A Few Ways To Fix Newspapers

Today the Tribune company filed for bankruptcy, The New York Times announced that it would borrow $225 million against its share in its own building to raise much needed cash and Don Graham of The Washington Post said, “The business model that used to work at newspapers does not work any more.” What impeccable timing I have, as today I published my feature for BER Business Times looking at the painful decisions that face the newspaper industry.

I compared the decision of The Christian Science Monitor to go web focused versus the New York Sun’s decision to go out of business. These are going to be choices that many newspapers face in the near future. It will not be simple. The Monitor is propped up by the Christian Science church allowing it time to develop a strategy. The Sun was not so lucky. Newspapers typically only earn 10% of their revenue from their web operations. Switch off the printing presses and they face revenue shortfalls.

I write about the problems with the industry and suggest that many news companies have not taken full advantage of the opportunities their vast resources present. Why am I more inclined to look for a restaurant using Urbanspoon than a local newspaper? Why do I get all my news for free? Why are companies scared to make the big jump from print to online? And will they have a choice in the near future or will the move be made, as suggested by Henry Blodget, “at gun point”?

BER Business Times Against A Deadline:

Sunlight pours into the nearly empty offices of The New York Sun on the second floor of the Cary Building in Lower Manhattan. With one sweeping view, a visitor can take in what was once a bustling newsroom. Now it’s a ghost town. Desks are littered with office memos, newspapers, and abandoned computers of varying vintages, waiting for their occupants to return.

On September 4, Seth Lipsky published a letter on the front page of The New York Sun titled, “The Future of The Sun.” He wrote, we may need “to cease publication at the end of the September unless we succeed in our efforts to find additional backing.” He had launched the newspaper in April of 2002 with a reported $15.9 million in financial backing from a diverse group of investors. At the time he printed his letter, The New York Post reported that his company was burning through a million dollars a month to keep delivering papers to newsstands and doorsteps around New York.

Just 26 days later, on September 30, Lipsky’s warning came true. The newspaper over which he had presided as president and editor, published its final edition, with another front page article by Lipsky. This time it was the transcript of a speech he gave to the Sun’s staff when he announced the paper would stop publishing. The decision, he wrote, was not an “acrimonious” one, rather, “a logical decision following a hard-headed assessment of our chances of meeting our goal of a profitable publication in the near future.” He “very much regretted” that the Sun “would not be able to return the capital invested in the paper.”

The Sun is not a singular case in the newspaper world. A month after it closed its doors, The Christian Science Monitor, a hundred-year-old daily paper, announced that it would stop publishing a daily print edition starting in April 2009. Instead, the Monitor is revamping its web operations, creating a site that is continuously updated. Its editor-in-chief, John Yemma, says this will free the staff to report in a real-time environment, no longer restrained by printing schedules. While the daily publication will cease, it doesn’t mean the Monitor is abandoning print altogether. The company will publish a weekly paper every Friday, but it won’t look like a newspaper. It will be about the size of The New York Times Magazine and will be printed on heavy white paper. This publication will not simply summarize the stories of the week, it will be its own product, with its own editor and exclusive reporting. Stories will not be published on the website first. It will cost $89 for a yearly subscription, a significant decrease over the $210 currently charged for a subscription to the daily paper.

Like the Sun, the Monitor struggles with economic woes. The paper is on track to lose $18.9 million for the fiscal year ending in March 2009, but losing money is a financial predicament that has dogged the paper for its entire existence. Unlike the Sun, The Christian Science Monitor survives such heavy losses because it is supported by an endowment and regular donations from the Christian Science church. “For the Monitor’s second century, we’ve got to make its business sustainable without relying on the subsidy from the church,” says Yemma. “The church shouldn’t have to keep putting money in.” The company now has a five-year plan in place to ramp up its web operations, which management hopes will bring in more web traffic and thus page views, allowing the company to sell more ads and eventually reach profitability. On the Internet, ads are generally sold by cost per thousand impressions, or page views. If a company can crank up its page views, it can generate more revenue.

As the migration of information away from printed products continues, newspaper companies will find themselves at the same fork in the road that confronted the Monitor and the Sun. Many experts, in and out of the traditional news operations, believe it’s time to tear up the old business models and start something new, a proposition made even more urgent by the current economic slowdown. The problem is that most media chiefs are still struggling to figure out what the new thing could be, whether to take the fork — and the risks — taken by the Monitor and try something wholly new or to make incremental adjustments in the old model and risk losing everything, like the Sun. Or maybe salvation lies somewhere in between.

It is appropriate that the Sun’s offices were in the Cary building. Constructed in 1857, it’s one of the oldest cast iron buildings in New York, and the Sun was an old fashioned newspaper, launched at a time when most experts had already accepted the notion that digital was the only way to go, that print was on its way out. But Lipsky describes himself as an “optimist,” and when I asked him just a month after his paper closed if he thought a print product could be launched successfully, he said, “Trouble is generally good for the newspaper business, in my view.” Of course the trouble he referred to — the ongoing economic shake-out spreading around the world — was what delivered a final blow to his newspaper. But going out of business after six years without a profit, or a benefactor, can hardly be blamed solely on the economy or bad luck. It’s closer to denial.

The irony is that a newspaper as old as the Monitor is less hidebound than the younger Sun. “The business model is broken,” says Yemma, “[Lots of newspaper executives] are grappling with how to create a sustainable business, the Monitor has its plan.” But it’s certainly not the only plan. Yemma warns that the Monitor is not like a typical daily paper. It covers the world, not a town. So what works or fails for the Monitor might not work for another paper. He also adds, “When technology changes and readers’ habits change, it does no good to just lament the fact that that’s changing, you have to go where readers are.”

“Broken business model,” is a phrase thrown around a lot when discussing newspapers. For over a decade, there has been a steady shift in readership from print to online. But it isn’t the drift of content to the web that’s killing newspapers, it’s the ad dollars that are fleeing from news companies to other sources. Newspapers long earned cheap revenue from classified advertisements, small chunks of highly profitable information that required little effort. Those ads are now on the web on sites such as Ebay, Craigslist, and Careerbuilder. For the third quarter of 2008, newspaper classified ad sales were $2.36 billion, a 31 percent drop from $3.42 billion in 2007.

Earning money from news was never really profitable. Content has long been funded by second revenue stream: advertising for most publications, but not all. The most successful news organization in the world, Bloomberg News, earns its billions of dollars from the over 250,000 proprietary data terminals that have become indispensable to anyone involved in the financial industry. The Washington Post Company earns its money from its educational division, which delivered $2.93 billion of the company’s total $4.18 billion in total revenue in 2007. The newspaper division earned only $889.8 million that year. The real kick in the pants for those who love newspapers is that the education services grew 21 percent while the newspaper declined by 7 percent. “Newspapers were fat and happy monopolies,” before the Internet, when there was no competition, says Philip Meyer, a University of North Carolina professor and the author of The Vanishing Newspaper, “but now they’re not.” His book came out in 2004, and it is already obsolete, he says, admitting that one of the biggest mistakes he made was overlooking the influence Craigslist would play in the demise of the newspaper. “I’m going back into the book, and I’m changing the tense from present to past wherever newspapers are mentioned,” he says.

For all the concern about newspaper companies, it’s important to remember they still generate plenty of revenue. In 2007, the newspaper industry pulled in $45 billion from ad sales alone, according to the Newspaper Association of America, an organization that represents the newspaper industry. That’s more than double the $21.2 billion in ad revenue generated across the entire Internet in 2007, according to The Interactive Advertising Bureau, an organization that tracks online advertising. This lopsided revenue distribution makes changing the business difficult in the short-term, but the long-term trend points to online advertising growing while newspaper advertising drops. “When you have legacy costs, it’s very difficult to make this transition because you don’t know when to abandon things that actually generate revenue,” says Yemma. Some of those legacy costs include printing presses, newspaper delivery systems, and large staffs. The Monitor is lucky in this regard. It operates with a small staff of about 130 people, it leases its printing presses, and it currently earns $9.7 million in circulation revenue from its daily paper. Yemma projects that those circulation dollars will drop to $4.3 million when the paper goes weekly. “We’re leaving $5 million in revenue on the table,” he says. But the ad side of the revenue stream and cost savings look better after the switch. For the financial year ending in March 2009, the paper will earn $1 million in online ad revenue versus just $800,000 from print ads. Printing and distributing the newspaper currently costs $6.9 million annually; switching to a weekly cuts that to $3 million. The lesson, Yemma says, is that given the cost structure for printing and distribution, even companies that earn a greater portion of their revenue from print will have to make the same transition soon if they wish to survive.

The New York Times Company may be a case in point. It has created a world-renowned newspaper, but its business performance has been less than stellar in the past decade. Henry Blodget, a former securities analyst, and current editor-in-chief of the digital media blog Silicon Alley Insider analyzed the Times’ most recent quarterly report and found that the company has a negative net worth. They have $46 million in cash and are owed $366 million from advertisers, giving them $412 million. They owe $398 million in short-term debt, which comes due May 2009, in addition to a projected $470 million in operational costs like salaries and newsprint, giving them a total of $865 million in near-term obligations — $453 more than they have. Probably because of the shortfall, the company announced at the end of November that it would slash its dividend from 23 cents a share to 6 cents a share, which will save $97.8 million.

These numbers certainly don’t suggest The New York Times is in danger of going bankrupt, according to Blodget, but survival will require significant short-term adjustments to its long-term strategies. He suggests the company trim staff, pay off debt, sell assets, and begin what will be a complete migration of its news distribution from printed paper to online. In all likelihood, these are changes that will occur only “at gun point,” says Blodget. Gun point being catastrophic financial news.

Blodget represents one group of pundits who believe print newspapers are cooked, and the only way they will survive is if they transform themselves into lean, online products. However, another group of experts believes just as strongly that the business is not broken, and only in need of a good scrubbing. They claim there isn’t enough revenue available on the Internet to support journalism. The Times’ parent company, The New York Times Company, grabs the eleventh most web traffic in the entire U.S. across its various web properties, according to Nielsen Online, a web ratings company, but the company earns only 12 percent of its total revenue from these operations, which is a standard online-to-print proportion across the industry. Make the switch to the web and the Times could be killing itself quickly, rather than slowly.

Indeed, if you look at the macroeconomic environment, news companies are facing the same systemic problems that plague all businesses right now, according to Tony Lee, vice president of Adicio, an online classified ad software company. Because of the tough economy, “every company tends to be in trouble at the moment. Not every paper is in trouble, just companies with way too much debt.” Lee doesn’t endorse a wholesale shift in the business model. He thinks companies need to be better managed, and eliminating debt is one part of fixing ailing news companies.

But Lee isn’t a disinterested party. He relies on the old business model of news, which uses classified ads as a significant part of the income that pays for the news operation. In a way, his organization represents a different legacy cost for newspapers. The surrogates of publishers — ad agencies, printing companies, newsstand operations, and distribution systems — all influence any decision a print publication makes. If this economic downturn is like most, though, ad sales will decline even further than they have over the past five years, forcing the issue. Writing on his blog, Reflections of a Newsosaur, Alan D. Mutter revised his projection for 2008 losses for newspapers from $5.4 billion to $7.5 billion. Keep in mind that total sales for the newspaper industry are only $45 billion, so the prospects of recouping all that lost money are dim. Mutter, a technology and media consultant, is one of the most widely read and respected voices on the topic of the changing media world. He changed his projections because “nearly three quarters of [newspaper] ad sales come from such vulnerable accounts as,” retailers, auto dealers, real estate agents, and employers who are no longer buying classified ads. Nor will this drop in advertising revenues be limited to print. As brands are lost to consolidation and bankruptcy, and ad budgets succumb to tightfisted management, plummeting ad sales will affect both print and online publications. The news business just can’t seem to win.

Could charging for online content be the simplest solution to their sinking ad revenue problem? In the print world, it’s standard practice to charge for a newspaper or magazine. Online it is rare. “I think what The Wall Street Journal has done online in the past year since Murdoch took over is very very impressive,” says Richard Tofel, the general manager of non-profit investigative site, ProPublica, and former assistant publisher at The Wall Street Journal. The Journal’s website is one the most successful premium products on the Internet. It has managed to avoid giving its content away for free while at the same time increasing its influence on the web. If you search through Google’s news site and find a Journal article, you can read it for free. Go directly to the site, and you’re blocked from viewing the article unless you’re a paid subscriber; an online subscription will run you $104. During the last earnings report call with financial analysts for the Journal’s parent company, News Corp., CEO Rupert Murdoch said the site earned $100 million in ad revenue and $100 million in subscription revenue. That’s almost as much as the entire New York Times Company’s online operation, even though the Journal has a fraction of the traffic.

So that’s settled. Just charge for what you’ve been giving away, and the business is fixed. Not so, says New York University journalism professor Adam Penenberg, long a critic of news content trapped behind a paywall like the Journal’s: “The Journal has always been a special case…it offers content you couldn’t get anywhere else.” Indeed, it does appear as though outlets that specialize in financial content, like the Journal, have managed to charge for content while the rest of the news business cannot. Two of the most successful newspapers, The Economist and the Financial Times, both charge for access to much of their online content. Both papers have seen rising circulation and revenue at a time when rivals are experiencing the opposite. But Tofel thinks a non-financial product like The New York Times could also charge for its content. “In the short-term, web traffic would drop considerably, but in the long-run they’d get a large number of subscribers,” that would offset the online ad sales lost due to lower web traffic.

It is hard to believe that people would not value The New York Times content, or any well-respected newspaper’s reporting, over news they get free on the web. However, the Times once tried to charge for content, albeit halfheartedly, with a product known as “Times Select.” It was a debacle. Rather than charge for the expensive, thoroughly reported news, the Times charged for access to Op-Ed columnists. The thinking was that it would be hard to get an advertiser to buy a spot near a possibly controversial, unpredictable opinion column, so the only way to make money with those pages was to charge readers. The Times’ mistake was trying to charge for the one thing the web has in abundance: opinions. Many blogs are little more than under-reported opinion pieces. In September 2007, the Times eliminated its limited paywall, and neither pundits nor executives have broached the idea of charging for content since.

While paying down debt and charging for any content they provide on their sites are two small fixes that can be applied to newspapers, the best solutions are still out there, as yet untapped. “We are in an environment that is only 11, 12 years old,” says Venture Capitalist Howard Lindzon, who invests in early stage companies and started his own video blog, WallStrip, which he sold to CBS for $4 million in May 2007. While he wouldn’t create or invest in another content company, he says, “I have not seen a slowdown in great ideas. I’ve never seen this many good ideas.” Lindzon is talking generally about companies springing up on the web, but his point is important for newspapers and media businesses. There will be a wealth of smart people willing to work for less money in the coming year, filled with fresh ideas that can create a new business built on the vast resources of newspapers. Almost every successful web start-up builds on the back of news stories or from content that newspapers control. How useful would a Google search be without newspaper content? How would people write their Wikipedia entries without newspaper stories? News companies could have developed travel websites like Expedia, movie databases like IMDB.com, or simple classifieds like Craigslist. They didn’t. That doesn’t mean they still can’t.

Missed opportunity: Online applications like iPhone’s Urbanspoon provide quicker, easier-to-access information about what to do in Pittsburgh than the Post-Gazette’s website.

If there is one thing that’s been proven time and time again on the Internet, it’s that a first mover’s advantage is rather minimal. The ease of clicking from website to website creates a perfectly competitive environment where the best site tends to win. Excite was displaced by Google, Netscape by Internet Explorer, Friendster by MySpace, which was displaced by Facebook. The Internet is still young, chaotic, and disorganized. If newspapers were to put every restaurant review they’d ever published on the web in a simple-to-access, organized data base, they’d drum up traffic, creating a new utility for their site. Suppose you’re traveling to Pittsburgh and looking for a place to eat. It’s much easier to check your iPhone’s Urbanspoon application than go to the website of the Pittsburgh Post-Gazette. The Post-Gazette’s website has no quick or easy way to find information on restaurants based on type of food or location. But open Urbanspoon, choose Pittsburgh, lock in the choice of vegetarian or Italian and, voila, the phone will provide a list of choices. This is a simple utility that could help drive up newspaper web traffic, which would lead to more revenue. Undoubtedly, the Post-Gazette has an archive of local restaurant reviews and menus it could easily organize and digitize. A simple upgrade like this won’t completely solve the problems of news organizations, but it will help.

News organizations that don’t want to create new applications for their content, preferring to lean heavily on their news, will have to slim down their operations. They will have to cut their staffs and become more selective about what news they report. While some see these as a death blow for journalism, it is actually the opposite. The Internet allows news organizations to link and summarize stories from around the world. There is no need for 50 news outlets to cover the same press conference. “I don’t think cooperation drives the economy, I think it’s driven by a spirit of competition,” says Tofel. “It’s driven by self interest, so is it in my self interest to cooperate?” He’s seen the power of sharing at ProPublica, where stories are dispersed for free through major news outlets like The Los Angeles Times, The New York Times, 60 Minutes, and National Public Radio.

In the end, the solution for newspapers is not one size fits all. They can’t trod down the path of The New York Sun; they must break themselves out of the old business model, according to Tofel. “I don’t see anyone who’s solved the economics of a print newspaper,” he says. But it’s not as easy as following the Monitor’s jump to the web, either. “A lot of print newspapers are making successful transition to web in terms of journalism and readership,” he says. “They’ve got a larger readership than they’ve ever had. The issue is purely a business issue.”