Farnen — and others — believe there is a tipping point, a point at which media companies have so damaged their product through cuts and profit-taking that they cannot recover. "I think we're at the tipping point," Farnen said. "I think some (companies) are probably past it."

ethorson-04.jpg
Esther Thorson
The results of these cuts should surprise no one, says Esther Thorson, associate dean of the oldest journalism school in the country, at the University of Missouri.

That's because the owners had been warned — repeatedly.

Three decades ago, the fall edition of Journalism Quarterly featured a 9-page article about newspaper quality and its effect on circulation. In 1978, researchers for the first time measured the relationship between quality journalism and increased circulation and profit.

The connection between investing in the newsroom and making a profit in newspapers has been shown time and time again since then, Thorson said. Three decades' worth of research shows more people buy a newspaper when the quality is high. Studies show the same holds true for television journalism.

By 2004, Thorson and several colleagues had actually developed a 5-step algorithm that predicted how much newspaper owners should spend in order to achieve optimum returns. Think of it as a formula for newspaper profit.

The researchers found that if newspapers spent too little, they were damaging their "product" and profits would eventually decline. But if they spent too much, they were simply eating into their profits. The formula predicted the "sweet spot" in the middle for maximum returns.

Thorson had tested her formula using data on hundreds of newspapers and found it solid. She was offering news executives a formula that would show how much to spend on each of its three main departments — the newsroom, advertising and circulation.

"We could show by optimal investment in your three departments an increase in yearly profit margins from 5 percent to 25 percent," Thorson said.

And she was offering this help for free.

Her results were presented at the 2004 conference of the American Society of Newspaper Editors, which at the time had heard an annual succession of keynote speeches about concern over quality journalism and the survival of newspapers.

The reaction stunned Thorson.

"I can honestly say nobody paid any attention to it," she said. "It was just amazing to me."

Thorson said she has taken her profit formula to major newspaper companies, including McClatchy, Hearst and Gannett, and major media foundations, including the Knight Foundation and the Poynter Institute.

"The bad news is, they all said 'interesting idea,' then went on their merry way without paying any attention to it," Thorson said.

Practically every other industry in the country bases its business model on what's called "econometrics," the combination of business and mathematical modeling, Thorson said. Companies use data to determine investments to an excruciating level of detail.

"If you're Proctor & Gamble, you know exactly how every dollar you invest pays you off in revenues," Thorson said. "You know that down to the level of how much shelf space do I want to have at the Kroger grocery store for Tide laundry detergent."

But the news industry has largely failed to do this, Thorson said, because it's been lulled by years of large profits and lack of competition.

While the news industry may lack the sophisticated business modeling of other American industries, it does have other things in common with some of them.

The American media has been full of stories recently about faltering banking and auto industries, featuring seemingly greedy corporations asking Congress for bailouts while flying on corporate jets and taking million-dollar salaries and bonuses.

But consider the scene that played out on April 21, 2009.

A multi-millionaire executive — hat in hand — was sitting before Congress, asking for help.

But this time, it wasn't a banking industry millionaire. It was a newspaper executive, Philadelphia Newspapers CEO Brian Tierney, hoping the government would give newspapers an exception to the anti-trust law so the industry could explore new business models.

Tierney's company was forced into bankruptcy in February with $395 million in debt. But Tierney was paid $1.175 million in salary and bonus for 2008 and, according to the Associated Press, hosted a $233,000 trip to Rome for about 70 advertisers, executives and family members.

Tierney is not out of the ordinary.

His income was just slightly under the median for the chief executives of the top five publicly traded newspaper companies.

Top Five U.S. Newspaper Companies: Total Compensation for CEOS, 1993-2008 Eb87a514-60ec-11de-b709-000255111976
Despite earning less in 2008, the CEOs of the top five most profitable U.S. newspaper companies still saw their compensation increase by nearly 90 percent in the past 15 years.
The New York Times Co., which threatened this year to close the venerable Boston Globe, paid its CEO Arthur Sulzberger more than $1.7 million, the median salary among the top five most profitable companies. Craig Dubow, CEO of Gannett, made $2.2 million last year. Gary Pruitt at McClatchy earned nearly $1.6 million. Mary Junck at Lee Enterprises earned $1.1 million.


Richard Boehne, CEO of E.W. Scripps, which shuttered the Rocky Mountain News in Denver this February, volunteered for a 15% pay cut in 2009. And he declined his 2008 bonus. Still, his total compensation last year was $3.5 million. That salary was the highest among the top five newspaper companies -- and about 50 times the top union reporter's wage at the Rocky.

Though Scripps said it lost $16 million last year on the Rocky, the company still managed a profit margin close the the industry average for the year: 10 percent. Still, it closed the paper.

In announcing the closure of the Rocky, Scripps CEO Boehne echoed fellow industry leaders when he complained about the loss of classified advertising to internet sites, such as Craigslist.

Industry-wide, print advertising revenue has dropped dramatically since 2006. But when adjusted for inflation, print ad revenue — including classified ads — have only dropped back to 1998 levels.

Print Advertising Revenue for U.S. Newspapers, 1950-2008 (adjusted for inflation)
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Print advertising revenue — the fuel that drive America's journalistic engines — saw a meteoric rise since the 1950s. It has dropped dramatically since 2006. But when adjusted for inflation, print ad revenue has only dropped back to the levels of 1998.

The news industry's profit margins have remained consistently above 15 percent to 20 percent for at least the past quarter century. Even in the last recession, the industry averaged an 18 percent return.

But the industry's relative monopoly until now has meant that it doesn't really know how it makes money, contends Thorson, who developed the profit formula. And so, she says, the industry continues to do the exact opposite of what her data shows it should be doing: producing in-depth, accurate, fair, issues-oriented, enterprise reporting.

Some of the top media analysts in the nation say this kind of reporting is the best hope for saving journalism in America.

Analyst Lauren Rich Fine says she has been consulting with major newspapers, including the Plain-Dealer in Cleveland, where she lives. Her advice is this: Focus on quality and then let your community know what you've done for them.

"They have got to get better at promoting themselves," Fine says. "If they divert their resources to more investigative journalism, they're going to have a lot to brag about. They need to promote the good things they do for the community."

Still, Fine says she is "worried" about the future of journalism.

The road ahead won't be easy in any case, Thorson says. No one is quite sure how the transition to digital media will play out. But right now, the researchers and the analysts seem to agree that investing in newsrooms looks like the bridge to the future. And cutting them looks like a ticket into the abyss.

"The place you invest your dollar to get the most bang for the buck is in the newsroom," Thorson said. "And that's where they're cutting the worst. They've done exactly the very thing that guarantees that circulation and advertising will follow each other down the ever-speeding death spiral.

"And that's what's happening to them."

When the Tribune Co.'s Sun-Sentinel in Ft. Lauderdale laid off 20 percent of its newsroom, including Mc Nelly Torres, at the end of May, Editor and Senior Vice President Earl Maucker said the company was moving to "right-size" the staff.

Before she was laid off, Torres had been working long days and weekends on a project for the newspaper. The day after she got the layoff call, she went back into the newsroom — to finish the story.

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