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| HOME | Revisiting the Finance Model |
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By SARA SHAHRIARI While profits from print newspapers still bring in the great majority of newspaper revenue, readership and ad profits from print are steadily falling. Online news offers a strong and growing readership, but comparatively small and slowly growing revenues. It’s a double-edged sword that has some newspaper owners chopping staff to cut costs and everyone in the business trying to answer two questions: What is a profitable online business model, and do print editions have a future? In its 2008 study “The Changing Newsroom,” the Project for Excellence in Journalism describes “an industry in the grips of two powerful, but contradictory, forces. On one hand, financial pressures sap its strength and threaten its very survival. On the other, the rise of the Web boosts its competitiveness, opens up innovative new forms of journalism, builds new bridges to readers and offers enormous potential for the future.” It’s no wonder that reporters and editors today are feeling a bit bipolar. On one hand, fear for the survival of some of the country’s greatest newspapers is not paranoia, but on the other hand is the mind-boggling, and as-yet-unmastered, potential of online news. Goliath suffers most Large newspapers are generally affected differently than their smaller counterparts. Papers with smaller circulations have been able to retain their advertisers and readers at higher rates than large city papers such as the St. Louis Post-Dispatch or the LA Times. “In some cases, these differences are so stark it seems that larger and smaller newspapers are living two distinctly different experiences. “Fully 85 percent of the dailies surveyed with circulations of more than 100,000 have cut newsroom staff in the last three years, while only 52 percent of smaller papers reported cuts,” the Project for Excellence report states. Larger papers across the board have cut back on their international and national coverage in favor of more local news. With the rise of the Internet came incredible access. People who once turned to large metro-dailies such as The Philadelphia Inquirer or the Kansas City Star for their international news now have access to hundreds of papers and other online sources, plus television and online video of international events. Many large papers that used to have foreign and D.C. bureaus now rely on wire services such as the Associated Press, which sells stories from a network of reporters around the world, for national and international coverage. While papers can buy international news from the AP much more cheaply than producing it themselves, in-depth local reporting is still the local or regional paper’s territory, and many papers are focusing their efforts on strong local coverage. Small papers that have always been hyper-local in their coverage have been less affected by the growing availability of national and international news online, whereas large papers have struggled to reconcile losses in what was formerly an important part of their organization. “It’s so important for a newspaper to maintain its franchise and have people to go out and cover the local news,” said Doug Crews, executive director of the Missouri Press Association. Pennies in place of dollars Print advertising revenues are down, and the Internet isn’t closing the gap. In the pre-Internet days of newspapers with substantial profit margins, people paid for their newspapers and businesses paid to advertise in those papers. The Internet is problematic on both of these fronts. Readers have generally proven unwilling to pay for online news content, even from prestigious sources. The Wall Street Journal is one of few publications still charging for online content. The New York Times made all its online product available free of charge in September 2007, citing better growth potential with free content reaching more people, which is attractive to advertisers, than with a subscription service reaching fewer people, according to a 2007 MarketWatch report. Papers carrying international news received a blow when The AP made a deal with Google, allowing Google to carry stories produced by the wire service on its own pages instead of linking readers to news sources outside Google that publish AP stories. “The AP, in my opinion, just totally sold out to Google. That just guaranteed the death of any sort of paying for news,” said Esther Thorson, dean of graduate studies at the MU School of Journalism. Online advertising on newspaper Web sites is also problematic, because the Internet offers so many low- or no-cost advertising alternatives. Craigslist’s free online personals and classifieds, along with Web sites devoted to often-advertised items such as cars or employment, dealt a deathblow to newspapers’ classified ad profits. Thorson doubts that traditional print advertising models can be successfully moved to the Web. “There are way too many ways for an advertiser to use the Internet without paying legacy newspapers,” she said. “They’re moving it to YouTube, their own sites, they’re buying key words in search.” Randy Cope began his career with his family’s small newspaper, became co-president of media conglomerate Gatehouse Media, and today is associate director of the media brokerage firm Cribb, Greene & Associates. Cope said that larger newspapers stand to lose more in terms of readership and advertisers. “On the readership side is that people are reading online. On the advertising side are classifieds, which used to earn up to 40 percent of the revenue,” he said. “Online businesses, such as Craigslist, are sucking up a lot of that revenue. In a small community you are less likely to have Craigslist, and classifieds are a smaller portion of the newspaper’s revenue anyway.” Brave new ad world An online newspaper business model that can bring back the profits of print advertising’s heydays is the Holy Grail of the news business, and the search is going on in all directions. One concept is clear to most in the industry: there is no regaining the past with print. “There are factors in the marketplace that really work against the print newspaper,” said Jim Hopson, former publisher of the Wisconsin State Journal and a former vice president of Lee Enterprises. Hopson, who graduated from the MU School of Journalism in 1968, points to low interest in print newspapers among younger people and the inefficiency of print as an advertising medium as important forces working against newspapers today. Hopson said that newspapers have never allowed advertisers to carefully target an audience, but that in the past they were inexpensive and there were few advertising alternatives. Today newspapers’ appeal is in decline because businesses can more easily target their best prospects online, Hopson said. “I don’t ever see the print business getting better, because of those underlying long-term trends,” Hopson said. In the past, he said, print newspapers have experienced recessions and recovery in advertising profits. But as business gets siphoned away by the Internet and other media, recovery is less robust. Hopson said that traditionally about 80 percent of newspaper revenues came from print advertising. As that profit slides downward, attempts to make online advertising generate more profits abound. One person engaged in this endeavor is Al Bonner, general manager for the Lawrence Journal-World in Kansas. Bonner and others have been developing an online marketplace that wants to be the go-to site for anyone looking up a business in Lawrence. Bonner said Marketplace brings the power of a Web site to small businesses that otherwise might not develop one. “Google and Yahoo let you find a business,” Bonner said. “The problem was you couldn’t find much more than a name, address and phone number, and if there was a Web site, you could link to that. There wasn’t much critical information.” The paper’s parent company, The World Co., emphasizes developing advertising software that can be used at the Journal-World and sold to other papers. The Journal-World constructed a page for every business in the city as part of the Marketplace project, and allowed businesses to take over those pages free of charge. Businesses can then pay to add on features such as a photo gallery or a product tab. “We offered every business in Lawrence, Kansas the opportunity to have their own mini Web site,” Bonner said. As of August, 16 months after its launch, Marketplace has totaled gross revenues of $700,000. Bonner said that smaller papers could adopt Marketplace more easily than large metros, but there are trials of the program under way in large markets. Although Marketplace has not completely offset the Lawrence-Journal’s print revenue losses, there are plans to continue expanding its reach. Negotiations among the Journal-World, the Missouri Board of Curators and the Columbia Daily Tribune over a contract to create a Marketplace-type product are reaching a conclusion, Thorson said via e-mail on July 30. “We have built an initial database of commercial organizations in Columbia and hope to launch a Marketplace-type product in the next eight weeks or so,” she said. The project will be a partnership between the Tribune and the Missourian, with support from the Journal-World. Though new forms of advertising are increasing online advertising’s profitability, Hopson doubts that online revenues will ever fully compensate for declining print revenues. He points out that a Northwestern University 2008 Readership Institute study shows that newspaper Web sites don’t inspire the same time investment and loyalty that print has in the past, making them less attractive to advertisers. Grand plans, crumbling ground Between 2000 and 2006 many newspapers were bought and sold. Companies borrowed heavily to buy papers they thought would be profitable, but those profits disappeared, leaving many papers struggling to pay the bills. The Philadelphia Inquirer was sold twice; the Los Angeles Times, the Chicago Tribune and the Baltimore Sun came under the private ownership of Sam Zell; and in 2005 the Pulitzer family sold the St. Louis Post-Dispatch to Lee Enterprises of Iowa. Newspapers were seen as good investments and profitable businesses. That profitability could be used by buyers, many of them large corporations or wealthy individuals, to allow a highly leveraged buyout. In a highly leveraged buyout, a buyer puts forth little principal and either borrows heavily or brings investors on board, with the assumption that profits from the purchased business will cover the purchase debt. This was a good idea when newspapers had high profit margins. When paper’s profits began to fall rapidly after buyouts, investors found themselves with an albatross around their necks instead of money in their pockets. “These big newspaper companies went out and bought tons and tons of newspapers, or they even bought each other,” Thorson said. “Then they developed this huge debt load. Sure they can’t make their 40 percent profit margins like they used to, so they drop it to 20, which is still huge, but they can’t service their debt on that profit.” Hopson was vice president of Lee Enterprises when it bought the Post-Dispatch. “We just didn’t see the wheels coming off the advertising model as thoroughly as they have,” he said. “I don’t think anyone saw classified revenues eroding as quickly as they have.” Thorson said the shift of many papers from family-owned businesses to parts of larger corporations, combined with downturns in the economy and the public’s quick shift online, has proven disastrous for many papers’ finances. “These papers used to be family owned,” she said. “Then the families got large and wanted to cash in on the paper. Now the papers are pushed to continue high profits or make higher profits so that debts can be paid off and stockholders see profits.” Family-owned papers are often less pressed for large profits than their corporate-owned siblings. “A family often has the flexibility of not needing a short-term profit. They see it more as a long-term investment,” Cope said. “But that doesn’t necessarily equate to quality. Some of the best-run newspapers I deal with are with the big companies.” Families that sold newspapers between 2000 and 2006 generally sold for strong prices and beat the major downturn in print profits. Now the companies that bought papers are left figuring out how to pay the bills. “Turns out the Pulitzers were smart to take their money and run in 2005,” Hopson said of the family that sold the St. Louis Post-Dispatch to Lee Enterprises in 2005. But some people think the change from family to corporate ownership has been detrimental to the Post-Dispatch and other papers. “Lee has the St. Louis Post-Dispatch, and they have virtually destroyed the paper,” Thorson said. “And the family made out like bandits.” Thorson believes that other papers, such as the Chicago Tribune under the ownership of Sam Zell, will continue to suffer newsroom staff cuts and see the space devoted to news in the papers decrease, while the paper takes on all the advertising it can. “If a mistake was made, and I kind of think it was, the people who borrowed all that money to invest in newspapers believed that the future would look like the past,” Hopson said. “If that assumption had proved to be true, all these highly leveraged deals would work out OK.” Cutting to the core Papers are cutting staff to decrease operating costs, and this makes a difference in the news consumers receive. The ideal newspaper owner, Cope said, is “someone who is not too highly leveraged and is looking for a long-term investment.” Today, many companies are looking to sell some of the papers they took on in the early 2000s, but buyers willing to go into debt to buy a paper are much harder to find today than they were 5 years ago. Is the nightmare scenario possible in which a large paper can’t meet debts, can’t sell and goes bankrupt? Yes, but that doesn’t mean the end of the paper. “The papers are not going to go away,” Hopson said. “The loans are going to get restructured, the owners are going to go away, the lenders are going to take a haircut, but the business is not going to go away.” Cope sees many sales of newspapers in the near future. “There will be a lot of papers sold over the next couple years, but there are still a lot of buyers out there,” he said. “The exception to that might be the larger metro papers. The buyers we are seeing are probably not going to be the type of folks who are willing to buy the large metro papers.” In this climate of decreasing profits, heavy debt and little hope for the profitable sale of newspapers, staff cuts are common. Buyouts are a common way for newspapers to phase out expensive senior staff and bring in younger, cheaper reporters who are also more versed in multimedia. But with smaller staffs composed of fewer experienced reporters, depth and continuity of coverage can be lost. Thorson believes that by cutting experienced staff and coverage, newspapers are reducing the quality of their most valuable product. “If you say, ‘I’m not making enough profit,’ and you reduce your newsroom, and you reduce the number of pages you print, that’s truly eating your seed corn,” she said. “That’s cutting back on the product that people pay for.” Hopson agrees that reduced staff in a newsroom decreases the quality of the reporting a paper can produce, but sees cuts as a pragmatic response to decreased advertising profits. “I don’t think there’s a question that all this cost reduction is having an effect on the journalism, but somebody has to pay the bills,” he said. “If the advertisers aren’t going to pay the bills, you have to cut back so that the business can be sustained on the advertising that you do get.” Hopson said it was needing to make cuts in a newsroom he managed that pushed him to retire. “I thought, ‘Jesus, I’m dismantling something that I’ve loved and given my life to for 30 years.’” FOR MORE INFORMATION: Newspaper Association of America’s March 2008 report on online and print advertising |
