How Did Newspapers Get in This Pickle?

By: Mark Fitzgerald

Note: Longtime E&P Editor-at-Large Mark Fitzgerald attended the annual midyear meeting of the Inter American Press Association this past week in Asuncion, Paraguay, where he delivered the following remarks kicking off a panel.

I’m starting off with an overview of where the U.S. newspaper industry is now and how it got in such a painful fix. But I’d like to say first, and I know I speak for all my colleagues here, that we recognize that as dire as things may be for U.S. newspapers and the journalists and business and operations employees who work for newspapers in the U.S. — we’re still just talking about money and jobs.

We do not confront the chilling reality of Latin American journalists that we’ll be hear about for the next few days. Narco-traffickers do not kill or kidnap or disappear journalists on our street. Terrorists disguised as revolutionaries do not firebomb our offices. Corrupt or despotic politicians do not seek to strip us of our freedom and livelihood.

We stand in awe of the courage of our colleagues in places where those things do happen.

Having said that, let me also say, though, that there are serious consequences for U.S. society in the distress of our newspapers. In every community in the U.S., the newspaper is the largest newsgathering organization. Newspapers are the watchdogs of corruption and crime. Society and U.S. democracy will be poorer if newspapers cannot find a way out of this mess.

There has been so much attention to the ills of U.S. newspapers — especially in these last few weeks — with the closing of the Rocky Mountain News in Denver, the imminent shuttering of the Seattle Post-Intelligencer and the Citizen in Tucson, Arizona — that it’s easy to forget that the great majority of America’s 1,200 daily newspapers are doing pretty well. Even some of the big papers in the most troubled chains are still churning out profit margins in the high teens. That’s three or four times the margins of Exxon Mobil.

I think it’s important to realize the problems of U.S. newspapers did not start with the Internet. They actually started, as many failures do — with success. Let’s go back to the 1960s and 1970s when many newspapers, especially the afternoon papers in big cities, went out of business. That left a big monopoly paper that was making very good money. These papers began to expand to other markets, and create the chains we know today, like Gannett and Tribune Co.

They got more cash when they went public and sold shares on Wall Street. Wall Street loved newspapers because they generate lots of cashflow.

Of course there were booms and busts in the economy, and newspapers suffered along with them. But often those busts shook out more competitors, and so the survivors’ margins grew.

Something was happened after every bust, newspapers would lose retail and display advertising, and get some of it back, but increasingly more of the ad revenue was coming from classified. Some of us warned that newspapers were almost becoming addicted to classifieds, which are, of course, the most profitable advertising. At some papers, classified accounted for 50 or even 70 percent of total ad revenue.

Then came an era of cheap credit, and chains began to think that if they got big enough the “synergies” would drive down costs and drive up revenue. Chains began to make multiple billion dollar deals. And not just Tribune, which bought Times Mirror, the publisher of the Los Angeles, or Gannett, which was expanding. Even once modest chains began to make blockbuster deals. McClatchy bought all of Knight Ridder getting trophy papers like the Miami Herald. Lee Enterprises, in sleepy Davenport, Iowa, took over Pulitzer, the most famous name in newspapers.

With debt. Lots of debt.

This is where the Internet comes in. The only real competition for classified ads used to be other print products, alternative weeklies or shoppers. But suddenly here comes the Internet — custom-made for classifieds. And Internet people – most famously Craig Newmark of Craigslist – were giving it away for free.

For newspapers the recession the United States is experiencing did not happen in the last few months. It’s been going on for more than a year. For newspapers in California and Florida, where the housing bubble burst the hardest, there’s been a recession for even longer.

The drop in classified, especially the key categories of real estate, automotive and help-wanted or jobs, has been absolutely chilling.

Newspapers began to lose not just advertisers but readers to the Internet – largely because we gave our news away for free. Revenues began to soften – but the debt just stays there like a hungry wolf outside the door.

The acquisitions turned out to be extraordinarily badly timed. Tribune put itself up for sale – and took on $8 billion in debt to go private. We see what happened. Less than a year after Sam Zell took charge, Tribune filed for bankruptcy.

Ad revenue fell 23 percent in 2008, according to the Newspaper Association of America.

Now it’s not like newspapers didn’t try to compete on the Internet. In fact, some of the best U.S. sites are newspaper sites. But the Internet has a virtually endless ad inventory, unlike the physical pages of a newspaper. And while newspaper ads have proven for decades they can make an advertiser’s cash register rings, that’s still not a sure thing with the Internet.

Consequently, as newspapers lose print ads they are not making it up in Web ads, even as their audience grows phenomenally on the Web. More people than ever are reading the newspaper, in print or online, and newspapers are unable to charge more for that. And in fact have to charge less.

The clich? that newspapers are exchanging print dollars for digital dimes is true. Web ads at most newspapers still account for just about 10 to 15 percent of revenue.

Worse, in recent quarters, the growth of online advertising has slowed dramatically. Several chains reported in their third and fourth quarters that Internet ad revenue fell compared to the year before.

At the same time, Wall Street has fallen out of love with newspapers to say the least. Virtually every stock has lost more than 80% of its value. Three newspaper companies were kicked out of the New York Stock Exchange because they could not keep their stock price above even $1 a share. The stock exchange changed its rules recently because of the financial meltdown – or there would be three or four more booted out now.

Consider what would have happened if in December 2003 you had invested $100 in a group of newspaper stocks including well-known names like The New York Times Co. and Gannett. And your friend had invested $100 in the Standard and Poor’s index of the 500 biggest stocks in America. A year later, you looked smart. You had $134 and your friend just $110. But by 2007, you would have $97 out of that $100, and your friend would have $142.

Last December, in 2008, your friend would have lost money since 2003. He would have $89. But you know what you would have from your hundred dollars? $18.

With the end of funding by issuing stock, with the credit crunch, and with even The New York Times Co. bonds rated as “junk,” newspapers are essentially selling the family silver, and all the furniture to stay afloat. They are borrowing from Peter to pay Paul. And they are paying a high interest rate to Peter.

The reaction of newspapers has been to fire journalists with a near- reckless abandon. They cut the numbers of pages in the newspaper. They even made the pages smaller. They put less news in the paper. And now even some loyal readers are leaving. I was shocked when a longtime friend of mine, who like me started reading the New York Times every day as a 13-year-old boy in New Jersey, told me he no longer subscribed. He didn’t like the redesign. He could get the news for free on the Web site. So why pay?

Our challenge is to give him reasons to come back. And get the young people who never came to the paper in the first place.

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