3.09.2009

Newspapers: Why They’re in Trouble (It’s Not the Reason You Think), and What They Need to do to Survive

by Jeff Siegel

It’s not news that the newspaper business seems close to collapse. The Rocky Mountain News in Denver is gone. The Post-Intelligencer in Seattle is near death (managers are set to announce the paper's future plans on March 10) and The San Francisco Chronicle isn’t far behind. The News and Free Press in Detroit stopped daily home delivery. Almost every other newspaper in the country has has laid off staffers, and some have done two and three rounds of layoffs. Even The New York Times, which is supposed to be smarter and better than everyone else, has had to scramble to keep up.

What is news is why this is happening. The usual explanation is “the internet,” where the internet is the Black Death and the newspaper business is so many medieval city dwellers hacking and coughing up blood. And there is some truth to that, though not in the way most people think.

Newspapers are not dying because the internet usurped their role. Most bloggers and news-style websites wouldn’t last 15 minutes without newspapers to crib from. You don’t see many bloggers at city council meetings, Congressional hearings, or even NFL games. They read their local newspaper’s account of the event and then offer their slant. If the newspaper, or its adjunct, the wire service, didn’t cover the president’s news conference, how is a blogger going to know what the president said?

Newspapers are in trouble because the recession has done a Black Death to their lifeblood — advertising. Circulation is a means to an end — to get an audience for the advertising — and costs most papers more than it brings in. Newspapers are dying because they have significantly fewer ads today than they did just three months ago. Sales declined 19 percent in the third quarter of 2008, and, anecdotally, it has been even worse in the five months since.

The recession has put major newspaper advertisers, like Circuit City and Linens ‘n Things, out of business, and it has crippled other important accounts like car companies and department stores. Recessions always do this to the newspaper business. The difference this time is that this recession is especially awful, and newspaper management was especially unprepared for it. In the last real recession the U.S. had, in the early 1990s, a number of major newspapers closed, including The Dallas Times Herald and The Houston Post. You can trace this effect back for decades. During the oil shock recessions in the 1970 and 1980s, The Washington Star, Chicago Daily News and The Cleveland Press closed. Other factors figured in, but in the end, the revenue just wasn’t there.

And revenue is where the the internet, in the form of free classified ad services like craigslist, has done its damage (For more, please see "craigslist: The New Reason for Rehab.") Classified ads, says Mike Simonton of Fitch Ratings, who follows the newspaper business for the bond rating agency, were $15 billion annually of found money. They didn’t cost anything to get and they weren’t particularly expensive to print. Craigslist and other internet ad services took that revenue away, even before the recession hit.

Which is the polite way of saying the newspaper business brought many of its current problems on itself. The past 20 years, since the last round of closings in the 1990s, have been a period of almost unprecedented prosperity. And what do short-sighted, near-term, make our money now managers do when business is good? They assume things will never change and make no plans in case they do.

Yet the newspaper business has known that it needed to find another business model since at least the late 1980s. Even then, some people realized that it wasn’t always going to be profitable to print a newspaper that was dependent on third-party advertising and deliver it by hand 30, 40 or 50 miles away. Circulation, as a measure of newspaper prosperity, has declined steadily for 40 years. And, in the early ‘90s, when faxes were high-tech, there were even experiments with delivering daily news updates over the phone.

But nothing ever came of this. Some of this was complacency; after the early ‘90s recession ended, many of the papers left standing had monopolies in their cities, and did all the things monopolies do — raised rates, cut service, and dared their customers to get along without them. Simonton told me that as recently as the beginning of the decade, newspapers had margins of 25 or 30 percent — almost unheard of in the business world. Walmart’s are less than 10 percent.

And most of what happened after those good times ended was plain, old-fashioned mismanagement. Let’s say you have a business that has spent millions for printing presses and the technology and infrastructure to support those presses. This means the last thing you’re going to do is to try to find a way to make printing press technology obsolete — unless you’re a business genius, and most newspaper executives aren’t. Case in point is Gary Pruitt, who runs the McClatchy chain. He paid $6 billion for the Knight-Ridder chain in 2006, which means he invested in the future of traditional newspapers just before traditional newspapers threatened to become obsolete.

But they don’t need to be. Newspapers, in fact, are positioned to prosper as never before, if only their bosses would understand what’s going on. What newspapers have is content, and what does the internet run on? Content. The industry must find a way to leverage that content to make money and in the process replace the advertising model that has existed for the past century and is no longer relevant. Advertising on websites, run and operated in the same manner as newspaper advertising, isn’t going to work. No one reads ads on websites, and most of us find them aggravating. Younger people, who didn’t grow up with the example of newspaper advertising, don’t even know they’re supposed to read them.

The solution may well be complicated, possibly cumbersome, and far from traditional. My guess is that it will involve new-style marketing, in which papers use their on-line content to match advertisers with readers in an editorially ethical way but without an ad. Let’s say I’m a diaper service or a baby furniture company. What content can the newspaper offer to direct its readers to my business that doesn’t involve traditional advertising? How about setting up a space on its website that my company would sponsor where new mothers could register to receive baby-related news, coupons and the like?

None of this will be easy. But it’s not like running a newspaper now is easy. It has just been profitable, and there is a big difference.

(Photo by jazza of Rotterdam, Netherlands via stock.xchng; the photo was discovered through everystockphoto.com.)
















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