SPECIAL REPORT: When Economy Rebounds -- What's Next for Newspapers? Tough Choices Await

By: Mark Fitzgerald Difficult as it may seem at the moment, newspapers will eventually work their way out of this worst-ever industry economic trough. But on the other side of the Great Recession, ironically, they are likely to ask themselves the same question they repeated at the depth of the crisis: Now what?

What should newspapers do with the increased resources they will have in a recovered economy? Where can they get the biggest return on investment inside the newspaper? Or does it make more

sense not to plow any more money into the traditional departments of a newspaper business?

Newspapers in this bewildering industry crisis have become so used to cutting ? and cutting in places that were once considered untouchable ? that it's no sure bet they will return to bulking up any part of their businesses, from the newsroom to the carrier force.

In 2009's second quarter, many newspaper companies surprised Wall Street and each other by managing to eke out profits, despite declining advertising revenue ? only because of deep cuts in manpower and material. On conference calls with analysts, several CEOs referred to those cuts as "permanent expense elimination" ? suggesting that those lost jobs, standalone sections, larger page counts and bigger newsholes were gone and never coming back.

That prospect alarms some increasingly vocal industry observers who fear newspapers are learning all the wrong lessons from their cost-cutting. A sizable contingent believes the absolute best place to bulk up is the segment of the newspaper herd thinned the most ? the newsroom.

But other academics, economists and executives just as vocally disagree about where to devote newspaper resources, which surely will be more abundant in better days but will almost as surely be scarce compared with historical cash-flow and profit-margin levels.

Some say newspapers must begin marketing themselves like other businesses. With the recent increases in revenue contributions from circulation, that area deserves more investment than it has traditionally received, one argument goes.

Good work good for business?
For others, however, there is no argument: Journalism ? news content ? is the principal business of newspapers, and without investment there, all is lost.

"Destroying the editorial value of an editorial product could be commended only in an asylum," noted British newspaper editor Harold Evans wrote recently in The New York Times Book Review, condemning "slash-and-burn strategies" that weaken the newsroom.

Indeed, there's a solid business argument for investing in journalism, a number of prominent American academics argue.

This summer, Esther Thorson, dean of graduate studies and research at the University of Missouri's School of Journalism, as well as Shrihari Sridhar and Murali Mantrala from Missouri's Trulaske College of Business, presented research taken from the extensive confidential financial data compiled in Inland Press Association's annual Cost and Revenue Study.

They probed the spending on newsrooms, circulation and advertising sales and developed an econometric model to see how much revenue would be affected if the mix of spending was altered.

"Could they have distributed those dollars differently to make more money with good journalism?" Thorson asks. "And the answer is virtually always yes, very consistently across hundreds of newspapers. They under-spend in newsrooms by a pretty significant amount, and they overspend in circulation ? though not nearly as much as they overspend in advertising."

Specifically, their model suggests that "under-spending" in the newsroom isn't just missing an opportunity for greater revenue ? it actually damages the business. Cutting back investment in the newsroom just 1% is three times worse than the same percentage cut in circulation or distribution, and seven times worse than making that cut in ad salespeople. The deeper the newsroom cut, the worse the damage, this research contends.

Thorson's conclusions didn't surprise Stephen Lacy, a professor and associate dean for graduate studies at Michigan State University's School of Journalism. "Newspapers have to continue to invest in the product, because every single piece of academic research I've ever seen indicates newsroom investment is the thing you've got to do," he says. "You can't shortchange the quality of the content and expect people to spend time with it ? particularly if you're going to charge them for it."

It's simple economics, Lacy argues. Any monopoly or quasi-monopoly ? a status that newspapers enjoyed until recently ? that takes ever-bigger profits, as newspapers took ever-bigger margins, and does not invest in the product invites competitors. One oft-cited example is the American car industry in the late 1960s and 1970s, which let quality slip as it maximized profits, and found a big share of its market taken away by Japanese and other foreign automakers.

That's how it works in the world of newspapers, too, says Lacy. One of his studies looked at counties where the dominant paper was a daily owned by a publicly traded chain, which typically needs to produce bigger profit margins, even if that means cutting newsroom spending. They were contrasted with counties where the dominant paper was family-owned or otherwise privately held. "The county with the publicly traded daily had an average of one more weekly in it than counties with the private daily," Lacy says. "The rules of economics don't just apply to cars ? they apply to media, too."

Rick Edmonds, the former St. Petersburg Times managing editor and now a media business researcher and writer at the Poynter Institute, worries that newspapers "are flirting with the tipping point of seeming expendable to discerning readers" because of the cuts. He notes that a reader complaint arising more frequently on the Web sites of newspapers is that "there's nothing there" in the print product.

"It's just my overall sense that some of the papers are dangerously small," says Edmonds. "Maybe of necessity, since you have to live within your means. But I would hope there would be some reinvestment in the product, or at a minimum redoubled efforts to be sure what's in there is good and reflects the added-value that good reporters can bring to the conversation."

Tim McGuire, the former top editor at the Minneapolis Star Tribune, agrees the newsroom should be first in line for more investment ? but the content it produces has to change. "If you look at newspaper Web sites and printed newspapers, you see story after story after story that you can find in a whole lot of other places. There's simply not enough work being done in producing value-added stories," says McGuire, now the Frank Russell Chair for the business of journalism at Arizona State University's Walter Cronkite School of Journalism and Mass Communications.

Newspapers will have to invest in both digital and print, with each a very separate product. "Obviously, anybody who doesn't see we're in an online world is an idiot," says McGuire. "But I see The Arizona Republic and the Star Tribune still selling to 300,000-plus customers every day, and that seems to my little peanut mind there's got to be a business there, and probably serious money again in a non-recessionary environment ? especially if you give people something they want."

Careful spending on content is critical, agrees Missouri's Thorson: "If you put a bunch of money into the newsroom and everybody just takes a couple more trips, it doesn't do you much good."

Feeding the 'black holes'
As far as Earl Wilkinson is concerned, however, increasing newsroom resources amounts to sinking more money into a "black hole." The International Newsmedia Marketing Association (INMA) executive director says too many editorial dollars go to coverage the consumer no longer wants: "We've over-served them ? but over-served them with stuff they don't want."

Wilkinson's not picking on editorial, he hastens to add, but on all the big cost centers of newspapers. The other "black holes," in his view: "Big printing monstrosities, preservation of departmental silos, payouts of enormous dividends, and the pursuit of large advertisers at the expense of the small."

What newspapers have to do instead, he insists, is spend more on marketing and research and development. Under-spending on marketing has been a newspaper problem for 30 years, he argues, with newspapers typically spending 1.5% of revenue, and only half of that on marketing to consumers.

"We spend just a small fraction of what we tell advertisers they should spend," says Wilkinson. "We've got an attention-deficit consumer culture. People need to be reminded of why they need to read newspapers every day." Advertisers, too, he adds: "The game is not about building a bigger magnet anymore, and pulling advertisers in. We've got to go and get them." To do that, newspapers should devote 5% of revenue to marketing and another 2% to R&D, Wilkinson advises. He also thinks spending in the advertising department could be adjusted to pursue smaller advertisers and equip them with self-serve technology, rather than always chasing the big accounts.

Consider reprioritizing
Mark G. Contreras plans for the newspaper business' post-recession future not from the perspective of an academic or industry advisor. He's E.W. Scripps' senior vice president/newspapers, responsible for the day-to-day operation and strategic direction of 28 dailies and community papers.

When Contreras is asked about where to devote resources ? newsroom or advertising? ? his answer recalls the old commercial for Certs breath mints: Stop, you're both right.

Scripps leaders, he says, came to that conclusion after spending a great deal of time in the past year thinking about how to organize the company in a changed media environment. One of the first steps was to bring in the restructuring firm FTI Consulting Inc. Out of that came a corporate reorganization of Scripps that was announced in August.

"We fancied ourselves pretty good at analyzing our business," Contreras says, "but their first question was, why are you guys organized the ways you are organized?" What FTI found was a company that basically replicated everything 13 times in every market. "We asked ourselves, what really is going to add enduring value, and the conclusion we came to was that it's content and advertising sales," he says.

There was another disconnect, he adds: "If you look across the company, you see 20% to 25% of our bodies are in either the news department or ad sales, and 75% are not. And that's because we're in a corporate model where the form and structure is more labor-intensive."

Over a period of time that proportion is going to reverse, Contreras says ? but he cautions that the "overall pie is going to shrink." The absolute number of employees is likely to go down, especially as Scripps looks to trim expenses again in the third and fourth quarters of this year. But the percentage of the remaining workforce devoted to editorial or sales will grow, he projects.

Shrink the workforce outside of the newsroom if you must, Missouri dean Thorson says in a final word of advice ? but stop shrinking the physical newspaper. And not just because loyal readers are beginning to complain.

"There's very clear evidence that advertisers, too, are very sensitive to what's in a newspaper, and what's missing," she says. "A big newspaper is like a big party ? you want to be there."

After the recession, INMA's Wilkinson and Michigan professor Lacy agree, newspapers will find themselves continuing to face issues that should have been addressed long ago.

"Not to spend, not to invest would be a mistake," Lacy says. "But I wrote something to that effect 16 years ago. People didn't listen then, and I suspect they won't listen now."