What's the Price of Newspapers' Profit Focus?

By: Lucia Moses You gotta hand it to newspapers. Even in the worst of times, they deliver strong earnings, and last year was no different.

Operating profit margins approached an estimated 20.1% in a year with essentially no top-line growth. While margins remain below their 2000 peak of more than 23%, they have increased dramatically since the 1970s, when they were in the low teens. And publishers seem intent on protecting margins this year, despite rising expenses and uncertainty about the revenue outlook.

But at what cost? Defensive measures such as reducing head count and switching to narrower paper sizes have been key to newspaper publishers' margin-growth strategy, but their share of advertising dollars has continued its long-term decline: U.S. dailies' share of total advertising fell to less than 20% last year from almost 29% in the late 1970s. Are short-term profit gains coming at the expense of share?

Culturally conservative, newspapers have a history of avoiding innovations and new products that don't have "a 20% profit margin, immediate return on investment, and 99% chance of working," says Earl J. Wilkinson, executive director of the International Newspaper Marketing Association (INMA). Probably the most notable exception last year was the Tribune Co.'s chancy launch of RedEye, a stand-alone edition of the Chicago Tribune aimed at young adults. But such examples are few and far between.

The relentless focus on margins has many business-side newspapermen, and even an investor or two, hoping that the industry will resolve this new year to pay equal attention to increasing market share.

Wilkinson doubts that any such change would come from within. "It's going to take an external event to move newspapers to address forthrightly the issues of circulation levels, advertising levels, and market share," he says. Remember, the industry spent big on the Web only after feeling that online competitors threatened its very being. Still, industry watchers say some recent developments suggest more willingness, however unevenly distributed, to be proactive.

* Publishers are talking louder than ever about the importance of readership. Recognizing, as the Tribune did, that the one-size-fits-all model won't work, papers are thinking hard about how to reach elusive segments such as young adults and ethnic groups.

"I think, for the first time in our industry, we have activities going on that are unprecedented," Tribune Co. Chairman John W. Madigan recently told a somewhat skeptical Wall Street crowd, referring to readership efforts. "This is not just a bunch of rhetoric."

Steve Diller, a partner in the Redwood Shores, Calif.-based consulting and research firm Cheskin, points as positive examples to work he's doing with newspaper clients that are looking beyond what people say they read to trying to understand news consumption on a deeper, more emotional level. Others are asking fundamental questions about the readership experience of the Sunday paper to improve its reach. "They're saying, 'We really want to address these questions. We just have to figure out a way to do it'" when money's tight, he says.

* In seeking market share, companies are more willing now than before to develop targeted advertising products even if they are less profitable than the core newspaper.

* Papers, whose online ventures started out as a defensive move, have built them into powerful local franchises and are more aggressively using them to compete against Monster.com and its ilk. As part of that evolution, companies are shifting from separate print and Web managements, which sometimes caused ill will between the respective sales forces, to a more integrated model.

"There's clear experimentation in how you manage a diverse portfolio of products," says Barbara Cohen, president of Kannon Consulting, a management consulting firm with a number of newspaper clients. "Newspapers have come to realize they have to figure out how to run [their Web sites] off one sales force, or [with] one face to the market."

* A risk-averse culture still tends to dominate at many papers, though. Among other things, industry observers call for them to take a more advertiser-oriented sales approach, as other media do, and to use technology to better serve customers. "We cut heads pretty quickly," Cohen says. "But investing in technology for long-term gains in productivity, I'm just not seeing as much as I'd like." INMA has launched a three-year project designed to show papers the economic benefit of a more aggressive mind-set.

As long as analysts and investors keep the spotlight on margins, it's hard to see any significant movement in the other direction. One analyst recently predicted operating margins will easily surpass the previous high of 23.1% in 2000 in the next few years. "Will the financial community allow for the flexibility [to ease off margins]?" Wilkinson asks. "I think it's really difficult for any company to fundamentally change when everything they do is pegged to one number."