone (IMCL) mess. But the sheer uncertainty of the situation gives rise to an obvious question: Can Martha Stewart's company survive without her?

The general view of the matter - at least among her fans and investors - is that the Martha Stewart brand name is so potent, and the loyalty of her nearly cult-like following is so intense, that Martha Stewart Living Omnimedia (MSO) will flourish even if Martha herself has to step aside. 

Unfortunately, the company's own business model says otherwise. 

I am aware of no Wall Street analyst who concurs, but a sober-minded look at how the company actually spends it money makes clear enough that Martha Stewart Living Omnimedia's profits trace directly to the "free" advertising generated by Martha herself as she goes about living and celebrating her frenzied life. 

If Martha were no longer able to do that, the cost of having to replace that publicity with conventional advertising would very likely bankrupt the business. 

But before getting into the details, first a thought or two on the vise-like situation in which the queen of the American kitchen now finds herself, and why the danger of having to step aside as CEO increases with every passing day that this case is not resolved. 

Simply put, the more time that passes with Martha under a cloud of suspicion, the more attractive she becomes to prosecutors as a white collar criminal defendant. 

When Leona Helmsley wailed, "My only crime is that I am Leona Helmsley," she was actually half-right. Her real crime was of course tax evasion. But the fact that she was also Leona Helmsey helped elevate the government's case against her to national prominence. 

That is the situation in which Martha Stewart now finds herself. Few people have ever heard the name of WorldCom's ex-head, Bernie Ebbers. Fewer still can name his counterpart at Tyco International. And how many people can still recall the names of the two top villains at Enron? 

But everybody knows Martha Stewart. They know the name, they know the face, they know the voice. If you're looking for someone to hang on the Post Office wall as "America's Most Wanted CEO" from the Era Of Greed, Martha Stewart is as good as it gets. 

If Martha didn't sell her ImClone shares last December on an illegal insider's tip, or lie about it to the government afterward, she's got nothing to worry about. No prosecutor wants to bring a case he might not win, and that goes doubly so when the defendant is a high-profile personality in the media. 

But if she did, she's toast. From a deterrence point of view, "making false statements" is just as good a charge as "insider trading," and prosecutors will pursue it relentlessly, since doing so will send an unmistakable message: Don't break the law, because this can happen to you. 

That is exactly what happened to Mike Milken almost 15 years ago in the Drexel Burnham junk bond scandals. It took four full years from the time prosecutors began investigating him, to his final guilty plea in April of 1990 and his sentencing the following November. 

Through it all, Milken's supporters wailed ceaselessly that the government was making him a scapegoat that he was the victim of a witch-hunt stirred up by anti-Semites on Wall Street that the charges he finally pleaded to were trivial, technical, and no more serious than jaywalking. 

A decade later and the same sorts of voices are now rising in defense of Martha Stewart. She really hasn't done anything wrong, they cry, she's being scapegoated by people who want to drive women out of business and back into the kitchen. 

But the arguments didn't work for Milken, and they're not likely to work for Martha, either. Quite the contrary, they simply underscore the government's point in bringing such cases to begin with - that even the rich have to obey the law even the laws against jaywalking. 

Meanwhile, what will happen to Martha's company if events continue to move in this direction? Nothing very good. 

Martha's company has four lines of business: Publishing, Television, Merchandising, and Internet/Catalogue marketing, and all are imperiled for one reason or another already. 

* Internet/Catalogue: A total disaster, currently losing $1.20 for every dollar of revenue collected. 

* Merchandising: Brings in barely 16 percent of revenues, but more than half the company's operating income. Segment is almost totally dependent on bankrupt Kmart, which may not survive. 

* Television: Smallest of the segments, with only 10 percent of company's revenues, and 8 percent of operating income. CBS has already nixed Martha's appearance last week on the CBS "Early Show," and more may follow. Yet exposure for Martha via programming in this segment is essential to the viability of the company's fourth - and flagship - segment, * Publishing. Segment has an impressive 36 percent operating margin, and accounts for essentially all the company's operating income. But the numbers don't give the whole picture. 

For one thing, a lot of the cost of marketing Martha's magazines appears to be lumped into the company's general corporate overhead. Result: corporate overhead at Martha Stewart Living Omnimedia amounts to six times as much of a drain on the business as overhead does at a company like Meredith Corp., which publishes magazines like Ladies' Home Journal and Better Homes and Garden. 

And there's another, and ultimately more important point: Martha's company has ahuge advantage in the form of Martha herself - America's one-woman, round-the-clock, media message juggernaut. 

Martha is the star of her own 60-minute daily TV how-to show, which is syndicated by King World Productions and is available in 90 percent of all U.S. television households. She has other shows, in which she also stars, on various cable outlets. She does a five-day-a-week 90-second radio show that is carried on 360 radio stations around the country. She writes a weekly newspaper column that is carried in 220 newspapers. 

Throw in her frenetic speaking and personal appearances schedule, and you have the reason why Martha Stewart Living Omnimedia makes any money at all: The company doesn't have to spend a dime on brand advertising; it's all generated by Martha herself. In return, Martha last year took home $2.7 million in salary, bonuses and various perks, plus another $2 million from renting out her homes to the company to be used for episodes on her TV shows and for photo spreads in her magazines. 

Sure, $4.7 million sounds like a lot of money. But from a business point of view, it makes Martha Stewart a colossal bargain. At an absolute minimum, the promotional value of that publicity would certainly exceed many time over a roughly $22 million in net income that the company reported last year. 

Take Martha out of the picture, and all that "free" advertising and promotion would go with her, while the cost of replacing it would quickly threaten to drown the company in red ink. 

The company insists that its finances are strong enough to weather any "short term" problem. But removing Martha from the business would not be a short term problem at all. The company would be fundamentally and permanently changed- from a profitable business into a chronic money loser that sooner or later would fail. 

So, can Martha's company survive without her? I don't think so.