The Buzz Factory Conde Nast, king of the glossy magazines, was long known as a rich man's plaything. Now it says it has gotten down to business. But it's not like any business you've ever seen.
By Joseph Nocera & Peter Elkind Reporter Associates Rajiv Rao, Ann Harrington

(FORTUNE Magazine) – This past Memorial Day weekend, Steven T. Florio, the president and CEO of Conde Nast Publications, made a dramatic change at The New Yorker, the most illustrious of the 17 magazines he runs for billionaire S.I. "Si" Newhouse Jr. He fired his own brother.

The move was not entirely unexpected. In the four years Tom Florio was president of The New Yorker, it lost $60.6 million--this despite the extraordinary asset of Tina Brown, under whose editorship the magazine had become the most provocative in the country. In recent months, Advertising Age, the Wall Street Journal, and the New York Times had all published stories suggesting that Newhouse was growing tired of the continuing cash drain--and had asked Steve Florio to do something about it. What's more, Tina Brown was quietly agitating to have Tom Florio removed.

The story got big play, of course; the gossipy New York media world is more than a little obsessed with Conde Nast and The New Yorker, and the whiff of fratricide made the machinations all the more delicious (although Steve Florio did find a safe haven for his brother at Conde Nast Traveler). But largely missing from the coverage was the most remarkable fact of all: that Steve Florio was even in the position to make such a move. The elder Florio, you see, preceded his brother at The New Yorker and compiled a record of ineptitude that would be hard to match. Installed as publisher in 1985, shortly after Newhouse purchased the magazine for $168 million, Steve Florio turned a mildly profitable property into one of the greatest money pits in American magazine history. On his nine-year watch, The New Yorker dropped almost 1,300 ad pages and lost $114.4 million. In all, FORTUNE has learned, The New Yorker has lost a stunning $175 million under the two Florios.

Conde Nast is a privately held company, part of the Newhouse family's famously secretive media empire. It has no public shareholders and no fiduciary obligation to turn a profit. For a long time nobody cared much whether Conde Nast and its magazines made money; the question was more a parlor game played in publishing circles. Certainly the 70-year-old Si Newhouse didn't seem to care. He is worth an estimated $4.5 billion. His magazines reward him in other ways--in the Manhattan currencies of status and buzz. They include some of the most important titles in their fields, including Vogue, Vanity Fair, GQ, and Glamour. Reaching more than 75 million Americans each month, Conde Nast magazines help set the nation's tastes.

In the past few years, though, the company has changed--or at least that's the buzz. In a series of media interviews, Newhouse and Steve Florio have been broadcasting the message that profits do matter at Conde Nast. In a brief preliminary interview with FORTUNE, Florio said, "I run this place like a publicly held corporation." He added, "Our margins, if they were known, would be very acceptable to Wall Street."

But when we began asking detailed questions, Florio stopped talking to FORTUNE. And who can blame him? If he were really answerable to Wall Street, his performance would be judged severely. Without question, Florio has made substantive changes at Conde Nast--and helped return the company to profitability during his first year in charge. But Conde Nast remains a woeful underperformer; at a time when magazine companies are comfortably producing profit margins of 15% and 20%, Conde Nast doesn't even come close. FORTUNE has learned that as recently as 1996, the company earned around $55 million on just under $750 million in revenues--a profit margin below 8%. And that figure doesn't include either losses coming from The New Yorker--which had always been kept separate from the rest of Conde Nast--or some $20 million in startup costs for new magazines. When you include those losses, the company's real profit margin drops below the T-bill rate. Last year--one of the best years ever for the magazine business--Conde Nast saw revenues and profits rise, but its margin was up only slightly. In fact, Cosmopolitan, the popular Hearst monthly that competes directly with a number of Conde Nast titles, made nearly as much money last year as all of Conde Nast put together.

In the rest of the Newhouse media empire, known as Advance Publications, the emphasis is very much on making money. Besides Conde Nast, the company's holdings include newspapers, a chain of local business weeklies, Parade magazine, and cable holdings (which Newhouse has combined, in a complicated joint venture, with cable holdings of Time Warner, the parent of FORTUNE's publisher). The Newhouse newspaper chain, in particular--the country's third largest, run by Si's brother, Donald--is renowned for its attention to the bottom line. And just a few months ago, Advance sold Random House, its barely profitable book-publishing division, in a move widely viewed as another signal that Si Newhouse was getting serious about profits.

But at Conde Nast things are different. On close inspection, it turns out to be a company run on a model long since abandoned by other mainstream publishers. It has a corporate culture in which cutting out flights on the Concorde passes for austerity, and a reward system that still has everything to do with creating beautiful magazines and surprisingly little to do with producing profits. This is a company that has perfected the art of creating glossy, idealized images of real people and things. That turns out to be a pretty good description of its business performance too.

"I'm the kind of guy who sucks the air out of the room," Steve Florio is saying. The 49-year-old CEO is sitting back in his plush office chair, hands behind his head. His clothes are gorgeous: a beige double-breasted suit with a dark shirt and tie. His smile is contented, suggesting a man who has gotten used to spinning this story--the story of Steve Florio, a middle-class Italian kid from Long Island who made it big in magazine publishing and now controls the most glamorous company of them all. "If there is a business story here, it is a story of a company that was riding high, and then its world changed, and now it is a much more sober and businesslike culture," he says in his one brief interview with FORTUNE. "We have budgets and fiscal reviews. We've taken the guesswork out of career evaluation. I changed 45 executives. I had to have a food taster for a while."

This is the business story that Florio has been telling to anyone who will listen. First laid out in a front-page Wall Street Journal article in early 1996, it begins with Newhouse calling him into his office early one January morning in 1994. Abruptly informing Florio that he is being made president of the company, Newhouse shares with him, for the first time, Conde Nast's books. They show that the company is losing money--somewhere between $15 million and $20 million in 1993, according to the Journal. Florio's mission: Turn it around. He succeeds brilliantly.

The Journal story, it turns out, contained a small but telling indication that things are not always what they seem when it comes to Conde Nast and its chief executive. It reported that the company made between $20 million and $25 million in 1994 on revenue of $900 million, an estimate that came from "people close to the [Newhouse] family." Actually, revenue that year was substantially less: $627 million.

To be sure, the central point of the Journal's report was accurate: Conde Nast lost money in 1993 and made money in 1994--and Florio had a good deal to do with that. The Conde Nast CEO is nothing if not aggressive, although he can be over the top. A few summers ago, in a talk to students at the Radcliffe Publishing Course, he described his former employer, Esquire--which competes with Conde Nast's GQ--as "a fucking piece of shit." (When Edward Kosner, then Esquire's editor, confronted him, Florio denied he'd said it.) Among the equally aggressive publishers he has hired, however, his combative style breeds loyalty. "He's my mentor," says GQ publisher Richard "Mad Dog" Beckman. "This man has done wonders for this organization."

Lots of chief executives are loud, egotistical, and profane. But there is another dimension to Florio's way of doing business that raises eyebrows. Even his supporters acknowledge that in Florio's hands, truth is a fungible commodity. Inside the company it is well known, as a former executive puts it, that "anytime Florio tells you a number, you should cut it in half." Virtually everyone interviewed for this story--whether friend of Florio or foe, current Conde Nast employee or former employee--agrees that Florio has a compulsion to exaggerate and even to make things up. Florio once told Interview magazine about taking a year after college to counsel underprivileged kids in New York: "Esquire hired me to work in the research department, but I never actually showed up for my first day of work at Esquire until a year later, after I'd worked as a career counselor in some of the tougher neighborhoods in New York, convincing kids with backgrounds similar to mine to stay in school." The story isn't true; Florio went straight to work at Esquire after graduating from NYU.

Former colleagues recall being in meetings with Florio--and then hearing him describe those meetings so differently that they found it hard to believe they had been in the same room. Sometimes the response has been bemused: A colleague once lampooned Florio's tendency to exaggerate by performing a skit about a character called "Florocchio," whose nose grew longer each time he opened his mouth. But some former employees say they left Conde Nast because, in the words of one, "I got tired of all of Steve's lies."

Conde Nast has always been something of a magazine fantasyland. Samuel I. Newhouse, the patriarch who built the family media empire, liked to tell the story of how he bought Conde Nast in 1959 as an anniversary gift for his wife, Mitzi, who wanted a fashion magazine.

The elder Newhouses may have regarded Conde Nast as a bauble, but for the couple's oldest son it became a preoccupation. As a young man, Si had found little pleasure in life as a newspaper baron's heir. He had dropped out of Syracuse, played the bachelor about town after a failed first marriage, and occupied a succession of jobs in the family business. With the acquisition of Conde Nast--which then included Vogue, Glamour, and House & Garden--all that changed. Si was put in charge, and suddenly he had influence over a glamorous realm that truly jazzed him.

Si Newhouse had a need to be jazzed. Short and painfully awkward, prone to mumbling and avoiding eye contact, he was drawn to tough, charismatic personalities. For years his best friend was Roy Cohn, the notorious red-baiting lawyer. At Conde Nast he soon came under the sway of another powerful personality, Alexander Liberman, a flamboyant Russian-born artist who molded Si's thinking about glossy magazines.

Liberman, then art director of Vogue, soon became editorial director of Conde Nast. It was he who established the lush look and feel that would draw upscale readers and advertisers. And it was he who established the primacy of aesthetic concerns over financial ones. "No one will ever thank you for saving money at Conde Nast magazines," Liberman once scolded an editor. "They'll only thank you for making a great magazine."

Conde Nast hired the most famous editors of its day, used the most expensive photographers, employed the most elegant models, and printed its stylish pages on the finest paper. Liberman thought nothing of forcing editors, at enormous expense, to change layouts--even kill stories--after the magazines had gone to the printer. "I believe in waste," Liberman once told a newspaper reporter. "Waste is very important in creativity."

Over the years, Liberman's dictum was embraced at Conde Nast. If Si Newhouse wanted to buy a magazine, the price was irrelevant; he just bought it. If he wanted to keep unprofitable magazines alive, he did it. If he wanted to pay huge salaries to lure talent, he did that too.

Conde Nast became known as a place that wallowed in perquisites. Editors got clothing allowances, luxury cars, limitless expense accounts, even huge loans--which could be forgiven at Si's discretion. Low-level editors hired car services to take them around Manhattan and fattened their expense accounts with nights on the town and fancy meals.

In a newspaper interview Newhouse likened his company to an "old-time movie studio." Publishers and editors were stars--and often feuded among themselves, vying for his favor. Of course, stars could be fired too. Newhouse became famous for abruptly firing editors, and more than one learned of her dismissal by reading about it in the gossip columns.

Without question, the magazines Newhouse has nurtured over the years have had a powerful effect on popular culture. They affect consumer behavior. They certify fashion trends. They are part of the nation's opinion-making machinery. The New Yorker alone has won 15 National Magazine Awards since Newhouse bought it in 1985. GQ, Vanity Fair, and Glamour have also won National Magazine Awards in recent years.

Along the way, Newhouse has paid lip service to the importance of making money. "I do not like charity cases," he said in a 1990 interview. "I believe my operations should have the sense of security that comes from knowing their work leads to a profit." (Newhouse declined to speak to FORTUNE for this story.) Yet almost no one in the company had any sense of what the profits were--and they were not encouraged to find out. Department heads were not shown profit or revenue data for their own operations. Editors at Conde Nast didn't even have budgets; they were simply told to spend what they needed to spend. Nor did the company's reward system bear any direct connection to making money. "Hot" editors like Tina Brown, whom Newhouse hired to edit Vanity Fair, made huge sums--even though, in Brown's case, her magazine lost money for most of her tenure. Less flashy editors, like Glamour's Ruth Whitney, tended to be undervalued--even though Glamour has long been the company's cash cow. Publishers also saw no link between their pay and the profitability of their magazines.

For people in the publishing industry, the dynamic at the top of Conde Nast is bewildering: What, they wonder, does the retiring, eccentric Si Newhouse find so appealing about Steve Florio? One theory is that Florio is simply the latest in the long line of "tough guys," like Roy Cohn, that Newhouse has been drawn to. Others believe that Newhouse gets a kick out of Florio's antics. A third theory is that Florio's true genius is the care and feeding of Newhouse--constantly fueling that sense of excitement that Newhouse needs to feel about Conde Nast, and never pushing too hard to make changes he doesn't want to make.

Whatever the case, it is easy to understand why Florio first caught Newhouse's attention: He was a terrific ad salesman. At Esquire he left the research department and within six years rose to the position of ad director. In 1980, Newhouse hired the 30-year-old Florio to be publisher of Gentleman's Quarterly, a men's fashion magazine he had recently bought. Florio was given one task: to bring in ad pages.

Ad pages--and ad-page growth--is at the heart of the way Newhouse runs the business side of Conde Nast. Obviously, every magazine company wants as many ad pages as possible, but at Conde Nast page growth is an obsession; far more than revenues or profits, it drives the company. If pages are going up, Newhouse believes, all is well; as a result, everything the company does on the business side is focused on increasing ad pages.

In the magazine business, there are two basic revenue streams: advertising and circulation. For decades, virtually all major publishers viewed circulation as a loss leader whose purpose was to get a magazine into as many demographically appealing hands as possible, even if that meant spending millions on direct-mail solicitations or offering readers bargain-basement subscription prices. Then the publisher would use the circulation numbers to charge more to advertisers--just as a top-rated television show can charge more for commercials than a less popular show can.

Because of this single-minded focus, publishers resisted discounting from their advertising rate cards; it was viewed as suicide. To this day, Conde Nast makes a big point of saying that its magazines do not discount from the rate card.

When Si Newhouse first began running Conde Nast, this was the model everyone used: Lose money on circulation, make it back (and then some) on ad pages, and never discount. He understood it, and he was comfortable with it. Even when that model began to change as other publishing companies began to find new ways to generate profits, Newhouse stuck to it. For a man who hated to divulge financial results even to his employees, ad pages became his yardstick to measure success. (Ad pages are tallied, and the results ranked, by an organization called the Publisher's Information Bureau.) And in good times it also gave him bragging rights. Since a number of the other major magazine publishers, such as Hearst, are also privately held companies, they too use ad pages as one way to keep score. (As part of publicly held Time Warner, Time Inc., the nation's largest magazine publisher, makes its financial results public.)

Conde Nast's obsession with pages suited Florio the ad salesman just fine. During his five-year stint at Gentleman's Quarterly (now known as GQ), he took a money-losing publication with fewer than 900 annual ad pages and turned it into a moneymaker. In Florio's last year at GQ, the magazine published a stunning 1,900 ad pages.

And then one day in 1985, Newhouse told Florio that he had a new assignment. The kid from Long Island was going to run Newhouse's latest acquisition: The New Yorker.

For all The New Yorker's prestige, it made absolutely no business sense for Newhouse to buy the magazine. Its commercial peak was in 1966, when it had 6,143 ad pages--the largest number any magazine has run since the dawn of television. But by the time Newhouse bought it, The New Yorker was in serious decline. Its ad pages had dwindled to a little more than 3,500. Its circulation was around 500,000. Its readership was devoted, but it was an older readership, not the kind that appeals to upscale advertisers. And though the magazine was still profitable, it wasn't the powerhouse it had once been: It made only $7.8 million the year before Newhouse bought it.

One reason for The New Yorker's decline was the rise of other magazines that could compete for upscale ads. The irony, of course, is that many of these magazines were published by Conde Nast, which probably did more damage to The New Yorker than any other publisher.

But The New Yorker was a publishing status symbol that Si Newhouse couldn't resist. There were rumors that Donald Newhouse objected to the purchase and especially to the extravagant $168 million price tag. Si Newhouse bought it anyway.

As part of the purchase agreement, Newhouse signed papers promising to keep the magazine separate from Conde Nast. He also publicly vowed to keep on as editor William Shawn--a man every bit as reclusive and eccentric as Newhouse himself. (Two years later Newhouse broke that promise, firing Shawn and naming Robert Gottlieb editor.) But he always intended to install his own people on the business side of The New Yorker. Ultimately, he brought in two executives: His cousin Jonathan Newhouse, then 32 years old, became the magazine's business manager. (Jonathan now runs Conde Nast's international operations and is widely assumed to be Si's eventual successor.) And Si named Florio publisher and eventually president as well.

At The New Yorker they had never seen anyone like Florio--strident, self-aggrandizing, convinced that he knew how to fix the magazine. He complained that the ad sales staff was lazy--not entirely untrue--and spoke gleefully about all the people he was firing. ("I just blew it out of here with a fire hose," he told one reporter.) People he couldn't fire he badmouthed behind their backs--especially Gottlieb, when he became editor.

Florio wasted no time making changes. He began accepting racy ads that Shawn had long refused, and he also solicited half-page ads, which had been verboten at The New Yorker. These were the changes reporters focused on in the first round of articles about the Newhouse regime. But the press missed the real import of what Florio was doing, which was imposing the Conde Nast formula on The New Yorker. In retrospect, it would be hard to devise a more wrong-headed approach.

The New Yorker was one magazine where circulation made money. Its basic rate was $32, and though it had a lower rate for students and teachers, it did not make cut-rate offers to gain new subscribers. It went years without spending money on direct-mail campaigns.

Although Florio had never run a circulation department before--when he was at GQ, circulation decisions were made at the corporate level--he quickly grabbed control of it at The New Yorker. He soon undertook a series of expensive direct-mail campaigns. By the early 1990s he was offering the weekly to new subscribers at the rate of $16 a year--around 32 cents an issue. He also lowered the regular subscription price. Although circulation had risen to nearly 800,000, by the time Floria left, those new readers cost The New Yorker millions.

The second part of the Conde Nast formula was to raise the price of an ad page, using the increased circulation as justification. That, too, Florio did. And, of course, he refused to discount from the rate card. Here, Florio came face to face with a harsh reality: The New Yorker wasn't like the Conde Nast magazines, and it couldn't be sold the same way. It lacked the kind of single-minded focus--on women's fashion, say, or shelter or food--that drew advertisers to the typical Conde Nast title. Nobody had to advertise in The New Yorker, not the way they had to advertise in Vogue. During Florio's first year The New Yorker lost a stunning 500 ad pages, although some of that undoubtedly was due to nervousness among advertisers about the magazine's new direction. The previous year's $7.8 million profit turned into a $200,000 loss.

It was in his second year that Florio made his first big ad rate hike--and lost another 300 ad pages. Soon he was discounting like mad, but the magazine never recovered from this miscalculation. By 1991 ad pages had sunk to 2,000. Revenue, which had stood at $60 million when Florio took over, also dropped, bottoming out at $50 million by 1991.

There are two other things his former colleagues recall about Florio during his time at The New Yorker. The first is that despite the mounting losses, he was incredibly free about spending Si Newhouse's money. He not only took the Concorde himself but also gleefully encouraged others to do so. ("It's great," he told one person who was flying to London with him. "You take the Concorde, a limo picks you up at the airport...") He hired an huge sales staff and rewarded them generously even as ad pages dwindled. New Yorker executives used to buy each other expensive Christmas presents--which wound up on their expense accounts. One former New Yorker executive says that at least 40 people at the magazine had cars paid for by the company.

The second thing people remember is the way he left certain, shall we say, impressions. He encouraged people to believe he had an MBA, which he doesn't. More important, when it came to describing the troubled state of affairs at The New Yorker, Florio simply lied. No matter who was asking, his line was always the same: The magazine was going like gangbusters, and profits were just around the corner. To Advertising Age he said that circulation was "profitable, so profitable. [The New Yorker] makes a lot of money on circulation." In 1992 the New York Times asked Florio whether it was true that the magazine had lost $10 million the year before. "Oh, God, no!" he replied. "If that were true, it would not be a new editor we'd be looking for. It would be a new publisher." The New Yorker hadn't lost $10 million that year--it had lost $12.8 million.

Conde Nast's explanation of this deception is direct and altogether remarkable. "The company policy back then," says spokeswoman Andrea Kaplan, "was to say we're not losing money."

"I'd read these stories about the wonderful world of The New Yorker and how the profitability was improving--and it just wasn't so," says a former member of the magazine's business staff. "I'd say to Steve, 'Do you and I work at the same place?' and he'd just laugh." Sam Ferber, Florio's former boss at Esquire, whom Florio brought in as a consultant at The New Yorker, was also shocked to hear him telling reporters about how well The New Yorker was doing. "I told him, 'Steve, don't be a're telling lies.'"

Obviously, Newhouse had to know the truth. Yet the ever-increasing deficit never seemed to affect Florio's relationship with his boss. They met Fridays at 6:30 a.m. Always Florio seemed to retain his ability to keep Newhouse engaged, excited--and distracted from the mess at the magazine. When, in the summer of 1992, Newhouse replaced Gottlieb with the controversial and charismatic Tina Brown, he was signaling that he thought the problem lay with the editorial product. In other words, not Florio.

Brown's first full year at the magazine turned out to be Florio's last. There was never any doubt that the magazine would lose an enormous amount in 1993: Brown immediately set about reinventing it, an overhaul that included publishing photography and illustrations for the first time, and replacing most of the writers, who got generous severance packages. No matter how much the magazine lost that year--and it turned out to be more than $30 million--no one on the business side was going to be called to account for it. It was a perfect time for Florio to make his exit.

That year, Steve Florio managed to produce a 236 ad-page increase. Though profitability was farther away than ever, Florio had given Newhouse ad-page growth. "You had a great year," Florio claims Newhouse told him. Newhouse named him president of Conde Nast.

Florio's mandate was nothing less than to save the company. Conde Nast's problem was even deeper than has been reported: The company was projecting a devastating 15% drop in ad pages for 1994. Florio's charge was to make sure it didn't happen.

In 1994, the publishing industry was coming out of an ad recession. All magazine companies had been hurt by it, but few as badly as Conde Nast, with its continued emphasis on ad pages.

By then, most other publishers had, out of necessity, developed other sources of revenue. Over the years, advertisers had learned that by playing one magazine off against another, they could force the industry to give them big discounts from their basic ad rates. So common had discounting become, in fact, that to make up for the lost revenue, publishers had been forced to find new ways to make money.

They ultimately found two. First, magazine executives started to look for "ancillary revenues" from such things as licensing deals and television specials. More important, publishers began looking to circulation as a key revenue source. They adopted aggressive pricing strategies, raising the prices of both newsstand copies and subscriptions. Over time, most publishers achieved a fifty-fifty balance between advertising and circulation revenues. And while circulation was still less profitable than advertising--because it's costly to replace readers who let their subscriptions lapse--it could be turned into a profit center in its own right.

Conde Nast never adopted this model. Its position was that it didn't have to change because it had never had to stoop to discounting from the prices on its rate card. But in truth, Conde Nast--especially under Florio--found ways to adapt to the new realities. One example: Conde Nast spent enormous sums--tens of millions of dollars more than its competitors--on "marketing support" for its advertisers. A fashion house that bought pages in a Conde Nast title might have its next show underwritten by the magazine. Or the magazine might pay for the fashion house's billboard advertising. Or it might conduct consumer research for the advertiser. Usually the dollar amounts for this marketing support would be negotiated as part of the deal to bring the ad pages into the magazine. Thus while the company could technically claim that it wasn't discounting, its practices had the same diminishing effect on the bottom line.

Florio did hire an executive to generate ancillary revenues, but the man left within 18 months after it became clear that neither Florio nor Newhouse would agree to the deals he put together. And to this day Conde Nast gets less than 25% of its revenues from circulation, half as much as its major competitors. But then, facing this problem would have meant butting heads with Newhouse, and that was something Florio was not about to do. As one Conde Nast publisher concedes, "Our circulation strategy is simplistic." Which means that even though many of the changes Florio has made are laudable, the company remains extraordinarily vulnerable to the next, inevitable advertising recession.

So what did Florio do that first year? He did three things. First, he began changing publishers, hiring a series of hard chargers. Second, he cut costs, though it appears now that he mainly plucked the low-hanging fruit. He imposed formal budgets on editors and publishers alike. He renegotiated paper and printing contracts, imposed staff cuts on the various magazines, and chopped at some of the most egregious spending excesses--though not to the extent he would later claim. "Basically, he cut out the excesses at the lower levels, but he didn't touch anybody at the top," says a knowledgeable insider. "Believe me, [Vogue editor] Anna Wintour was taking the Concorde in 1995."

Finally, he put great emphasis on a Conde Nast "corporate buying program." This department--which now numbers some 50 people--was charged with making big corporate deals that would place advertisers in multiple Conde Nast titles. On the one hand, this program has been responsible for bringing in hundreds of pages of ads. On the other hand, because big advertisers could qualify for rates that were as much as 30% lower than the standard rate at individual magazines, it had the effect of lowering Conde Nast's per-page revenue.

Plainly, Florio's moves made a huge difference in 1994. The company made $26.6 million, and ad pages dropped only 4% that year instead of 15%. But perhaps a more telling picture emerged in 1995. That year ad pages increased by 1,100--yet profits only went up by $400,000 (and remember, that profit figure does not include startup costs or The New Yorker's losses). Why so little additional profit? Because these new methods of acquiring pages--whether through the corporate buying program or marketing support or so-called advertorial sections--were costing the company dearly. Here is where one could most clearly see the essential Conde Nast illusion: Page growth did not necessarily translate into increased profits.

In subsequent years--which have been some of the best in the history of the magazine industry--the company has earned substantially more money, but so has every other magazine publisher. Throughout, Conde Nast's margins have remained embarrassingly small.

Nonetheless, while the financial picture at Conde Nast surely is better than the one Florio left at The New Yorker, he has continued to show a compulsion to stretch the truth. He told a trade magazine in 1997 that the company's revenues were "very, very close" to $1 billion, when they were closer to $800 million. He enjoyed telling the press about the company's "great margins." In 1995 he appeared on the Charlie Rose television show and insisted that Vogue's circulation was larger than its three biggest competitors' put together. In fact, their combined circulation was almost twice Vogue's.

Florio continues to leave misleading impressions about his personal life too. He told at least two Conde Nast executives that he had played minor league baseball, which he has not. (He told one of them that taking batting practice in Yankee Stadium as part of the Yankee farm system was "one of the great thrills of my life.") He told an interviewer that he'd played football in college--even though NYU doesn't have a football team. He also claimed to have been a premed student at one point.

When asked about these claims, Florio, through spokeswoman Kaplan, offers a variety of explanations. Football? "He meant touch football," says Kaplan. Minor league baseball? "He creates personas" to fire up the sales staff, she says. Premed? She says he was premed at Nassau Community College, which, it turns out, he attended prior to NYU--and which, it also turns out, doesn't offer a premed program. The Charlie Rose show misstatement? "He meant readership," not circulation, she says, explaining that he was "nervous" because "it was his first TV interview." (FORTUNE found several examples of prior television interviews.)

And what about the story that Florio had put off going to work at Esquire for a year to help underprivileged kids? At first, Kaplan said Florio stood by his account. But FORTUNE spoke to three former Esquire executives, including Sam Ferber, who had given Florio that first job--and they all said he had started right after graduating. On learning this, Kaplan said Florio actually helped kids while he was still in college, and that it didn't delay the start of his career.

Nor has Florio toned down his manner when it comes to running Conde Nast. People he has fired have found themselves publicly belittled by Florio. And his fondness for profanity is undiminished. On the dais at a roast for Advertising Age columnist James Brady earlier this year, he offended a roomful of publishing bigwigs by making lame jokes about "blowjobs."

As for the company's fixation on ad pages, Florio has made one change. This year, for the first time, a small percentage of each publisher's pay will be based on profitability. But ad salespeople are still paid commissions based on the number of pages they sell, not on how much money those pages generate. "You cannot go to [Florio and Newhouse] and say, 'pages are down but revenues are up,'" says one Conde Nast publisher.

Florio loves to gloat about the fact that Conde Nast has more total ad pages than its archrival Hearst. But the financial reality is somewhat different. Unpretentious Hearst makes twice the profits of glamorous Conde Nast.

Early this year Steve Florio made his next big move. He began the process of bringing The New Yorker--the one Newhouse glossy magazine outside the Conde Nast umbrella--under his control. He did it by undercutting his successor at the magazine, his younger brother, Tom.

To be sure, Tom Florio's tenure at The New Yorker could hardly be described as a success. Though he managed to shrink the annual deficit from the $30.3 million he inherited, he could never get it into the single digits. Throughout, ad pages hovered in a narrow range of 2,000 to 2,200. Discounting was rampant--as it had to be just to get that many pages. Though Tom Florio had fought hard for the right to raise subscription prices, the average price readers paid for the magazine was still well under $1 per issue. Staff turnover on the business side was heavy; morale was poor.

In the summer of 1997--reportedly at the behest of Newhouse himself--Steve Florio began attending meetings where New Yorker business was discussed. He also floated a proposal to merge The New Yorker into Conde Nast--a plan that both Tina Brown and Tom Florio fought fiercely. They came away from that fight believing that Newhouse had agreed to shelve the idea. By then The New Yorker had a business plan that called for an $8 million deficit for 1997; when it became clear that Tom Florio was going to miss that mark by several million dollars, the die was cast.

In late January, Steve Florio granted another of his buzz-generating interviews to the Wall Street Journal. This story, by media reporter Patrick Reilly, said that Newhouse had "recruited his trusted troubleshooter"--Steve Florio, of course--to launch "a rescue mission" at The New Yorker. Although Florio went out of his way to defend Tina Brown as fiscally responsible, he made no such claim for his brother. Most startling of all to people at The New Yorker, Florio used the story to announce that Conde Nast would indeed be taking over the magazine in the not-too-distant future.

Neither Tom Florio nor Tina Brown was aware that this plan was in the works until Reilly called them for comment. On the record both were politic, but behind the scenes they were livid. The next day Tom Florio declared war on his brother. "I can't believe this," he screamed, according to one person who watched the tirade. "My brother did this to me! He ran this magazine into the ground! I'm going to go public with all the numbers! People are going to realize that I did a good job, and Steve did a bad job!" When the New York Times published a story in February about The New Yorker's troubles, the $30 million deficit Steve Florio had run up in his last year managed to find its way into print. To the Times, Steve Florio said, "I am sorry I never got the chance to finish the job [at The New Yorker]. Now I get the chance."

Indeed he does. The problem is that applying the Conde Nast formula is likely to have no happier consequences for the magazine now than it did the last time. Whatever cost savings result will likely be minimal: Many of the magazine's back-office functions have long been handled by Conde Nast.

No, the real consequence will be on the advertising side, where The New Yorker, just like all the other Conde Nast magazines, will no longer be allowed to discount from its rate card. Conde Nast officials claim that The New Yorker will receive a big boost by being included in the corporate buying program. But this seems like wishful thinking, for it fails to overcome the problem that has dogged The New Yorker ever since Newhouse bought it. It's a different kind of magazine, and its advertising base is never going to be found among the advertisers that populate other Conde Nast titles.

A more likely scenario is that merging The New Yorker into Conde Nast will cost the magazine millions of dollars in ad revenue. In an effort to head off an advertiser revolt, the company has already decided to reduce its ad rates by 25%. But since the average New Yorker discount right now is around 50%, it's hard to see how this will stem the tide. According to an in-house analysis at The New Yorker, in the best of all possible worlds the merger will generate an additional $2 million because of the corporate buying program. That same analysis, however, concludes that the move will put some $12 million in annual advertising revenues at risk.

But never mind. The deed is done, and Steve Florio has already begun to put his stamp on The New Yorker. First, of course, he moved his brother out of the magazine. Then, a few weeks later, he issued a memo announcing that the merger of The New Yorker into Conde Nast would not begin in 1999, as originally planned. It would begin immediately.

A few weeks before this story was written, two FORTUNE reporters went to a luncheon at the Plaza Hotel in New York, where Florio was getting an award from NYU's Center for Graphic Communications Management and Technology. There were at least 500 people in the room. Florio had been told that FORTUNE's reporters would be there. In the middle of his speech, he looked up from his prepared text and said, "When I was in the military..."

Need it be said? Steven T. Florio has never been in the military.

In the interest of full disclosure, it should be noted that co-author Nocera was a writer-at-large for GQ between 1990 and 1995.

REPORTER ASSOCIATES Rajiv Rao, Ann Harrington