The end of newspapers

IN OUR ONLINE ERA, NEWSPAPERS ARE FINISHED, RIGHT? THE NEW NEWS BARONS SEE OPPORTUNITY WHERE OTHERS SEE COLLAPSE

I

he thud that announces the delivery of the daily newspa­per is neither an ancient nor a sacred sound, but it used to be essential to the American morn­ing. Your parents, like their parents and grandparents before them, took part in the ritualistic scrutiny of the paper. The headlines, photographs and pages of print engaged everyone according to his or her own interests. Maybe your father took the whole thing and released it only after he was finished. If the paper was large enough, maybe your family came together to divvy up the sections—news, business, entertainment, sports, gossip, comics and classifieds. The reason newspapers have been so much a part of American life is simple: We have demanded it. Of all the things they could do each day, millions of people chose to spend a few cents to get their hands on a copy and strain their eyes reading it. As commodi­ties go, it's hard to find a better value: A newspaper's business model revolves around advertisers, and advertising rev­enue effectively subsidizes both the jour­nalism and the cost of consuming it.

Historically, this arrangement served just about everyone. Though the press has been far from perfect, U.S. citizens have long enjoyed relatively high-quality reporting, distinctive for its boots-on-the-ground coverage of local affairs and city life. For generations, small and large businesses were so pleased by the return on newspaper ads that they continued

to place them even as prices rose. From Hearst and Pulitzer to Murdoch and Sulzbcrgcr. newspaper owners made out best of all, building fortunes and even empires from the generous profits and impressive powers rewarded to those who control the press. Great newspaper corporations didn't print money, but they came pretty close.

Today, however, it's hard not to believe the end is near. Consider what happened in late July 2007. when the Tribune Company reported its earn­ings were down, with net income for the quarter off 59 percent from the previ­ous year's and revenue down SI00 mil-

lion. Under normal circumstances these kinds of numbers would be bad news tor a publicly traded company, often fol­lowed by abrupt retirements and calls for strategic change. But investors had a strange reaction: The news actually increased demand for Tribune stock. tribune c.o.'s SHARES soar, one headline read, and by day's end the company— the nation's second-largest newspaper chain and the only corporation to own daily papers and broadcast-television sta­tions in New York City, Los Angeles and Chicago—had gained hundreds of mil­lions in value. According to news reports. Tribune's accounting statement gener­ated "investor optimism" and "renewed confidence." particularly about the status of real estate magnate Sam Zell's bid to buy the company. "It's not as bad as I thought it would be," said Benchmark Company media analyst Edward Atorino, who anticipated steep drops in revenue as advertisers moved online and newspa­per companies continued to light to keep market share. There is only one reason a 60 percent drop in earnings sends a st<xk rising: Investors expected worse.

Recently a lew big-name businessmen have questioned the accepted wisdom. They wonder whether analysts are so focused on short-term performance they don't see the newspaper industry's durable strengths. In the past two years, Jack Welch tried to buy The Boston Globe, Maurice "Hank" Greenberg made a run at The New York Times. Ron Burkle, Kli

Broad and David GeH'en vied for the Los Angeles Times, and Brian Tierney pur­chased Philadelphia's Inquirer and Daily News. Then there are the real titans: Zell used an employee stock-ownership plan to finance his takeover of Tribune Company, and Rupert Murdoch, who spent S5 billion for Dow Jones (which publishes The Wall Street Journal), tells playboy he took over "a great news­paper, which we intend to make even greater. We believe we'll expand its cir­culation both on the web and in hard copy." (See "A Few Words With Rupert Murdoch"at right.)

The Cassandras are not impressed. They say Murdoch is sui generis. Dow Jones immediately becomes the anchor of the baron's global media business, and after 2012, when Dow Jones's exclusive arrangement with CNBC expires, it will supply valuable content to the new Fox Business Network. "He got a great bargain," entrepreneur Mark Cuban told Portfolio. "The WSJ brand can be applied to all his business operations. The Fox Business Network

can be the Wall Street Journal channel and gain immediate credibility."

Zell took a greater gamble, albeit with less potential downside. His genius was managing to acquire an $8.2 billion media conglomerate with only $315 million of his own considerable fortune, leveraging the rest on huge loans (by the close of the deal Tribune's debt was around $13 bil­lion) and the retirement accounts of Tri­bune employees. If the company revives, Zell adds to his ledger and his legend. If it fails, he won't feel too much pain.

The others are a different story. PaidContent.org derided them as "bored billionaires." Business Week's Jon Fine lampooned them as vain fools who discovered "there is no easier way for a rich dude to get his name in the paper than to announce he wants to buy it." Vanity Fair's Michael Wolff called them egomaniacs with "a nostalgic idea about dominance" in their hometowns and speculated that "maybe none know what they would be getting into."

After all, who but a self-involved bil­lionaire has not heard the death knell for newspapers? (continued on page 142)

NEWSPAPERS

(continued from page 98) Paying subscribers are an endangered species. Their ranks have been thinning for decades. Young people get their news online, where they expect it to be free. Advertisers who once paid handsomely for prime spots on the printed page spend much less for digital ads. Classifieds, always a great profit center for newspa­pers, have migrated to Craigslist.org and other online competitors who make ads better, more effective and free. High fixed costs—for ink, paper, printing presses and delivery trucks—put papers at a competi­tive disadvantage. Each of these changes is reflected in the sagging financial sta-

tistics analysts look at before they ad­vise their clients to buy. hold or—most likely—dump news­paper stocks, which lost 42 percent of their value (roughly S21i billion) between the end of 2004 and the start of 2008.

These are real problems, so it's easy to conclude that a combination of ego, vanity and boredom explains the latest paper chase. But men like Murdoch, Zell, Welch, Burkle and Geffen hardly crave attention, and bidding for a news­paper company is an expensive and inef­ficient way to get in the news. Certainly, these men don't lack self-confidence, yet none is known as reckless, foolish or clueless, especially when it comes to managing his own wealth. What's more, billionaires are not the only ones seek-

ing newspaper investments. Some lesser-known media companies have expanded their newspaper holdings in the past few years. New players—including hedge-fund managers and value investors—now think the industry will eventually turn around. What do these people see in the bleak newspaper business?

Until recently the Newspaper Association of America's investor review meetings were dull affairs attended by financial analysts from white-shoe securities linns, business reporters and a handful of rogue specula­tors. These days, however, they oiler a rare chance to see some of the world's most

powerful chief executives—from the New York Times Company, Gannett, the Wash­ington Post Company and, until recently, Dow Jones and Tribune—line up to beg for patience, mercy and a chance to prove their industry is positioned for a digital future. It's a tough sell. During the June 2007 confer­ence, in midtown Manhattan, the relatively small crowd of investors made no effort to disguise its disappointment. Why hadn't the companies' cutting-edge projects—so-called convergence newsrooms, digital classified ads. niche products for affluent communi­ties and the like—arrived sooner? One bel­licose investor harangued McClatchy chief executive Gary Pruilt for acquiring new dailies and blasted the chief executive of the New York Times for refusing to sell its small

community weeklies. A smart newspaper company, the investor said, should be get-ling out of the newspaper business. As the meeting closed, a prominent analyst from Goldman Sachs asked a panel of executives whether it was time lor investors "to reset the bar" and "anticipate that this will be a less profitable business in the future." Since the wrong answer could have sent their companies' shares into a nosedive, everyone onstage ducked.

NAA president John Sturm, who moder­ated the panel, laughed oil" I he (|ueslion, but after the meeting he conceded that "the reality of this turbulent period is that mar­gins are a bit lower." An amiable Midwest-erner who held executive positions at CBS

and NBC before moving to the newspaper association. Sturm is frustrated because so few analysis recognize that between 2002 and 2006 the industry's revenue grew each year. He says the leading securities firms demand such high profit levels that news­paper corporations must gut their product to avoid liilling short. "Companies in differ­ent businesses would be happy with the margins newspapers get right now in a down time. Really successful businesses are luck)p to get nine percent or 10 percent mar­gins. The big newspaper chains are slipping down into the teens, and some are still in the 20s. Yet there's a public impression"— partly created, he says, by bad press printed in newspapers—"that newspapers are los­ing money. It drives us around here nuts."

As Sturm sees it, the widespread mis­understanding of newspaper econom­ics makes it even tougher for institu­tional investors to look beyond short-range problems. ITiis leaves enormous opportunities for private actors will­ing to absorb risk and endure lean years. "Today brands, franchises, talent and established rela-tionships can be obtained at a pretty decent multiple." says Sturm. "Zell, Burkle, Tierney—these guys look at the long haul. They see assets avail­able now at a frac­tion of what they were a few years ago. If you take a long-term view—three years, five years—it's pretty good."

Sturm contends all but a few news­papers will remain profitable even in the toughest market conditions because

no one else can oiler what newspapers can: street-level coverage of what's hap­pening where customers live. Only a newspaper company, with its large edito­rial stall and commitment to reporting, can provide the comprehensive Hurri­cane Kalrina coverage that helped Gulf Coast residents understand what was hap­pening in their neighborhoods. Only a newspaper company willing to invest in expensive investigative journalism can routinely expose cases of local corruption, from the rampant waste and favoritism in the Miami public-housing agency that won I hi' Miami Herald a Pulitzer Prize in 2007 to the continuing series on wrongful convictions in capital punishment cases

published by the Chicago Tribune. Only a newspaper company can produce the beat coverage of local institutions—gov­ernment agencies, businesses and sports teams, to name just a few—most of us take for granted. That's why all other local media—radio. TV and Internet—rely on newspaper journalism lor content. With­out newspaper content, the entire media ecology would collapse.

All this leads to Sturm's core argument for why newspapers will endure: No mat­ter how many new outlets I he digital age oilers, local journalism has no serious competitors. "If newspapers are still a monopoly," Sturm says, "it's a local-news monopoly, and we know darn well that people want local news."

Dean Singleton, chief executive of the privately held MediaNews Group, whose fleet off)" daily papers includes The Den­ver Post, the Sun jose Mercury A'eirs and the St. Paul Pioneer Press, is confident about newspapers' strong hold on local journal­ism. He has spent the past several years scooping up publications his competitors have discarded. "Newspapers are uniquely positioned for the future communications explosion, he says, because no matter how global the world feels or how digital the media become, consumers will continue to demand their content. The key to suc­cess, Singleton says, is not to prevent print readers from moving online but to make sure the content—wherever it appears—is lively, fresh and attuned to local concerns.

MediaNews's growth strategy involves building clusters of newspapers in a geo­graphic tegion. inciting production lacili-ties and shrinking newsrooms to cut costs. Singleton sees promise in new circulation figures that measure consumption both in print and online. Newspaper websites increase the industry's overall readership, but they also attract young people whom skeptics w rote oil as uninterested in journal­ism. "()ur audiences have never been this big,' Singleton said during a surprisingly bullish presentation on newspapers at the Aspen Institute in August 2007. "Most of our print papers are actually gaining cir­culation." Singleton feels investors are so fix used on (he neat term in big metro mar­kets that they fail to appreciate the steady growth of small newspapers. "More than hall the newspapers in this country have a circulation of 20,000 or below," he says. "They don't know there's any turmoil."

It would be foolish to shrug off the sig­nificance of the falling metros, of course, and Singleton's stomach has churned a few times dining their drop. His recent acquisitions are now worth a fraction of the price MediaNews paid for them, and more than a few analysts question the aggressive strategy. "It's just a bloodbath," Singleton admits. Yet he believes it's a temporary condition. His large papers, for example, can leverage their brand reputation as online-ad spending grows

and businesses turn to newspaper web­sites to reach the local audience. "We're going to have two to three years of down performance." he allows, "but 1 like what I see on the other side. " Online revenue already accounts for about 10 percent of MediaNews's income, and Singleton pre­dicts it will soon deliver halfthe company's profits, "If by 201 1 the industry is getting 50 percent of its profit online, Wall Street will love our business." he says. "People who are selling newspaper stocks today will look back and wish they hadn't."

Other newspaper executives wish they had the luxury to expand. As a private cor­poration. MediaNews can ride out the tur­bulence while anxious investors pressure its competitors to abort. "If they were public and they announced investments, they'd lose 25 percent of their value in a day, says newspaper-industry analyst John Morton. Tribune, which was criticized for gutting its editorial staff and downgrading the quality of its most prominent newspapers, should get some breathing room once the economy stabilizes. Morton says. "Zell can say they have to make si/able investments to sustain the company over time. Bankers tend to be more long-term oriented, and he's no dumbbell." Still, Morton warns, the newspaper industry faces a tough stretch, and Zell should be braced for a bumpy ride. "Is the newspaper economic model busted?" Morton asks. "1 don't think so. but it has certainly been damaged. News­papers tend to be the dominant vehicle for local advertisers, and in most markets the next most popular place for advertis­ers is the same newspaper's website." The cloomsayers, he thinks, haven't recognized how profitable Internet advertising could be for newspaper companies, as it requires neither ink nor paper nor delivery trucks to produce and deliver digital content. "Newspapers don't have to reach the same revenue levels with digital as with print to make the same amount of money," Morton says. "It may be that the era of the 22 per­cent margin is behind us. but the industry still has a lot of strength."

"I don't see il." investor Warren Buffett said at a shareholder session of his com­pany. Berkshire Hathaway. "Newspapers face the prospect of seeing their earnings erode indefinitely. It's unlikely that at most papers circulation or ad pages will be larger in live years than they are now. That's even Hue in cities that are growing. It's hard to make money buying a business in perma­nent decline." Bulled is no stranger to the newspaper industry. Berkshire Hathaway is the largest shareholder of the Washing­ton Post Company, with roughly 20 per­cent of its stock. It's also a major investor in Gannett and Dow Jones and the out­right owner of 'The liiiffulo Mra's. Buffett's bearish forecast echoed through the mar­ket, scaring investors everywhere.

"Of all the industries we invest in." said Ariel Capital Management's Charles

Bobrinskoy in an interview with PBS's Frontline, "there's no industry more out of favor right now than the newspaper industry. No doubt about it." Bobrinskoy explained why Ariel had rejected Buffett's forecast and—before the Zell deal—in­creased its stake in the Tribune Company. "Warren would tell you he's not in any way an expert on the Internet. One of the things he's underestimating is the growth of the interactive and Internet traffic at many of these newspapers. The second thing he's underestimating, we think, is the innovative skill of this industry. A lot of people don't know this: The Internet site that has the most help-wanted ads? Most people think it's Monster.com, but it's ac­tually CareerBuilder.com, which is owned by Tribune, McClatchy, Cannett and Microsoft. They do a great job of getting their product onto the Internet, and we think the market underestimates that."

Ariel has stuck to this position, even during the difficult summer of 2007. That July Ariel increased its McClatchy holdings by 50 percent.

At the NAA meeting, McClatchy presi­dent and chief executive Gary Pruitt made a sweeping case for why firms should invest in his company, which has lost much of its value since spending S4.5 billion to buy Knight Ridder (then the nation's second-largest newspaper company) in 2006. "Peo­ple think of us as just the printed product," he says. "They look at circulation numbers, and they're going down. They look at the pie charts of ad share, and it's shrinking for newspapers. They look at the number of daily newspapers, and it's declining. So the inevitable conclusion seems to be they're dead." What they don't see, Pruitt says, is that most newspaper companies don't com­pete with The Neu< York Times and USA 'Ibday. They're local businesses, and they produce much more than a newspaper. "We're the biggest and most successful Internet com­pany in most of our local markets," he says. Further, since newspapers are not prolifer­ating in number as are television and radio stations, newspaper corporations actually face less l<x:al competition than broadcast-

ers do. "Our audience is less subject to frag­mentation," Pruitt points out. As advertisers begin to see this, they'll rely more on news­papers than they do today, he thinks.

Pruitt, who joined McClatchy as corpo­rate counsel in 1984 and is now respon­sible for shepherding the sixth-generation family-run business into the digital age, says his bullish stance is based on the industry's history of disproving skeptics. ".As a new medium emerges everyone thinks what's going to happen is obvious," he says. "But conventional wisdom has often been prosed wrong. People said broadcasting would kill newspapers, but television and radio made newspapers more profitable. For the hardy ones, that's when the margins exploded."

Like Singleton, Pruitt expects several more lean years and a lot more talk of doom and gloom. "We're not the kind of company you want to invest in with a short-term outlook," he says. "We have a long-term outlook. We think you can do well over time." For now, he says, McClatchy is redefining itself as the leading local mul­timedia company. "No one really knows what that's going to look like," he says, "but whatever it ends up being, we'll be it."

Impressive as it may be to speculators at Ariel Capital Management, Pruitt's strategy didn't impress Fitch Ratings, the global agency whose opinions move credit mar­kets. Fitch issued a sobering survey of the newspaper industry in January 2007 and in August announced things were even worse than expected. The latter report probably wouldn't have surprised anyone who had attended the NAA meeting back in Man­hattan, because ever)' financial officer who t(K)k the stage warned of bad news to come. The problems, the newspaper companies said, were related to cyclical trends in the U.S. economy: Real estate markets were slumping, particularly in Florida and the Southwest, meaning that housing, con­struction and furniture ads were low. Retail business was down, as was the auto industry. Therefore, classifieds, even help-wanted ads, were scarce. And 2007 wasn't an election year, so there were no political ads to compensate for the slow economy.

Fitch rejected this explanation, calling at least half the fallolf "secular" or struc­tural and predicting the lost revenue would never come back. Once again the business media joined in the bloodletting. "The ink-stained wretch is a dying breed," wrote PRWeek before warning that, at the current rate of decline, "papers will all be broke in three years."

Such scaremongering stirred investor anxiety even though no one on Wall Street believed the industry's rate of decline would last. More problematic, the Fitch report helped drive up the cost ol credit for news­papers. Some analysts figured Zell. who would have to take on another S4.2 billion of debt to complete his bid for Tribune, would throw in the towel. Ix-hman Broth­ers Holdings claimed the likelih(x>d of the acquisition was "no better than 50-50." and Tribune's share price fell to about three quarters of Zell's oiler price. But by the end of 2007 Zell took over the company as planned and joined Murdoch in the ranks of those who still believe in the business.

During the panel on the future of newspa­pers at the Aspen Institute, Dean Singleton insisted the concerns about the long-term health of the industry stemmed from fun­damental misunderstandings. "You have to separate structural change from cyclical change," he said. "Real estate sucks right now. Employment is slow. But we always have cyclical change, and after downturns things come roaring back." What's more important. Singleton said, is that newspa­per companies are not passive players in the industry's transformation. Yes. he allowed, "we've lost tens, maybe hundreds of millions of dollars because of Craigslist, and it's not coming back. But we're participating in the structural transition by changing our busi­ness, and we're generating all kinds of new revenue we never dreamed we'd create."

Murdoch points out a more positive struc­tural change lor the industry even though it's not within his control. "The world is getting better educated and wealthier," he says. "The essential demand for knowl­edge from people to lead their daily lives is going to get greater and greater." News

Corporation is betting it can convert its young Internet users into newspaper read­ers, linking sites such as MySpace (which Murdoch bought in 2005 lor 5580 million) to its newspapers. "We have to some extent become social networks," he says. "So peo­ple feel almost as if they're part of a club if they read a really distinguished newspaper. I think the iwo will go together."

Murdoch is not the only media executive who thinks the industry's strategic changes are most evident online. That's where news­paper companies attract new readers with streaming video and special video proj­ects, stories with links to related coverage, hyper-local journalism, blogs, interactive forums and citizen-produced content that could never fit on a printed page. Yes, it

took lar too long for most newspapers to take advantage of the Internet's capacity for multimedia content, but the days when websites just repro­duced the printed page are over. The Internet also allows newspaper com­panies to increase their audience with a product they haven't been able to offer since the birth of radio: breaking news. A growing number of consumers go online to get updates on their interests, from sports and weather to campaigns and elections. Newspaper companies appre­ciate the growth potential of up-lo-the-second content and are expanding their Internet stalls. Less visible to the lay reader are new strategic business partnerships, such as Open Network, in which the three

largest chains (Gannett, Tribune and McClatchy) combine forces to sell Internet ad packages to national businesses, and Hot Jobs.com, in which newspapers have joined with Yahoo to sell classifieds online. Such initiatives drive a strong growth in newspapers' Internet revenue, which is up by as much as ,'i() percent a year.

The thorniest question about the indus­try's business model concerns its journalism investment, which has diminished dramati­cally in recent years. Gannett has maintained relatively high profit margins through these lean times and has always kept skeletal reporting staffs at its local papers. Tribune, which has not, has compensated with layoffs in the past few years, cutting one of every lour journalists at the Los Angeles Times, as

well as hundreds ol reporters at the Chicago Tribune. Other lai-ge newspaper companies are doing the same, leading the Project for Excellence in Journalism to predict "an accumulated drop in newsrooms since 2000 of roughly seven percent by the end of 2007," while "in certain newsrooms the cuts go far beyond that—as high as 40 percent." Among the many threats to the future of newspapers, cannibalizalion and the result­ing lack of satisfying content rank high.

In their eSbrts to please Wall Street too many newspapers have cast off their most valuable human capital: skilled report­ers whose journalism attracts eyeballs and advertisers both in print and online. This is the standard refrain of the newspaper industry's most revered figures, who have

begun to stand their ground. During his brief tenure as editor of the Los Angeles Times, John Carroll fired some 200 report­ers and achieved profit margins above 20 percent but quit when he refused to comply with Tribune directives to fire even more. Dean Baquet, who replaced Carroll as edi­tor, was fired by Tribune for refusing to execute another round of job cuts.

Yet in a turbulent economy, private own­ership is no guarantee of editorial invest­ment. In January 2008 the Los Angeles Times lost its fourth senior executive in less than three years, when Zell's new management team—only a month into its tenure—forced James O'Shea to resign. O'Shea, a Tribune veteran in Chicago, became the Times's third consecutive editor to leave after resisting

layoffs. He lasted 14 months at the helm in Los Angeles, and before departing he as­sailed Tribune for asking its papers to do more with less: "I disagree completely with the way this company allocates resources to its newsrooms, not just here but at Tribune newspapers all around the country. I think the current system relies too heavily on voo­doo economics and not enough on the cre­ativity and resourcefulness of journalists. This company, indeed this industry, must invest more in solid journalism. We must integrate the speed and agility of the Inter­net with the news judgment and editorial values of the newsroom, values more im­portant than ever as the hunger for news continues to surge and gossip pollutes the information atmosphere." |ournal-

ists applauded his statement. Tribune stopped sending him checks. Media man­agers may dismiss editors like O'Shea, Baquet and Carroll as self-interested, but an analysis of newspaper manage­ment published in Journal of Marketing suggests editors may know something about business strat­egy. According to a study of financial data from small- to medium-size news­papers (with circula­tion of 85,000 or less), companies that invested in the news­room were more profitable than those that didn't. "Better news quality drives circulation, and cir­culation drives ad­vertising revenues," writes lead author Murali Mantrala, a professor at the Uni­versity of Missouri's College of Business. "If you lower the

amount ot money spent in the newsroom, notes his co-author. Esther Thorson, "then the news product becomes so bad you begin to lose money.' This may startle the MBAs running most newspaper compa­nies. Business professors aren't the only ones surprising newspaper observers: De­spite—or perhaps because of—the indus­try's dismal recent performance. Warren Buttett bought more shares of the Wash­ington Post, Gannett and Dow (ones in 2007. "Newspapers have fallen out of favor with Wall Street," says analyst John Mor­ton. "I think this will be true for a while. But you can't wait until things get better until you buy these stocks."

WHAT DO MEN LIKE MURDOCH, ZELL, WELCH, BURKLE AND GEFFEN SEE IN THE BLEAK NEWSPAPER BUSINESS?