The true assassins of the American newspaper

Will Bunch at Attytood says, “The American newspaper is being assassinated by ‘a lone nut.'”

Craig Newmark of Craigslist is responsible for the demise of an industry, Bunch argues. Traditional newspaper classified advertising has migrated to Craigslist, he says, because CEO Newmark doesn’t want to make too much money. He permits free ads or ads well below market rates. So, of course, people with stuff to sell or jobs to offer flock there.

That leads to job losses at newspapers, Bunch says, because classified ads produced (or used to, at least) lots of money. Newspapers are poorer, so they cut jobs.

Well, Bunch is wrong. These job losses are not Newmark’s fault. Bunch should point his finger elsewhere — at the incredibly stupid decisions of newspaper ownership and management.

What does a wisely managed company do when faced with a competitor taking away customers?

Presumably, to this non-economist, it improves its product to produce greater value than the competitor’s product, which, again presumably, leads to greater value of the company’s stock. Everybody wins.

But did the newspaper industry act sufficiently and swiftly in the late 1990s when it became apparent to all but the oblivious that the Internet was rapidly becoming the new home of classified advertising? Did the industry react by offering a better product with a better deal both for classified advertisers and display advertisers?

Nope.

Did the newspaper industry adroitly recognize that the media landscape had swiftly and irrevocably changed? Did it do more than preach convergence and swiftly act on the notion in compelling and reader-maintaining way?

Nope.

What did the industry do?

Consider this from Willy Stern of the Nashville Scene about Gannett, chain owner of 90 dailies:

From 2003 through year-end 2005, in a down market for media properties, Gannett’s sales increased from a staggering $6.7 billion to $7.6 billion. Gannett’s net profits grew over that period from $1.19 to $1.21 billion. … After paying your corporate taxes, Gannett finished last year [2005] with a profit of more than $1.2 billion. [emphasis added]

In October 2006, Gannett posted a 12 percent decline in third-quarter profit.

Hand-wringing ensues at Gannett. “Profit’s down,” execs cry. Well, no, not really. A decline in profit still means Gannett is making money. It is still profiting. Immensely.

Says Stern:

According to The Value Line Investment Survey composite newspaper index, the average net (after-tax) profit margin among publicly traded newspaper companies in 2005 was a robust 10 percent. By contrast, Gannett’s was 15.9 percent, an extraordinary figure that most CEOs in any industry would give their first born to achieve. [emphasis added]

And, Stern says, operating profit margin at Gannett in 2005 was 30.6 percent. Stern, quoting Value Line, lists the competitors’ operating profit margins: Dow Jones, 13.6 percent; New York Times, 14.9 percent; and Washington Post, 20.1 percent. [Operating profit is a measure of a company’s earning power from ongoing operations, equal to earnings before the deduction of interest payments and income taxes. Thx to answers.com.]

To Gannett, any decrease in quarterly profit is alarming. Remember, this is the corporation that never missed a quarterly dividend increase in the first 10 years of USAToday, a paper that did not turn a monthly profit, let alone an annual profit, until 1987, five years after its founding. Gannett — as did newspapers as an industry — had been accustomed to net profit of 20 percent or more well into the 1990s. Any decrease inevitably leads to a fall in its stock price. Do you recall that old saw about maximizing shareholder revenue?

Then that Internet thing happened. The World Wide Web. The newspaper industry arrogantly ignored it. Advertising fled.

So what’s the ownership and management response by Gannett and the industry? Improve the product? Nope. Maintain net profit? Yep. How? You know the answer. I’ve said it often enough. All together now: “Cut expenses.” And that means whacking jobs.

In central New York state, just east of me, Gannett whacked 19 jobs at three papers, often following the first-in, first-out rule. Why’s that important? It means Gannett saves that salary and benefit money as well as the potential costs of buyouts of older reporters near retirement. Quality of product decreases, but net profit, presumably, is maintained.

So, I’ve argued repeatedly, to maintain net profit, the industry eats its principal resource — intelligent human capital — that could be used to improve the product. As journalism academic Phil Meyers argues, good journalism can make good money.

Stern’s outlook is different:

The true crime of the corporate takeover of the American newsroom is in instituting a culture where smart people do not wish to work. Or so we’d like to believe.

The problem with this logic, as you well know, is that it is utter rot. From a financial standpoint, anyway, it doesn’t appear to have a downside. There’s simply no evidence that putting out a quality news product will produce more revenues or profits for the parent company—at least not anymore. In fact, a careful analysis of the 13 largest publicly traded newspaper companies today indicates that just the opposite appears to be true. That is the genius of Gannett. You figured it out first. Your papers don’t win serious journalism awards. Few self-respecting journalists with job options would consider a career at Gannett. There is almost no original thinking or cutting-edge analysis of the important issues of the day in your papers. Your columnists are absolute nobodies. Your editorial writers have virtually no impact on policy-making institutions, either here inside Nashville’s Interstate 440, or inside the Beltway, up near where you live. [emphasis added]

All this time I’ve been tilting at windmills. I’ve been arguing from what I see as the continual erosion of the ability of journalism to serve the needs of the people who are citizens of this (presumably) democratic Republic.

Ownership just doesn’t give a damn (its self-laudatory, PR-driven raves about its journalism notwithstanding). Stern predicts the news biz will make oodles of money in the foreseeable future. Then the “cash flow” (that’s the Gannett mantra) will wither and die. Newspapers companies will cease to exist as journalism entities. They’ll become “content providers” fundamentally online. Says Stern:

The newspaper companies that successfully survive this transition to becoming “content providers” will be those that figure out how to use today’s profits and strong cash positions to place smart strategic bets on what the new media world will look like.

Critics like Attytood’s Will Bunch have missed the point. Failure to invest now in capable, bright journalists (and circulation, production, advertising and management executives) means the industry won’t be ready when the inevitable befalls the news biz.

In the newspaper industry, a short-term focus on maintaining net profit guarantees failure in the far more important issue of long-term survival.

Why haven’t the stockholders figured that out? Ultimately, they may have the most to lose.

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