Newspapers Arrive at Economic Crossroads

Now is a good time for journalists to take a deep breath and do what they do best: Ask questions and try to obtain objective answers.Greed is wrecking the newspaper business. Budgets are being squeezed to the point that some newspapers no longer adequately report news about their communities. Media conglomerates that increasingly control the press care more about keeping their shareholders content and less about the quality of the news they convey or their responsibilities as special members of larger communities.

So goes much of the conventional criticism of the press in the last decade of the century.

When economist Mark Willes, for instance, took over as Publisher of The Los Angeles Times and put business managers alongside editors in each section of the paper, long-time press observer Ben Bagdikian noted that “Willes has done more to increase cynicism about the news media than any other person in the industry.”

Perhaps the most dramatic example of the current criticism occurred in a July 1998 cover story of the Columbia Journalism Review. The article, entitled “Money Lust,” contended that U.S. media companies had decimated news budgets to increase their profits and were “perverting” American journalism. The result: a “deracinated journalism” that was heading toward “a fatal erosion of the ancient bond between journalists and the public.”

Now is a good time for journalists to take a deep breath and do what they do best: Ask questions and try to obtain objective answers. What is happening inside the newspaper industry today? Are owners demanding more profits and sacrificing quality to achieve them? How much, if at all, have companies squeezed news budgets? And if they have, why? To what extent are problems at newspapers the result of unsuccessful business strategies or newsroom isolation from marketplace realities? Or are they a mixture of both?

Claims on all sides need to be approached with skepticism. Journalists need to examine the facts, moving beyond suspicion and perception to examine, as they would in any other story, why and how their professional environment is being altered. Indeed, a detailed review of financial data—some of them never before published, interviews with financial experts and news executives, and a review of studies and stories about trends in journalism during the last two decades reveal that a more complicated story is unfolding inside newspapers today.

The fact is that newspaper profits have not suddenly soared. But that doesn’t mean that the fear among journalists is merely the knee-jerk response of a tradition-bound culture that is mindlessly resistant to change.

The Underlying Story

During the last decade, the business of newspapers has become significantly more difficult even as pressures to perform financially have grown more intense. It no longer is a business, as publishers once joked, in which even the brain dead could make money. The traditional advertising base has eroded as major department stores have consolidated, supermarkets have found new ways to distribute their price-and-product messages, and consumers have flocked to discount retailers who eschew newspaper advertising. Billions of dollars that once lubricated American retailing through print advertising (and subsidized U.S. journalism) are not finding their way to newspapers.

The situation is made even more worrisome with the emergence of the Internet, which threatens the pot of gold at the back of newspapers—the classifieds. Set alongside these threats is an even more substantial problem— the continuing decline in circulation penetration, the proportion of Americans who read a newspaper. Young people are not maturing into newspaper readers at rates anywhere near their parents, and older readers are finding other sources of news.

Confronted by these trends and by steep advertising revenue declines in the early part of the decade, newspaper companies have had to make a choice: Either accept lower profits in the short term, while looking for new ways to grow, or cut costs, restructure and try to maintain historically high profit margins.

Most newspapers chose to maintain profits and cut costs. Data that have not been made public before document that recent newspaper profits have been fueled by a variety of cost-cutting measures. These include cutting distribution costs, slashing unprofitable circulation, and reducing the financial commitment to news coverage. At the same time, newspapers have tried to increase their profit margins by investing more in marketing. The result is that even in today’s more demanding economic environment, generally speaking, newspapers are more profitable than 10 years ago, and a great deal more efficient.

These transformations amount to nothing less than a remaking of the culture inside newspaper organizations. The independence of the newsroom, once considered a market asset, is now considered by some to be a business impediment. At some newspapers, the diminished commitment to news coverage at a time of rising profits reflects a loss of confidence in the long-term prospects of the newspaper business. The question now is whether cuts in news budgets will threaten the long-term viability of newspapers by eroding quality which, in turn, will lead to more decline in readership. Do these cuts point to a slow, deliberate liquidation of the newspaper franchise? Is the newspaper industry, as Wall Street analyst John Morton has suggested, “eating its seed corn?”

Changes in how the newspaper industry operates are so vast that they might account, in part, for declining public confidence in the press. And diminishment of the long-held belief that quality leads to readership, which leads in turn to advertising, represents a fundamental shift in the way newspaper owners think about how their business functions.

Data suggest that the erosion in newspaper advertising and audience during the 1990’s was at least exacerbated, in part, by the business strategies put in place at newspapers to emphasize profit over market share. Newspapers used their leverage over advertisers by raising rates without building circulation. In fact, at many newspapers, circulation was intentionally cut as the managers streamlined costs by eliminating those readers who were less attractive to advertisers. Now, as that strategy shows signs of backfiring, there is evidence that cost cutting, in place of product investment, may have weakened readers’ connection to newspapers as an object of trust and authority. Perhaps sacrificed by these business decisions had been the maintenance of a public trust, both in terms of newspapers’ quality of coverage and their reach into the community.

Exactly how profitable are newspapers? At least as measured by operating margins, the answer is very profitable. (Operating margin is profit divided by revenue, before taxes. It is a way to define a company’s efficiency.) Using this measure, newspapers achieve profit margins about two to three times the average for U.S. manufacturing industries. (This is the category that newspapers are placed in by the Census Bureau.) The average operating margin for a U.S. manufacturing company in 1997 was 7.6 percent. The comparable average for publicly traded newspaper companies in 1997, according to Veronis, Suhler & Associates, Inc., was 19.5 percent. Gannett, often cited as an industry benchmark for profitability, achieved 26.6 percent in 1997. Some newspaper companies, such as The Buffalo News, owned by investor Warren Buffett, had margins that were in the 30’s. With the exception of television stations, which often enjoy operating margins of more than 45 percent, newspapers are hard to match for profitability among U.S. media investments. In the mid-1990’s, newspapers outperformed consumer magazine and book publishers, direct mail and promotional services, radio broadcasters, cable and pay-per-view networks.

A broader measure of financial performance is return on stockholders’ equity. By this yardstick, too, newspapers show strong results, though not as dramatic as when measured by their operating margins. According to the Census Bureau, the average after-tax return on equity for a U.S. manufacturing company was 12.9 percent in 1997. Public newspaper companies showed returns that range from 10 to 20 percent. Gannett is an industry leader, at 22.2 percent.



A collective income statement for the nation’s newspapers would show that the industry is slightly more profitable now than it was a decade ago. A comparison of selected newspaper companies tracked by Morton Research shows operating margins in the mid-to-late l990’s climbing back to the historic highs of the 1980’s and eventually surpassing them. The two-year average for 1997 and 1998 reached 20.7 percent, up from the ’87-’88 average of 17.6 percent. [Please see chart above.]

“The editor once had the standing— and the chutzpah— to calmly ignore wooly-headed ideas from management.”
—Jim NaughtonBut below these modest increases is the crash and bang, angst and change that were triggered as newspaper companies tried to reconcile a more demanding business environment with continuing expectations of high profits.

One important set of empirical measures comes from the Inland Press Association. For 83 years, Inland, based in Des Plaines, Illinois, has gathered meticulous financial detail from its hundreds of member newspapers. In its last survey, Inland Press asked 425 questions about newspaper operations and turned the answers into comparative ratios, such as cost per copy, profit per ton of newsprint, and salary per full-time equivalent employee. Those ratios provide templates by which publishers can evaluate their operations. The analysis of the Inland numbers shows six clear trends occurring inside many of the nation’s newspapers:

1. Investment in news coverage, as a percent of revenue, has declined.


2. Production expense, as a percent of revenue, has fallen.


3. Payroll, as a percent of revenue, has fallen.


4. Investment in marketing has increased.


5. Revenue is up.


6. Profit is up.

In short, the Inland numbers show that newspapers have maintained profits by diminishing commitment to newsgathering, by spending less on employees, by cutting circulation and production costs, and by investing more in marketing efforts. And this has all been taking place as circulation penetration has continued to fall. The strategy represents a reversal of the approach that predominated among newspapers for most of this century. The formula had at its core the belief that newspapers had to construct their business strategies around stronger and more credible journalism which, in turn, would drive demand, sales and profits.

A look inside the Inland numbers reveals some worrisome patterns.



Newsroom and Production Investments

The percentage of revenue dedicated to news coverage has shown a slow decline. [Please see chart above.] At papers in the 50,000 circulation range, the percentage of newspaper revenue invested in news went from 12.6 percent, on average, for the five years ending in 1992, to 11.28 percent, on average, for the five years ending in 1997. This amounts to a decline of roughly 10.5 percent.

Lessened investment in news reporting was even greater at larger papers, those around 500,000 in circulation. There, the percentage of revenue invested fell from 9.92 percent to 8.5 percent for the same years, a decline of 14.3 percent or roughly $8.5 million per newspaper each year. In practical terms, this means a loss of roughly 60 reporters and editors (based on an approximate annual cost of $75,000 per position).

Inland’s survey shows that newspapers also cut costs by operating more efficient production departments. The reductions came primarily as a result of the purchase of new equipment, such as better computers for composing type and more sophisticated inserting equipment for assembling the newspaper. These improvements in technology often led to employee buyouts and smaller production payrolls.

Marketing Strategies

After achieving savings in production and news, newspapers invested more in marketing. Though increases were small—less than one percent at small and large newspapers—they signaled a clue to the shifting operating priorities of managers. Money added to the marketing budgets went for increasing sales staff, more advertising presentations, and investments in technology to bolster sales and training for sales representatives.

This approach worked, on one level. As the Inland numbers show, profit margins for the two periods grew at small papers from 16.2 to 21.4 percent, a gain of 32.3 percent, and at large papers from 14.68 to 18.1 percent, a gain of 23.3 percent. (To some extent, these increases exaggerate trend lines because of the depth of the newspaper recession of the early 90’s and the cyclical nature of spending for advertising.)

An overview of the recent economic history of newspapers puts the trends in perspective. During most of the 1980’s newspapers performed extremely well. There were two major reasons for these good times. First, new technology made newspaper operations more efficient. In the composing room and plate-making areas, newspapers eliminated armies of workers who were replaced by machines, and these savings dropped to the bottom line. Second, revenue from advertising continued to grow steadily, even though circulation was mostly stagnant and market penetration was falling. Advertising expenditures in newspapers increased by more than 10 percent per year from 1980 to 1987. Advertisers’ spending in newspapers rose from $14.8 billion in 1980 to 29.4 billion in 1987. (That year total newspaper revenues reached $37.8 billion.) Times were good, and a few newspapers had trouble printing all the classified advertising coming through the door.

The newspaper business for decades had been a bastion of stability and prosperity, protected against competition by high barriers of entry. It took millions of dollars to buy a press and many millions more of sustained losses to operate until an advertising franchise could be established. Newspapers were a community’s principal source of news, and advertisers turned to print, as they had always done, to reach their local customers. Classified and display advertising kept the registers ringing, and fortunes, many associated with families who had owned the papers for generations, were made and spent.

The biggest source of revenue was local retail advertising. As a 1993 report by Sanford C. Bernstein & Co. put it, “For as long as anyone can remember, retail has been the backbone of newspaper advertising. Stable and dependable, retailers advertised heavily, and nearly all of the spending went into newspapers. Year after year the rates went up (by and large retailers could pass on price increases to their own customers anyway), and who cared if lineage declined a bit—the net was rising revenue and golf partners for life.” [Please see chart below.]



Amid the prosperity, however, forces were converging that would hit newspapers with hurricane force. The stock market crashed in the fall of 1987, and in 1989 the newspaper business fell into its worst recession since World War II. Revenues plummeted; profit margins at some companies dipped into the single digits. The reasons were numerous and related to complex economic and social trends.

Advertising Losses

As the 1990’s opened, the glow between newspapers and retailers dimmed. For the first time in two decades, newspapers experienced a reduction in total advertising revenue. In 1991, revenue from retail advertising fell 4.9 percent, the steepest one-year drop in the industry’s history. Many large retailers had ended the previous decade with a heavy load of debt. What followed was a period of consolidation, bankruptcy and falling advertising budgets. Newspapers felt the pain as American retailing restructured.

Huge discount stores such as Wal-Mart, which sold everything from drugs to dungarees, guns to groceries, and electronics to envelopes, sprouted around the nation. The discount retailers didn’t advertise at anywhere close to the same volume of the older department stores, if they advertised at all. Sears, for example, in the early 1990’s still put nearly four percent of its revenues into advertising, a big chunk of it in newspapers, according to Bernstein. Its new competitor, Wal-Mart, dedicated less than one percent to advertising and very little went to local newspapers.

Discount stores such as Wal-Mart don’t rely on newspaper advertising. Unlike more traditional retail stores, they don’t need large display ads to draw attention to which products are going on sale because all their products are discounted all the time. Television advertising began to supplant newspapers as discount stores geared up for selling name recognition rather than particular products at particular prices. Publishers were familiar with the up-and-down ride of the economy, but now the talk at their conventions was of structural, not cyclical, change.

Advertisers were also bypassing newspapers by putting their money into a less expensive alternative, direct mail. It was a cheap, easy way to get printed messages to consumers, and the direct mailers were promising advertisers that they would deliver segmented audiences, the advertiser’s targeted audience, instead of the entire circulation of a newspaper. The community could be sorted by income, so direct mailers could deliver advertising more efficiently. By 1990, direct mail had grown into a $22.6 billion industry. In just eight years, direct mail revenues were at $36.9 billion, representing nearly one-fifth of all advertising expenditures in this country.

All told, from 1980 to 1991, when newspapers were highly profitable, the industry actually suffered a decline of eight percent in advertising linage in large metropolitan papers, according to Bernstein.

The newspaper industry was slow in reacting to the decline in advertising space, primarily because the reduction in lineage was masked by an increase in advertising rates. Even though advertising space was being reduced, revenues to newspapers were still increasing as the industry maintained its long-standing policy of each year bumping up rates, then plugging its ears to advertisers’ yelps. If there ever was a good example of what would, in time, affect the industry in harmful ways, this was it: Short-term profit making hid a long-term structural problem that needed a bold response. (This episode offered hints of the hubris that unfortunately would lead to big reductions in news staffs as readers fell away, citing lack of interest or no time to read.)

By the 1990’s, with strong competition and a weakened national economy, newspapers found they had lost the ability to price their advertising almost at will. More bad news was arriving. Niche publications, for cars and real estate, proliferated, taking money away from newspaper classifieds, which had been increasing as a share of total newspaper revenues. Then came the Internet. With its low-cost, infinitely expandable and searchable databases, it seemed designed to take classified out of print and put it on to computer screens.

Newsroom Cutbacks

Newspaper managers manipulate two variables, revenue and expense. With declining revenue, publishers could move in one of two directions. They could accept lower margins, at least for the time being, while maintaining their level of investment in news to protect its quality and look for new ways to increase revenues during a period of transition to better times. Or they could cut expenses to maintain profits.

Some were willing to take the former course and maintain news investment. But, in general, the industry went to work on trimming expenses. Managers argued the industry could afford cuts to news while holding on to sufficient quality. Some publishers, attempting to make a virtue out of necessity, adopted a strategy that would reduce news staffs, but seek to generate content that was more useful to readers.

“If we must earn an adequate rate of return and be compelling to readers in order to attract the advertisers that basically pay the bills…then the choice is not, do we have high quality journalism or do we have a successful business. We must find a way to do both….”
—Mark WillesThe Inland numbers show newspapers whose circulation was in the range of 50,000 reduced the dollars they spent on news by about nine percent from 1990 to 1991. Publishers used hiring freezes, buyouts and layoffs. Editors received on-the-job training in the new economics. The dramatic reductions in news budgets made FTE counts and productivity levels bigger issues for them than rigorous editing and vivid storytelling. Staff cuts affected both large and small papers. At The Los Angeles Times, with more than a million in circulation, nearly 700 employees took buyouts. About 90 of them were journalists, nearly 10 percent of the newsroom. The San Francisco Examiner, one-tenth The Times’s size, made its second buyout offer in 212 years and trimmed its editorial staff by 15 percent in 1993. At The Altoona (PA) Mirror, seven newsroom employees, roughly 12 percent of the staff, were laid off in 1992. The Albany Times Union reduced its staff three times in three years, from 1991 to 1993. Other papers, including The New York Post and The Chicago Sun-Times, put employees on four-day work weeks.

Newspaper industry employment, after steadily climbing through the 1980’s to reach a peak of 542,000 in 1989, declined to 478,000 in 1996. This downward trend appears to be reversing itself, perhaps as the industry faces up to its circulation problems. The most recent figures available, for 1997, put the number at 503,000.

Whether the decision to cut news staff and reduce resources allocated to news reporting will prove prudent in the long term is debatable, but extensive scholarly work has pointed to a connection between a strong investment in news and market success.

RELATED ARTICLE
Excerpt from Letter
- Stuart GarnerAmong some media executives, the decision to cut news staff represented a collapse of confidence. Some felt that the industry’s best years were in the past. There was concern that the fundamentals of the business had changed dramatically and irrevocably. Some of the companies felt an urgency to invest in other businesses. Thomson Newspapers, for example, after pushing its newspapers to produce astronomical profit margins with evidence of damage to some of their franchises, sold off many of its newspapers and aggressively entered electronic publishing. Other companies, E.W. Scripps and Tribune Company, for example, followed strategic plans that would retain newspapers as a base but would broaden the corporation into more diverse and profitable portfolios. Knight Ridder, on the other hand, reinvested heavily in its newspapers. For example, Knight Ridder paid $1.65 billion for the Cap Cities/Disney newspapers and almost immediately invested $30 million in one of them, The Fort Worth Star-Telegram, to purchase new press equipment. However, at the same time, Knight Ridder was sloughing off some of its less profitable newspaper properties.

For many papers, such as The Los Angeles Times, layoffs and buyouts represented an historic change. While owners tightened budgets during previous lean times—deferring new hires and cutting back on raises—The Times and many other papers had resisted large-scale layoffs. After the newspaper wars of the 1950’s and 60’s, it had become an article of faith that papers should invest during downturns as part of a wise long-term business strategy. Publishers still recall how The New York Times, during the paper rationing of World War II, cut back on advertising, not news, and continued to build its loyal readership. Their competitors chose the opposite strategy, and those different choices enabled The Times to emerge as the dominant paper in New York following the war. By the 1990’s, however, the principle of basing present-day operating decisions on the goal of long-term market position all but disappeared at many companies.

Marketing Drive

The cutbacks in people and news were part of a larger revolution. Suddenly the survivors in the new newsrooms were being instructed in the mores and manners of business. Marketing, once the province of circulation and advertising, became a concern of editors. Even the language used to describe what goes on in newsrooms began changing. Executives talked about the development of a “news product” that appealed to “customers.” Readers, as a word, no longer sufficed to capture the commercial relationship that was being emphasized. Many companies introduced “team management” training that stressed organizational objectives over conventional newsroom values.

Some of the oldest names in the newspaper business began employing management consultants such as McKinsey & Co. to redesign the news product and introduce efficiencies. Concepts that had come out of manufacturing’s restructuring, such as “total quality management,” took hold in newsrooms. Advertising and marketing people became more involved in shaping what news sections would look like. Some companies, such as Media General, even began calculating the number of stories produced per employee, per day. An April 1998 article in Presstime magazine found that at least 192 daily and weekly papers had formed marketing committees that included newsroom members.

In 1997, Edward W. Jones, Managing Editor of the Fredericksburg (VA) Free Lance-Star, described the new direction at a meeting of the American Society of Newspaper Editors. “Five or 10 years ago, your focus could be pretty much solely on content. And the question always [was], ‘Is this a good story?’” Jones said. “Now I have to think, ‘Is this a story that will connect with my readers’ particular lifestyles?’ That’s marketing. And it’s something I never had to think about before.”

Many editors, faced with declining news budgets and a shift in organizational authority toward marketing, sought to maintain influence in corporate councils by learning to speak the language of business. Around the country, they enrolled in accounting courses at local colleges, flew off to marketing seminars and earned MBA’s. In some companies the changes created a cultural divide. The proliferation of marketing methods, including greater reliance on focus groups, reader polls and a consumer-product sales orientation, were perceived as a serious challenge to decades-old newsroom attitudes about independent news judgment, editorial detachment and a give-them-what-they-need news report.

Even the kind of people who newspapers sought to become their leaders shifted. “Every job description that we developed for an [executive] search,” said Michael Walker of the firm Youngs Walker & Co., “talked about the need for marketing, and that included editors, advertising and circulation directors, and publishers.” For managers in the advertising and circulation departments, marketing became the new tool they used to create a dialogue with the editors about the content of the newspaper. Customers’ “needs and wants” were to be considered first and foremost. The editor became one more member of the team responsible for managing the newspaper’s assets. Meeting those “needs and wants” was the way editors helped to generate revenue.

The marketing message hit the newsroom hard. Given the stubborn declines in circulation, the newsroom, which defined and crafted the product, was not in a strong position to defend traditional practices when called to account for bottom-line results. Public distrust of journalists and a perception of elitism mirrored attitudes inside many newspaper companies. Business-side executives often resented editors, and such attitudes gained currency among some publishers. Editor-bashing turned into a diversion at publishers’ conventions. Over time, the editor’s lofty seat inside the organizational hierarchy began to crumble. The job of editor was mutating into a seat on a company operating committee along with the heads of circulation, advertising and promotion, and sometimes chaired by a new central power within the organization, the marketing director.

RELATED ARTICLE
Essay
- Jim NaughtonThe days were dwindling when the publisher managed the newspaper’s business affairs and the editor, as archbishop, was left alone to work out the ways in which news would be covered. Jim Naughton, Director of the Poynter Institute and former Executive Editor of The Philadelphia Inquirer, explains it this way: The unique perspective of the news department has been subsumed into the cacophony of other departmental viewpoints, few of which are grounded in journalism. “If the operating committee has 10 people, and one is the editor, then a publisher, who does not have news experience, is relying on eight others with non-news perspectives for advice,” Naughton says. “Now this problem can be ameliorated if the publisher has newsroom values, but absent that, it is inevitable that the newsroom point of view is going to be diminished.” Naughton also notes that fewer publishers are coming to their jobs from the ranks of journalism.

Once considered sacrosanct and impenetrable, the wall between news and business is viewed today, by many among the new breed of business managers, as a quaint impediment to fully developing the revenue potential of a modern media organization. For many, news is a digital commodity that can be packaged and sold in a variety of formats, with different degrees of editorial integrity.

After decades of assuming its value, the question is worth posing again—what is the purpose of the wall?

The wall was put there to reassure readers that news decisions were being made in their best interests as citizens who needed to receive information that was unaffected by the commercial interests of the newspaper or its advertisers. The point was credibility, an asset that doesn’t leap off of the balance sheet, though some marketing executives are beginning to give it value under the rubric of the newspaper’s “brand identity.”

One justification for removing the wall has been to bring into the newsroom from the marketing departments the techniques of consumer research. It was seen as a way to invigorate circulation and advertising. But important questions need to be asked about the market research on which newspapers are basing many of their decisions. How is the research framed? For example, are questions designed to elicit responses that would better inform an enterprise whose ultimate goal is consumption of products advertised on its pages or providing information as a basis for civic decision-making? In other words, is the reader thought of as a consumer or a citizen? There are no easy answers to this question, and at different papers there will no doubt be different approaches. But within the culture of journalism, which for generations had avoided even a flirtation with commercialism, this movement to embrace marketing raises concerns about the mission of the organization.

“Drop the ‘our-work-speaks-for-itself,’ ivory-tower hauteur and come out fighting for your profession and its values.”
—Maxwell KingThere are some who argue that the credibility crisis with the public is fueled by the more market-oriented approach in many newsrooms. Bruce Sanford, an attorney who witnesses firsthand the erosion of public support for the press in his work as a lawyer for various news organizations, argues in his new book, “Don’t Shoot the Messenger,” that much trust has been lost in the relationship between the press and the public. “The most compelling business reason for Time Warner and other communications companies to nurture their public service traditions is that the public believes, quite firmly and not irrationally, that today’s news media has abandoned that which it once held dear,” Sanford writes. “This is the most basic cause for the rising tide of anger rushing over the media’s breakwalls. The public believes that too few owners of communication companies—be they public or private—are devoting enough time, talent, and money to the task of improving America.”

The emerging marketing ethos inside newspapers has evoked varying intellectual responses. Two books published in the 1990’s, both by journalists who eventually left the newsroom, arrived at opposite conclusions. One contended that marketing would be the death of newspapers. The other said it was part of their salvation.

RELATED ARTICLE
Essay
- Maxwell KingIn “When MBAs Rule the Newsroom,” Doug Underwood, a former reporter and now professor at the University of Washington, argued that marketers ultimately would push readers from newspapers. Jack Fuller, former Editor of and now President and Publisher of The Chicago Tribune, offered a reasoned defense of marketing in “News Values.”

Underwood’s telling of the marketing story begins in the late 1970’s when, he says, newspapers tried to reverse the loss of circulation through a “reader-centered” approach to journalism. Stories were shortened. Heavy use of color and graphics was adopted and “light” stories about celebrities were encouraged. In fact, he traces the birth of contemporary newspaper marketing, as an industry phenomenon, directly to the hiring of Steve Sloan, of the Massachusetts Institute of Technology, by the Newspaper Association of America to conduct seminars on marketing and strategic planning around the country. The marketing approach that eventually emerged out of the seminar rooms of this publishers’ association, he says, created product changes, but they have failed to reverse the circulation trends.

“Sadly, what the marketing movement has accomplished is to drive many committed and creative journalists out of the newspaper business and to leave many of those who remain lamenting what has happened to their craft,” Underwood writes. “At many of today’s market-minded newspapers, good writing and reporting have been forgotten. Newspaper professionals who are not caught in the readership revolution complain that today’s customer-obsessed editors devote too much energy to marketing and bottom-line concerns. Daily newspapers caught up in the reader-friendly journalism are in danger of losing the true spirit of the journalistic mission—the commitment to community service, the passion for probing injustice, the love of good writing, and devotion to enterprise reporting.”

Fuller defends the marketing efforts as a laudable attempt to better understand the needs and wants of readers and use those findings to improve what goes into the newspaper. He argues that marketing and the journalistic impulse for social improvement are both necessary in a successful newspaper organization. “The market provides some measure of whether a newspaper is successful in communicating,” he writes. “A newspaper that reaches people with information they want and need will attract advertising and, unless otherwise mismanaged, will turn a nice profit. A newspaper that pleases its writers and editors but is not a vital part of the community’s life will be a commercial failure because it is a rhetorical failure.” Yet he acknowledges the strains in the relationship that attention on marketing has created. “The hostility between journalists and marketers has increased with the growing pressure on newspapers to find ways to expand readership,” Fuller writes. “The conflict between the disciplines has helped sustain a wave of nostalgia about great newspapers of yesteryear,” a nostalgia that he challenges as being more mythical than real.

Circulation

The incentive behind the marketing push of the 1990’s was both the slow pain of declining market penetration and the sharp pain of advertising revenue losses. The circulation penetration decline began 50 years earlier, but now was bringing serious consequences. For decades, even as circulation penetration numbers tumbled, remaining readers tended to be the more affluent and educated Americans, so the demographic profile of newspapers’ core audience actually improved.

As seen by the advertising department, a somewhat smaller, more upscale audience wasn’t a bad thing—in fact, it was a strong sales message for upscale department stores. After The Minneapolis Star Tribune dropped in circulation by four percent in three years in the mid-1990’s, Publisher Joel Kramer told The New York Times, “We are a healthier business if we are charging readers more and accepting a somewhat smaller circulation.”

Circulation viewed selling papers to a subset of readers that appealed to advertisers as a welcomed efficiency. In most big cities, only about a quarter to a third of the households bought the major metro daily in town. In smaller towns, penetration, while falling, was much higher. But newspapers continued through the next few decades to do a tidy business in this way. Perhaps nothing illustrates this better than the often-told story of a Bloomingdale’s executive who told Rupert Murdoch that the store did not advertise in The New York Post because “your readers are our shoplifters.” This tale, though almost certainly apocryphal, became something of an urban legend within the newspaper industry during the 1980’s because of how succinctly and concisely it framed the industry’s perception of this issue.

Even recently, higher circulation numbers have not been viewed as entirely favorable. During the mid-1990’s, several papers cut costs by stopping delivery to remote, “out-of-market” areas that did not interest advertisers. The Rocky Mountain News in Denver and The Des Moines Register attracted attention when they deliberately reduced circulation. According to American Journalism Review, in the 12 years following Gannett’s purchase of The Des Moines Register in 1985, the paper’s daily circulation dropped either through cancellations or retrenchment by 70,000, and its Sunday circulation by 103,000, in the area outside the so-called “Golden Circle.” What difference did it make if some readers on the fringes of the circulation area canceled their subscriptions? It at least meant that fewer tons of increasingly expensive newsprint had to be purchased and that meant cost cuts that improved the bottom line.

By the mid-1990’s, the concept of the regional and statewide paper, as epitomized by The Des Moines Register, was disappearing. Largely ignored as this trend toward consolidation accelerated was the role that newspapers are uniquely poised to play in bringing people from one region—people of all races, political persuasions, incomes and economic backgrounds—together in a single shared reading experience.

By the late 1970’s and early 1980’s, the circulation losses had stabilized. Since many afternoon dailies had gone out of business, the number of newspapers in the country held relatively steady. Those that were left could actually operate more efficiently and profitably with the cross-town competition diminished and consolidation of advertising into a single newspaper. In some cases, such as USA Today or The Los Angeles Daily News, a few newspapers were even being born.

By the middle of the 1990’s, however, the industry was awaking to the erosion of its foundation—its readers, the people who subscribe and shop with advertisers. The circulation losses that newspapers had weathered for years, and in some cases even regarded as a way to save money in the short term, began to loom as a principal threat to the health of the business. The reason was simple: Newspapers found that they needed to maintain a critical mass of readers within a specific market to be perceived as a desirable advertising vehicle.

The proliferation of alternative sources for news and information on such outlets as the Internet, the convenience and immediacy of television and radio, the expansion of what constitutes a broadening definition of “journalism” to include infotainment—from Oprah to Rush Limbaugh to “Hard Copy” to Matt Drudge—battered the newspaper industry.

Newspaper executives started thinking anew in terms of share of households in the market, but figuring out where to turn wasn’t easy. Richard Picard, a leading scholar of newspaper economics, explains this reversal in terms of trends.

“‘What is the shareholder value we’re getting?’ [This] is the same question a widget company asks.”
—Ken Auletta“In decades past, more young people began reading newspapers as they established families and became increasingly active in community and economic life. Today, however, young people are not acquiring the reading habit at the same rate as before, even when they enter family and community life. This generational difference is occurring because many are using other sources for their information and diversion needs. The result is that household penetration and audience reach are being lowered significantly. The population is growing and circulation declining. The changing audience is leading to change in advertiser choices.” Picard asserts that newspapers are nearing the end of their natural life cycle—an eventuality that is pushing newspaper companies to hedge their bets with investments in the Internet.

For now, the new focus is building circulation. To do this, executives are searching for ways to draw in readers while keeping a lid on costs. Suggestions include focusing more on local news, highlighting celebrity news, generating “useful news” about planning vacations, buying cars and picking a breakfast cereal, and expanding coverage of hot topics such as health and technology.

RELATED ARTICLE
Excerpt From Remarks
- Ken AulettaEfforts to increase circulation through marketing a new news product are taking the form of collaborative initiatives that many editors would have scoffed at just a few years ago. At The Providence Journal, news and circulation are cooperating on a high-school marketing effort that asks high-school athletic directors to suggest the names of athletes to profile in the newspaper. Upcoming articles are then promoted at school assemblies. “Such blending of journalism and marketing,” an article in The New York Times said, “has been taboo at many newspapers, but the economic payoff was quick: the pilot program pushed single-copy sales up seven percent.” At The Los Angeles Times, the news and advertising departments are cooperating on the development of business sections whose aim is to produce more advertising revenue. According to David Shaw, the Los Angeles Times media writer who has written about the collaborative marketing effort, the expansion of the business pages has come mostly through the addition of “soft” business features. Two days a week, he pointed out, The Times publishes a personal investing section. This appeals to the growing investor-advertising segment that, along with a personal-investing conference, produced a 40 percent increase in financial advertising. The editors’ bonuses, Shaw reported, were also tied to increases in advertising revenues and readership.

Wall Street/Stockholder Influences

Changes going on inside newspapers reflect changes in other industries. The stockholder pressures being felt by public newspaper companies have been felt in other segments of the economy for more than a decade, says Robert Broadwater, an investment banker with Veronis Suhler in New York. Broadwater attributes the new weight of these market forces to changes that were triggered by events of the early 1980’s, a time when many big companies were underperforming and their stockholders were frustrated. Investors, says Broadwater, looked inside corporate America and saw bloated staffs and unrealized profit potential.

“These companies were lousy to own, great to work for,” Broadwater says. “Then [junk-bond financier] Michael Milken came along and monetized the desire to take action.…” Suddenly, companies were under the constant threat of takeovers. “This gave urgency to the people running companies, and it put pressure on management and boards of directors.”

Takeover threats made it clear to management that their jobs were vulnerable, as were their companies, if they didn’t improve the financial performance. A focus on shareholder value swept American business. The restructuring of many businesses followed. Broadwater applauds the change and sees it as good for investors, including those who put their money in newspaper companies. “There is no reason why it shouldn’t be happening in the newspaper business,” he says. “A newspaper is a collection of assets put together in a moment in time to earn a return. If you can’t beat the cost of capital, then you are a charity.”

The increase in profit margins in the newspaper industry not coincidentally overlaps a trend of longer duration, the continuing movement toward public ownership and aggregation of large media companies. The shift toward public ownership, which has occurred mostly during the past 40 years, began with Gannett going public. It has been a fundamental factor in transforming company cultures. Newspapers have become part of companies whose main product may be entertainment and their operations linked to the demands of equity markets. This has created increased pressure for optimum financial performance at a time when results are increasingly difficult to achieve.

Public ownership has proven to be a mixed bag. On one hand, it provides the capital necessary for a company’s expansion and diversification, and it offers owners liquidity. On the other hand, it cedes control to investors who are primarily interested in profit, not journalism. Stockholders in these companies—those who come to own a piece of Gannett or Knight Ridder or Times Mirror through their pension or mutual funds—have a single-focused interest: seeing a good return on their investment. Questions about journalism do not dominate stockholder meetings. When the subject gets addressed at all, conversation tends to be about business strategy and not whether the product is contributing to an improvement in civic health. Doing the right thing does not show up on the pie charts projected on screens at meetings with Wall Street analysts.

This is the system that has evolved: Ownership of newspapers is now divorced from service through journalism. There is accountability for profit, not for journalism, except as it effects the business plan.

It isn’t coincidental that two of the nation’s leading newspapers, The New York Times and The Washington Post, have structured their stock so that family members retain control. These families have maintained an interest in their companies that goes beyond making money. By itself, public ownership of a newspaper corporation does not destroy the civic mission of a newspaper. But it makes the act of balancing public service and profit more difficult. The fiduciary responsibility of the board of directors puts the law clearly on the side of profit, and this fact tends to create a short-term business orientation. At the very least, it requires managers to present a persuasive financial case for long-term thinking and investment in intangibles such as trust and community-mindedness.

“The pressures to perform are greater now because Wall Street is more short-nosed,” says John Morton, a media analyst for Morton Research. “Back in the 70’s, there actually were investors who took the long-term view. Today long-term is three months.” Says Diane Baker, former Chief Financial Officer of The New York Times Co., “On Wall Street, long-term is very short. Long-term is a quarter. Short-term is a minute.”

RELATED ARTICLE
Excerpt From Remarks
- Mark WillesMark Willes, CEO of Times Mirror, says that he and his managers have “a fiduciary responsibility to our shareholders. We can say we don’t like that, we can say we wish it were otherwise, but that is the fact.… Therefore earning an adequate rate of return is not a ‘nice to do,’ it’s a ‘must do.’”

Newspaper stocks, in general, have been good buys on Wall Street. The Standard & Poor’s newspaper index shows that the industry, as measured by the recent five-year performance of six companies, has performed about even with the rest of the market. In a shareholder scoreboard of 1,000 companies in 94 industries, prepared for The Wall Street Journal by L.E.K. Consulting, publishing—which included a majority of newspaper companies—ranked newspapers in the middle of the pack of all stocks based on a five-year average of returns. Newspaper companies showed an average one-year return of 12.3 percent and an average five-year return of 19.6 percent. Among the high performers: Harte-Hanks, with an average five-year return of 34.7 percent, The New York Times (23.6 percent), Times Mirror Co. (21.3 percent), and Gannett (20.0 percent). These rankings were based on total return to shareholders.

“The issue today is whether the values of the First Amendment generate political liberty that news organizations have an obligation to sustain….”
—Jim CareyDuring a 20-year period, the S&P index shows newspaper stocks outpacing the market. Media analyst John Morton prepared an index of newspaper stocks that illustrates an incredible rise of 5,813 percent since 1971; this compares very favorably with the 1,086 percent rise for the composite index of the New York Stock Exchange during that same time period.

At a conference about newspapers, Kevin Gruneich, an analyst for the brokerage firm Bear, Stearns & Co. Inc., said Wall Street investment managers are not just trying to make money for their clients, they are trying to beat the market. Those are the people who control nearly two-thirds of the trading in public newspaper companies. Their judgments determine the current value of company stock and, by extension, a large part of the compensation of the managers who run the companies, and in many cases this includes editors who receive stock options.

Profits and Perils in Journalism

Discussion about the impact of focusing single-mindedly on profitability in newspapers occurs because they are considered to be a different kind of business. Newspapers are essential in a democracy, and their missions extend beyond the financial interests of their owners. As was envisioned by our nation’s founders, newspapers provide citizens with the information necessary for self-government.

Can newspapers continue to perform this mission in the current business environment?

RELATED ARTICLE
Essay
- Jim CareyThe economist Jim Rosse, who now is President of Freedom Communications, which owns The Orange County Register and other newspapers, believes investors and readers are being well served in the current business climate. “Newspapers can’t perform public service unless they generate a competitive return to shareholders that will induce them to continue supplying the capital they need,” Rosse says. “The best newspapers find ways to serve their audiences with distinction and, simultaneously, be profitable. In fact, it may be that serving an audience with distinction and being profitable go hand in hand.”

Burl Osborne, Editor and Publisher of The Dallas Morning News, offers a perspective that acknowledges the role of the market but also the connection between a newspaper’s success and its service to its community. The Morning News is a regional newspaper (recognized for its high quality of journalism) and the flagship publication of Belo Corporation, a public company with $1.2 billion in revenues and significant newspaper and television holdings. Osborne is a former working journalist and former President of the American Society of Newspaper Editors. “In the long run,” he says, “a newspaper that serves its community will create value and it will be repaid in revenue increases and attractive financial returns. I’m not telling you [in an economic downturn] that we don’t respond by controlling costs. But we try to do it by not damaging the franchise, which is a legacy in many ways. That’s easy to say and hard to do. There is more art than science in finding that balance.”

In 1998, finding such a balance became very real for Osborne when Belo’s stock lost value because of weakened advertising at The Morning News. The newspaper put into place cost-saving initiatives that included employee buyouts and a simplified edition structure. Analysts on Wall Street are watching closely to assess the impact on earnings of these changes, and their judgments will reverberate through the company.

Osborne is conscious of the scrutiny. “There is a natural tension between the [Wall Street] analysts who want you to achieve consistent growth in profits without any breaks and our desire to run the company both efficiently and for growth,” Osborne says. “To be fair, they are never going to be as patient as we would like and we are never going to increase the earnings curve as steeply as they would like. They have objectives for their clients, and they may not even be concerned with the longevity of the company. There isn’t always a congruence of objectives. We try to resolve the tension in our conversations with Wall Street. We look for investors with a certain interest [in a longer-term investment], where there is a congruence of interest.”

Leo Bogart, a sociologist who was Vice President for Marketing, Planning and Research for the Newspaper Advertising Bureau and then its General Manager, has written several books on mass media, including “Commercial Culture: The Media System and the Public Interest.” He chastises the newspaper industry for failing to invest more in gaining readers, yet stops short of blaming the profit orientation on public companies. “For a long time, editors were disdainful of the business side of the organization and egocentric in pursuit of their own interests to the exclusion [of the public’s] and disrespectful of readers,” Bogart says. “What has happened in the last generation is an understanding by editors that they are part of an enterprise that has to make a profit.”

While Bogart approves of editors assuming global views of their tasks and responsibilities in the company’s business, he is also troubled by the increasing reliance on market research. He regards much of it as shallow, especially if it is meant to serve as a basis for editing a newspaper. “To what degree, when you study readers’ tastes and interests, do you modify the product?” he asks. “To what extent do you create an editorial product to serve interests of advertisers by running ‘advertorial’ content and selling the newspaper’s soul to the highest bidder? There is an increasing amount of the latter.… It is very easy to ask the public hypothetical questions [about their tastes] and then pursue an editorial policy that is presumably the outcome of the answers. It is easy to misjudge how people respond to real changes as opposed to hypothetical changes.”

Bogart’s tone sounds surprisingly similar to Underwood’s, in his book, “When MBAs Rule the Newsroom.” “What determines success with readers is the fire, passion, restlessness, intelligence and persistence of the writer, not the ability of the writer to produce a product that fits a formula,” Bogart says. “The problem with introducing marketing [into newspapers] is not a problem of a search for coordination among the departments to serve the reader. It is an understanding of the limitations of research and its application to a creative product.”

On the subject of profit-making, Bogart is concerned about conflicting demands that arise from the pressure to produce financial results and the need to retain a longer-term view that acknowledges the need for investment in product strength. “The industry is under investing in its future,” he says. “The hard thing is how do you balance the need to stay afloat in financial markets with the need to survive in the long run in the marketplace of mass communication? There is no easy answer. Every newspaper manager is grappling with it. But they must put more of their resources into the product in their search for the future.”

Over the last century newspaper operations followed a business model created by 19th Century entrepreneurs and editors who responded with combinations of genius and opportunism to the information economy of their times. Today newspapers are being reshaped by executives and editors in response to the information economy of our era. Michael Sandel, professor of government at Harvard University and author of “Democracy’s Discontent,” a book that traces the erosion of civic ideals, contends that today’s corrosive trends in journalism are at work similarly in other professions. “We’re seeing market values and norms eroding public purposes,” says Sandel, who is writing a book about markets and morals. “There is a tendency when news becomes a profit center for ratings and advertising to dominate the traditional considerations of quality and public service. Journalism is not the only place where this is happening. If you look at the medical profession, you see medical considerations and doctors’ judgments increasingly taking a back seat to market considerations and profit.”

Sandel suggests that television might be a model for what is happening to newspapers. “The trend hit television earlier,” Sandel says. “It became a consumer- driven source of health news and human-interest stories rather than a public source of education. Markets and commercial considerations dumbed down TV news [and they are having] a similar effect on newspapers.” It is a false assumption, Sandel says, to regard the marketplace as demanding the best from newspapers. “The purpose of the market is to cater to consumers. The purpose of newspapers is to inform citizens,” he says. “Markets are good at giving consumers what they want. They aren’t so good at providing citizens what they need to be citizens in a democracy. [The assumption] forgets distinctions between consumers and citizens, markets and a democracy.”

Ironically, the long-term financial health of newspapers might have more to do with citizenship than consumerism. Newspapers, more than any other medium, depend on their audiences being interested in the details of their local communities, government and civic life. Providing this kind of information thus becomes their competitive advantage because they can do it more effectively than any of their competitors can. To survive in this competitive marketplace, the best strategy for newspapers may be to serve readers by helping them comprehend the world in which they live and inform them as citizens.

The uncoupling of newspaper ownership from accountability for community service that goes beyond simple economic success is a relatively recent development. Perhaps it is no coincidence that the change coincides both with high profits and declining market penetration. As this examination of the changing economic circumstances of newspapers illustrates, it was a short-term perspective that at least in part created the problems of the late 1980’s and encouraged the cutbacks that could be endangering the quality of newspaper coverage today.

It is essential that journalists know the economic dynamics of their profession, understand the implications of change, and participate in finding paths that achieve both journalistic and business goals. Yet it is also important for top executives to focus as much attention on the potential long-term consequences of their actions as they do on the daily up-and-down fluctuations of the stock price. Those who hold the reins of the nation’s newspapers should exercise civic responsibility and demonstrate to citizens their commitment to furthering the public good. This is, after all, the source of newspaper credibility and the primary asset that will ensure, as it has in the past, a prosperous future for newspapers.

Lou Ureneck is Assistant to the Editor at The Philadelphia Inquirer. The former Editor and Vice President of The Portland (ME) Press Herald, he was editor-in-residence at the Nieman Foundation in 1994-95. He also is the former Chairman of the New Media Committee of the American Society of Newspaper Editors.