(Reuters) - The family of late billionaire stereo magnate Sidney Harman has stopped investing in the Newsweek Daily Beast Co joint venture that it co-owns with Barry Diller's IAC/InterActiveCorp, according to representatives of both companies.
IAC said it continues to subsidize Newsweek Daily Beast's operations, and as a result its initial 50 percent interest in the joint venture has grown into a controlling stake.
The Harman family confirmed its ownership stake has been diluted by its decision to cap contributions to the loss-making venture, but would not give a figure. The family plans to maintain a minimum level of ownership in the venture, according to a source familiar with the situation.
Jane Harman, the former Democratic congresswoman from California who has overseen the estate's interest since her husband's death in April 2011, will remain on the company's board and participate in conferences and other media events it organizes, according to the family.
"The Harman family remains supportive partners in the business of Newsweek Daily Beast, including service on the Board by Jane Harman and family participation in various informal roles," the Harman family said in a statement to Reuters.
"However, given the death of Sidney Harman, who was actively involved in the Newsweek Daily Beast business, the Harman trust has indicated that it does not intend to make further capital contributions to the venture."
A Newsweek Daily Beast representative referred calls for comment to IAC.
Sidney Harman acquired Newsweek from the Washington Post Co in August 2010 for $1 plus the assumption of the magazine's more than $50 million in liabilities. The then-91 year-old Harman, who made his fortune as the founder of audio equipment giant Harman International Industries, viewed owning Newsweek, which had gone from earning $30 million in 2007 to losing the same amount just two years later, as more of a philanthropic effort than an actual business endeavor.
Barry Diller launched The Daily Beast under the auspices of former New Yorker and Vanity Fair editor Tina Brown in October 2008. The presence of Brown, coupled with an emphasis on political coverage that dovetailed with the election of U.S. President Barack Obama one month later, allowed The Daily Beast to immediately establish a brand and build an audience.
But advertising sales never caught up with the buzz, and media reports have estimated losses at The Daily Beast at around $10 million annually.
Diller and Harman decided to merge their titles in November 2010 -- the rationale was to leverage the combined audiences to cross-sell advertising at both publications and subscriptions for Newsweek. The Daily Beast is a free, ad-supported site.
So far, however, the combined venture is still losing money, according to Diller, though he has said this year's loss will be substantially less than last year's. He did not give a figure and Brown has called reports of $30 million in losses last year "excessive."
Sidney Harman bought Newsweek with the intent of reestablishing the 79-year-old publication as a thought leader among the elite, particularly in the world of politics.
The Harman family's pullback from the venture has prompted speculation among IAC insiders that the family felt the magazine was emphasizing the sensational over the intellectual, said two sources close to the situation, pointing to controversial covers such as a digitally aged Princess Diana, a piece about spanking, and an image of President Obama under the tagline "The First Gay President."
A lawyer for the Harman family dismissed the allegation outright, saying that the family's reasons for capping its investment were "purely financial."
Another source with knowledge of the relationship said Tina Brown and Jane Harman have "a very good relationship" and noted that Harman is hosting an event for Brown in her home in Aspen on Thursday.
Financially, IAC's pockets appear deep enough to absorb the additional costs of funding the Newsweek Daily Beast venture that it now controls. The company reported a first quarter profit of about $91 million, a 52 percent increase from the prior year. As of March 31, IAC had $776 million in cash and cash equivalents, and only $96 million of debt on its balance sheet.
"Due to capital contribution, IAC has acquired a controlling interest of Newsweek Daily Beast," an IAC representative said in a statement. "This is one of the many small areas of investment for IAC and is not material to the overall business, which is largely driven by search and Match."
From a corporate perspective, little will change for IAC beyond the way it accounts for the venture in its earnings. Currently, IAC treats its stake in Newsweek Daily Beast as an investment and reports it under the "Other items" segment of its results as "equity in losses of unconsolidated affiliates."
Going forward, IAC will likely report financial results from Newsweek Daily Beast under its "Media & Other" segment, fully consolidating its losses -- as the venture is still unprofitable -- on its balance sheet.
An official announcement of the change could come as early as Wednesday when IAC reports its second quarter earnings.
IAC shares were down 1.1 percent, or 56 cents, to $48 in afternoon trading Monday.
Advertising revenue for Newsweek through this June rose 13.3 percent to $67 million, according to Publisher's Information Bureau data. Advertising pages increased 7.6 percent through June to 344 pages. By comparison, ad pages industry-wide declined 9 percent during the first half of the year.
On a full-year basis, however, both figures are tracking below the $140.7 million in advertising revenue and 745 pages of ads the magazine recorded in 2011.
Circulation at the magazine fell 2 percent to 1.5 million copies. At its height, Newsweek's circulation totaled more than 4 million worldwide.
Average monthly unique visitors to the Daily Beast through June numbered 11.4 million, up 73 percent from the prior year.
More importantly, Newsweek Daily Beast's digital app for mobile devices has been well received by readers, with paid subscriptions up 233 percent through June, from 10,299 to 34,265.
In addition to being unprofitable, Newsweek Daily Beast has suffered from high staff turnover on both the business and editorial side. Still, IAC appears to be heartened by the business' trendlines and said it is not curtailing investment.
Brown continues to lure big name writers to replace those who have left, including most notably among her new hires prominent blogger Andrew Sullivan, who recently scored a big scoop when Anderson Cooper confirmed in an email that he was gay. Other recent new hires include Megan McArdle from The Atlantic and Dan Gross from Yahoo.
Also, last October Newsweek Daily Beast launched an ambitious video effort aimed at increasing ad revenue by leveraging the demand for online video content.
(EDITORS NOTE: Peter Lauria worked for The Daily Beast from March 2010 until February 2011)
Reporting By Peter Lauria; Editing by Tiffany Wu and Phil Berlowitz