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Newspaper Chains Face Tough Financial Challenges

March 9, 2006 at 12:00 AM EST
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UNIDENTIFIED FEMALE: Now in the news, is it two….

JEFFREY BROWN: With all news, all the time…

UNIDENTIFIED FEMALE: Well, thousands of New York walking…

JEFFREY BROWN: … anywhere, and on your schedule, who needs these once a day?

For the newspaper industry, the question grows more urgent as the news about the newspaper industry grows worse. Starting today, for example, the fate of the Knight Ridder company, the nation’s second-largest newspaper chain, could be determined, potentially having ripple effects for the entire industry. It’s the final day for companies that want to bid on the Knight Ridder chain to submit their financial plans.

Knight Ridder owns 32 papers, including “The Philadelphia Inquirer,” “The Miami Herald,” “The San Jose Mercury News,” and “The Kansas City Star. The unusual auction came about after Knight Ridder, led by fourth-generation family member Tony Ridder, announced late last year that its profits had dropped 22 percent from the same period a year ago. The money management firm that owns part of the chain then demanded that the company put itself up for sale.

Other major companies have also seen falling earnings, including The Tribune Company and Gannett, the largest chain and publisher of “USA Today.” In fact, these chains and many other papers do continue to make money, many around 20 percent annually. But the falling profit margins have not satisfied Wall Street, and stocks have been taking a beating.

Advertising dollars are being siphoned off by a variety of media, including the Internet. And readership is down. According to industry figures, in the six-month period ending last September, circulation nationwide fell 2.6 percent, more than in any six-month period since 1991.

By way of comparison, circulation hit its all-time peak in 1984, when 63 million people subscribed to 1,688 papers. As of last September circulation had dropped to some 45 million at 1,457 papers.

Faced with financial pressures, changing technology and reading habits, newspapers are experimenting with a number of innovations, including new attention to the Internet, where more and more readers are heading.

Newspaper Web sites might offer the same content as the print version or added features just for online readers, from photo galleries, where readers can post pictures of local events, to blogs written by the reporters, to really simple syndication, or RSS, which allows readers to preselect certain topics that interest them, and have those articles specifically sent to their computers automatically.

PATTI PETTITE: Good morning. I’m Patti Pettite with your Delaware online report for this Thursday.

JEFFREY BROWN: At “The Wilmington Journal” in Delaware, the 134-year-old paper has introduced a video Webcast to build audience in what the paper calls the newsroom of the future. The paper’s print circulation has been dropping. Its Web readership is on the rise.

Some papers offer digital newspapers, electronic editions that mimic the print version visually and can be pulled up on a computer or at a public kiosk. “USA Today” has created the so-called “USAT News Center,” allowing hotel guests to interact with a scaled-down version of the Web site.

Reaching out to younger, often disaffected readers, some newspapers, including “The Washington Post,” have spun off a shorter, free version of the paper. The Washington Post Company also recently announced it will start a new radio news station this spring, a move to showcase its reporters.

Other papers, such as “The Tampa Tribune,” have merged their print operations with sister television and Web operations, offering consumers their product on many different so-called platforms.

JEFFREY BROWN: And to discuss the newspaper industry, I’m joined by Phil Meyer, professor of journalism at the University of North Carolina and author of “The Vanishing Newspaper: Saving Journalism in the Information Age,” Paul Tash, chairman & CEO of the Times Publishing Company, owner of “The Saint Petersburg Times” in Florida, a privately owned independent newspaper, and Clark Gilbert of the Harvard Business School. His research focuses on corporate innovation and how the newspaper industry has responded to the Internet.

Professor Meyer, starting with you, the auction of Knight Ridder seems to present a rather blunt question: What is the value of a newspaper today? Explain to us why this case is so important?

PHIL MEYER: It is so important because Wall Street is trying to value newspapers according to their performance in the past.

But technology has undermined their ability to maintain that performance. To survive as community-based information providers, they have to adapt to new technology. That takes investment. But Wall Street is pressuring them to pump out their cash flow, for the — for the sake of the — of the shareholders. And that’s keeping them from making the short-term sacrifices that they will need to preserve their long-term viability.

JEFFREY BROWN: Professor Gilbert, how do you see the stakes, particularly since Knight Ridder and these other companies, are, in fact, making money?

CLARK GILBERT: Yes.

You know, Wall Street has every right and expectation to expect returns from these companies. The issue going on here, as Professor Meyer points out, is there — there is a new business that is emerging. And there is a traditional print business that is a very effective cash-generating machine.

And the question is, will investors let them take that cash flow and invest it in the new business, or would investors prefer to have that invest in a diversified portfolio of different investments altogether?

JEFFREY BROWN: And, Paul Tash, you are in the middle of this, trying to run one of these businesses. How do you explain the financial pressures that are on you and others?

PAUL TASH: Well, I would say that the pressures that we face are the pressures facing a lot of businesses, and a lot of media, in fact, as we are all trying to adapt to new audience tastes and a variety of ways to address it.

The different at our company is that, because we are private and independent, we have a longer time horizon than simply the next quarterly stock report. And, so, we can take the long-term view and try to build toward the future.

JEFFREY BROWN: Professor Gilbert, you write about so-called disruptive technologies. Is this a matter of new technologies crowding out what we think of as old media?

CLARK GILBERT: Yes, absolutely.

What — what is happening in the newspaper industry follows a pattern of many, many other disruptive innovations, where the — the new innovation actually takes seed in a different part in the market that’s not in the core part of the established business. It gets a foothold there.

And then it starts to move up and slowly attack the core business. But the core newspaper business isn’t going to disappear overnight. What’s happening is, lots of new applications, new customers, different business models, are emerging around online media. Eventually, they start to come in and — and supplant traditional print advertisers.

But, ironically, while the newspaper industry is in trouble, and the core print business model is under attack, newspaper organizations are poised on the brink of a growth opportunity. Audience is growing for the first time in 15 years. You know, while print subscriptions are down, online audience in some of these metro newspapers is up three or four times what it is in print.

New advertisers can be reached by online media with consumer direct advertising and means of reaching advertisers that just really aren’t available in a traditional news — newspaper product.

The question is, will newspapers adapt their business models to reach these new advertisers, and with new products and services that these new advertisers want?

And — and I think that is a fundamental question. And — and it is — and it is something I think that faces the industry, because it’s not a matter of doing what you used to do more intently or more carefully. It’s a matter of finding new things and doing them from scratch.

JEFFREY BROWN: Phil Meyer, while this industry is going through these adaptations, we’re seeing layoffs; we’re seeing cutbacks; we’re seeing — we are seeing overseas people brought back. How is the journalism being affected?

PHIL MEYER: It depends on — on the newspaper company. Some companies, like McClatchy, are maintaining the quality of their journalism. And others are — are cutting back.

It — Professor Gilbert is right. It will be a new business model. And the fact that newspapers can sell advertising online isn’t as comforting as it sounds, because they won’t be monopoly providers in the online environment.

What has made them so fantastically profitable is that newspapers have shaken down to pretty much one per market in most places. And that’s why they can command margins of 22 to 40 percent. When they are competing with online technology, when they no longer have the monopoly afforded by the high capital cost of a printing process, it’s going to be much more difficult to be profitable. They will have to find some other basis for dominating the market.

JEFFREY BROWN: Paul Tash, do you worry at all about what is happening to the journalism, as your industry goes through all these financial pressures and changes?

PAUL TASH: Well, you see some effects on the journalism, as Phil Meyer points out, at some of the companies, much more so than at others.

But I would note…

JEFFREY BROWN: Well, we just lost our signal to Saint Petersburg.

And, Paul Tash, we apologize for that.

Phil Meyer, does it matter if someone gets the news in a newspaper anymore or over the Internet or through their cell phone?

PHIL MEYER: I think it does matter.

What — newspapers are geographically based. The Internet is not. The newspaper creates a social and political and economic sphere that brings a community together. And that’s one aspect of its monopoly position, because the public can’t attend to all the possible information sources.

But the one that is the convener of the community, that provides the glue that holds it together, is the one that most folks want to pay attention to. Now, maybe you can replicate that with a Web site, but you don’t have the automatic protection from competition that the expense of buying a printing press gives you.

I think some really interesting stuff is going to happen. And — and I admire the entrepreneurs who are going out and trying to start news operations that compete with newspapers just with a Web site.

JEFFREY BROWN: Clark Gilbert, what is your answer to that? Does it matter how one gets his or her information?

CLARK GILBERT: Well, I — I think newspapers need to realize that they really are facing an opportunity.

If I’m a journalist, trying to cover news in the Boston area, and all of a sudden — you know, I have been working for 15 years, and my audience in print has been declining at 1 — you know, 1 percent, a point each year, the Internet comes along, and my audience has suddenly expanded again.

And, if you take “The Boston Globe,” for example, their Web site, Boston.com, has four or five times the reach that “The Boston Globe” does. And, so, as a journalist, my potential to have an impact and knit a — knit a community together should have gone up.

One thing that’s new and different is, not only to — to Professor Meyer’s point, are new competition entering the market; new journalists are entering the market, and sometimes not in the form of a business, but in the form of citizen journalism.

And the Internet really has democratized who can have a voice in — in journalism. And, if — if our values are around, you know, democracy and freedom of the — of the press, as opposed to, you know, who — who I want to control that pipe into the community, then, we should be thrilled about this, as a community of journalists.

If I’m worried about my particular voice being the sole voice in a market, yes, maybe I should be worried.

JEFFREY BROWN: Let me ask you both a brief last question. We started with a blunt question.

One more blunt question: In 10, 20, 30 years, will people still be getting — going out in the morning and getting their newspaper, starting with you, Phil Meyer?

PHIL MEYER: I certainly hope so.

I see some hybrid of print and online media eventually prevailing. But, you know, anybody who discusses the future of newspapers without mentioning Craig Newmark doesn’t fully understand the situation. Craigslist is doing terrible things to newspapers’ advertising business. And I don’t see how a newspaper’s online operation can contend with that very well.

JEFFREY BROWN: Craigslist being…

(CROSSTALK)

JEFFREY BROWN: Craigslist being an online classified organization — classified ads.

PHIL MEYER: And become what the business school types call a bad competitor. That’s somebody who is willing to provide a service that is as good or better at a lower profit.

JEFFREY BROWN: And, Clark Gilbert, briefly, your answer to, will people be going out to get their newspaper?

CLARK GILBERT: I do — I do think there will be some hybrid residual product that is in print that people will read. Certainly, they will be reading news and other information from a myriad of sources, including, you know, mobile devices, as well as their desktops.

I think the more interesting question is, who will — who will they be reading that information from, and who will own those companies?

JEFFREY BROWN: All right.

CLARK GILBERT: And I think the burden that sits on newspapers is, will I adapt my business model, so, in the future, while I might have a print product, I also have some of these other options as well?

JEFFREY BROWN: All right, Clark Gilbert and Phil Meyer, thank you very much.

And, also, thanks to Paul Tash. And our apologies.