Greedy vultures

Why corporate management of daily newspapers spells disaster for the news business, community debate and our way of government

Photo Illustration By Don Button

All you have to do to understand that newspapers are in trouble today in America is to read one. It seems that almost every day, newspapers are reporting one story or another about their own demise.

Centuries-old newspapers like the San Francisco Chronicle and the Boston Globe have reported that they’re losing money. Two publishers and two editors of the Los Angeles Times were forced out after they refused to make further cuts by the Tribune Company, which owns the newspaper and 10 other major dailies. The stock price for McClatchy Company, which owns the Sacramento Bee and 31 other daily newspapers, declined by nearly 25 percent in recent months.

In a 1996 story in SN&R (“Newspapers R.I.P.,” SN&R Cover Story, November 21, 1996), I made this prediction: “Within the next 10 years, the Sacramento Bee and most other local daily newspapers across the nation will be out of existence. Or they will be losing so much money, they will wish they were out of business.”

Indeed, that prediction seems to be coming true. Shareholders eager for ever-increasing profits last year demanded the sale of Knight Ridder’s chain of newspapers, and they’re pressuring Tribune today to auction off its properties. Re-sold, these and other dailies are now struggling for their very existence.

It didn’t feel good to make that prediction 10 years ago, and I’m seriously concerned to see that it’s coming true today. I’m worried about the impact on our society when daily newspapers are no longer able to function. Without an agreed upon set of facts that newspapers provide as a starting point, what shape can community discussion possibly take? Without credible oversight of government, how will citizens govern themselves? The loss to our society is huge, and I blame the CEOs running those companies and their failure to manage toward the future for the impending demise of their newspapers.

A decade ago, I predicted newspapers would today be operating in a vastly changed environment—readership would continue to slide, display advertisements would decline and, most importantly, classified advertising would dry up. All that meant that daily newspapers would have had to creatively adapt to a changing environment and hunker down for the long term by accepting significantly lowered profit margins. Those predictions are holding, but newspapers have not adapted as I had hoped.

Americans today don’t read newspapers like they did in the past. And daily newspapers in particular have seen continuing declines in circulation over the past half-century. Just this September, daily circulation declined nationwide by 2.8 percent from the previous year, and 3.4 percent on Sundays. The year before that, circulation declines looked about the same, with 2.6 percent fewer daily readers and 3.1 percent less reading on Sundays. Readers are going to the Internet, and younger people have never developed a newspaper-reading habit. And there’s no sign that future newspaper readers are being developed to suggest anything but a continuation of that downward slide.

Of course, fewer people buying newspapers means less money to operate them with. But newspaper sales represent only about 20 percent of most daily’s revenues; most of the money comes from advertising. Fewer people buying papers also means fewer in-paper and insert ads—fewer eyeballs mean less revenue. Other factors—such as consolidation of businesses like department stores and competition from the Web and a host of other sources for advertising—have cut the number of ads and continue to diminish this revenue source.

But it’s the Internet that’s really crippling daily newspapers. That story I wrote 10 years ago is available today on the Internet, but back then we were just getting to know the emerging World Wide Web. Google, which started in September of 1998, is now worth more than twice as much as the 10 largest newspaper chains in the country—more than $80 billion. Craigslist, which, like Sherman marching through Atlanta, has devoured huge hunks of newspapers’ classifieds ads, wasn’t even invented a decade ago. In those days, classifieds made up roughly 60 percent of daily newspapers’ profits. Newspapers haven’t been able to make up for the continuing loss of classified revenues. And I believe that the dailies don’t fully understand that the classified market is headed for a complete collapse, and quickly. As I thought 10 years ago, online advertising is simply an easier, more efficient way to go about finding a job or buying a car than print. Classifieds accounted for $17.2 billion in revenue to newspapers last year, so the loss is going to be major.

The impact of these changes on smaller weekly alternative newspapers like SN&R has been significantly less than on the larger metropolitan dailies for several reasons. For one, we’ve never been as reliant on classifieds revenue as daily papers, so we haven’t been hit as hard by the migration of classifieds to free sites on the Web. Size is also a factor. Because newsweeklies are smaller, we can maneuver more easily to adapt to changes and, importantly, require less revenue to sustain ourselves. So the effects of these environmental changes on alternative newspapers may not be as dramatic as on much larger dailies, which require huge revenue streams to survive. I think of it this way: In the hunt for survival, larger animals—metro daily newspapers—have to hunt down 5,000 calories a day to survive, but the much smaller species—alternative newsweeklies—need to find only 125 calories a day to sustain themselves. In the competition for available advertising money, it’s much more difficult to obtain the $200-plus million that a newspaper like the Sacramento Bee (or the close to $1 billion needed annually to run a daily like the Los Angeles Times) needs to keep going than it is to pull in $5 million in advertising that SN&R requires to fund its annual operation.

These marketplace changes have destroyed the economic foundation of large metropolitan daily newspapers. They’ve failed to adapt, and so now the question is no longer if daily newspapers will continue to decline, it’s, “When will they go out of business?”

Even though I saw it coming, I find myself stunned that it actually did. And I’m outraged at the greed of the CEOs and companies that have brought us to this point.

Daily newspapers have been cash cows for their owners for many years, consistently delivering anywhere from 20 percent to 40 percent profits. Changes in the marketplace over the past 10 years have reduced these margins, yet still newspapers’ profits last year averaged 19.3 percent—more than twice the average for the Fortune 500. Dread over the lack of future for newspapers and the corresponding panic about declining profits has sent these stocks into a tailspin, falling on average 20 percent in 2005. In the same year, Tribune’s stock declined 30 percent and the New York Times was down 35 percent.

Owners and CEOs blame the pressure from Wall Street for the way they’ve managed newspapers, squeezing out short-term profits through stock buybacks, consolidations, and, when savings from economies of scale are exhausted, by slashing budgets and cutting staff. McClatchy has been able to base its future profitability on owning newspapers in growth areas, but most others today face only declining markets and continue to diminish their newspapers in order to deliver 20-plus percent margins. And I blame the leaders of those newspaper chains for destroying the infrastructure of the very companies they claim to be saving and, at the same time, lining their own pockets with stock increases and golden-parachute payouts.

Their greed is far greater than I have ever anticipated and their shortsightedness is far greater than I have ever anticipated. Take Mark Willes, former chairman of Times Mirror and publisher of the Los Angeles Times, as an example. That company’s stock price rose because of stock buybacks and cost-cutting, not because he strengthened the underlying business. When Willes left, he floated off with an estimated $64 million to $100 million parachute. After Knight Ridder was forced to sell off its newspapers, that company’s executives reaped $57 million in severance packages—$27 million of that went to the top five alone. And even McClatchy, which bought all of Knight Ridder’s newspapers and sold off those not in growth markets, paid a $1 million bonus to chairman and CEO Gary Pruitt and another half-million-plus dollars to four other executives for this accomplishment, while the company’s stock took a 25-percent nosedive. It’s absolutely nuts!

They have been bad stewards of their companies, sacrificing the long-term health of their newspapers by dramatically reducing the quality of their editorial content, cutting back their services and rendering their newspapers shells of their former selves. If these people owned apartment buildings, they’d argue that since rent has gone down they just won’t make repairs.

Jeff vonKaenel, owner and CEO of SN&R, CN&R and RN&R.

Photo By Larry Dalton

Through this kind of management, they’ve told their employees they don’t care about them, they’ve told their readers they don’t care about them, and they’ve sold out their duty to serve as the Fourth Estate for a quick buck. But even more than that, these CEOs have justified it all by claiming it’s their fiduciary duty to stockholders that’s made them do it. I don’t agree. To defend themselves under the guise of protecting the stockholders makes no sense. If people bought in at $50 per share and the changed economic realities mean that shares are worth only $40 apiece, squeezing out short-term profits to artificially raise the stock price only means that people are going to get screwed if they don’t sell their stock in time. Is it a CEO’s responsibility to help his current boss (read: shareholders) swindle his future boss (read: shareholders) by stripping all the future value out of a company? I don’t think so, and I think what’s happened is morally reprehensible.

It’s been impossible to maintain stock prices set during the height of newspaper profitability as the industry has changed over recent years. When I predicted these changes 10 years ago, I’d hoped that newspaper managers would have been able to say: “We’ve enjoyed these 20-plus-percent returns far more than anyone in history. That’s ending now, and we need to shepherd ourselves into a spot where we may make a lower return in order to preserve our institutions.” If they’d created a more reasonable balance between profitability and investment, money would have been available to make substantial investments in the future viability of newspapers. Unfortunately, this is not what they have done, and more than a few editors and publishers who tried to make this argument were fired.

What’s really disheartening to me is how greed has dismantled the unique corporate structure that has worked for many years to finance newspapers’ ability to build a community among readers and work independently to protect the public interest. It’s this unprecedented business model and these almost altruistic goals that have attracted so many talented and committed employees to news organizations. It’s stunning how much they care, and it’s embarrassing and disappointing that the model seems to be failing in corporate hands.

The cost is more than the thousands of jobs lost in the newspaper business in just a couple of years. It’s more than the future value shareholders will never receive. It’s the price we’ll all pay for losing the institution that represents a major foundation of a working democracy that really scares me.

I have been publishing alternative papers since 1973 and am currently the CEO and majority stockholder of this weekly newspaper and others in Chico and Reno. For 33 years, my papers have been offering a different perspective on local news and entertainment, and I’m not looking forward to the day when I’m publishing an alternative paper without a daily newspaper to be an alternative to.

But this is the reality I think we’ll soon be facing. For me, the question is, “Can we run a democracy without the reliable reporting delivered by daily newspapers?”

People may be getting their news from various sources today: radio, television, online. But most of the original reporting—even that which ends up on radio, TV and the Internet—is done by daily newspapers. Daily newspapers also do nearly all of the investigative reporting that monitors how government spends its citizens’ money and watch over how the government works to protect its citizens’ interests.

Journalism is to a democracy what accounting is to business: It’s a set way of looking at things through agreed-upon reporting standards that come as close to “truth” as we can get. In a democracy where people have such divergent views, standards, values and socio-economic differences, we need the agreed-upon facts that daily newspapers provide as a starting point for us to evaluate and debate.

Here’s how I think about it. If I’m debating a topic with my brother—our politics aren’t even close—we can agree at least that information from the Wall Street Journal is accurate. Those facts give us a mutual starting point for discussion. Those kinds of discussions are informative, the questions are penetrating, and we gain a lot from that discourse. But when we talk about information my brother heard from Rush Limbaugh, the discussion focuses on unsubstantiated beliefs, not facts. We get nowhere, and there’s no benefit to this type of argument.

In the same way, if our communities don’t have the core information that daily newspapers provide as a starting point for intelligent and informed discussion, we’ll constantly be operating in parallel universes and won’t be able to talk to one another.

How are we going to be able to figure out a civic plan in that situation? How will we work together to build livable cities? How will we ever find agreement as to what to do about complex issues like global warming if the facts are muddied and polarized by bellicose opinion and misguided belief? How in that kind of a world will we ever be able to get anything accomplished? I don’t know. It’s a future that scares me.

I’m worried about how journalism can exist in a post-daily-newspaper world. I’m not alone in struggling to find answers, but I don’t believe that citizen journalism, or blogs or other information freely available on the Internet, is the solution. Who knows how a blogger or citizen journalist or unknown source on the Internet derived its information? They lack credibility and therefore cannot help but create an environment where we’ll find it impossible to talk to one another.

That doesn’t mean that the Internet isn’t where news is heading. It is. My fear, however, is that daily newspapers haven’t been quick or creative enough in making the transition. And, even worse, in the search for quick profits they’ve not only failed to invest significant enough amounts in online futures, they’re now also decimating the very resource that would provide value online: their news-gathering operations.

The dailies all have Web sites that feature their news and even more than runs in the paper, but these sites aren’t moneymakers. They only provide about 5 percent to 8 percent of the money needed to publish a newspaper. Newspapers are expensive to run—newsprint, printing and distribution alone comprise at least 25 percent of the total cost. An advertising sales staff costs at least another 25 percent. And there are a bunch of other expenses. But the most important part of a newspaper—the newsroom—represents only about 10 percent to 15 percent of the total cost of publishing.

I believe by taking the long-term approach to business, daily newspapers should have been working much harder to move their newsgathering operations online. How will they pay for themselves? I think we all need to grab our shares of the advertising market. But I also believe that subscriptions eventually will play a big role in supporting strong, daily online newspapers.

The conventional wisdom today is that people won’t pay for information online. They’re used to getting it for free. It’s a good argument, but I don’t think it holds up. Reliable information is extremely valuable. People need it to move through life’s difficult choices; they need it to be relieved of the difficulty of everyday life through entertainment.

That’s why I think it’s a myth that people won’t be willing to pay for credible information. Right now, only the Wall Street Journal and the New York Times (in part) have been successful in getting people to pay for online content. Not long ago, the Los Angeles Times quietly withdrew its requirement that users pay to view its entertainment news online after too few signed up. But I believe people will change their habits, and mechanisms that provide easy ways for people to pay for online content will be developed. It’s just a matter of time and effort.

Jeff vonKaenel published his predictions in November of 1996.

Not that long ago, the conventional wisdom held that no one would pay for television. Cable companies proved that wrong. Everyone also believed that people wouldn’t be willing to pay for software. Microsoft showed us all that wasn’t true.

With the demise of daily newspapers, some $50 billion worth of advertising money will be freed up. My hope is that this wealth will fertilize and support new advertising and circulation strategies as news operations move online.

Newspaper companies are struggling to try to keep their businesses alive. Just the other day, seven media giants representing 176 newspapers made a deal with Yahoo to provide news to the millions who use that service. But my fear is that as long as newspaper executives continue to manage their companies for short-term profits, their efforts are bound to fail as too little, too late.

Ten years ago, I predicted that the Internet meant the death of daily newspapers. Although it appears that prediction is becoming a reality, I see cause for optimism. I believe the economics of the Internet make it possible to finance strong, local journalism online through a combination of subscriptions and advertising revenue. Because of the way many of the major newspaper companies relentlessly have pursued profit at the expense of journalism, I believe they will not be the ones left standing.

I’m hoping for new leaders to emerge. Leaders who believe in the importance of journalism. Leaders who believe in the importance of telling stories that make a difference in people’s lives. Leaders of a rebirth of local online newspapers that operate 24-seven, with lower costs, greater immediacy and stronger impact. I’d like to imagine that we can return to the time when there was more than one local daily newspaper in a town. There are so many stories that need to be told.

Blind optimism?
Ten years ago, we published comments from CEOs who then were aggressively bullish on newspapers

“I absolutely believe that we have a robust future … but if newspapers fail, it won’t be because newspapers are intrinsically a bad medium. No, we’ve been dealt a good hand. If we fail, it will be because we played our hand badly.”
P. Anthony “Tony” Ridder, October 1996, then chairman and CEO of Knight Ridder newspapers, which was dismantled and sold off earlier this year

“The name of our business is how many eyeballs look at our content. If you just look at ink on paper, the number of eyeballs is going down. But to all the people thumping their breast about the end of the daily newspaper, I say ‘phooey.’ ”
Howard Tyner, October 1996, then-editor of the Chicago Tribune, who retired from Tribune Co. in 2003

“The industry is at a crossroads, and a lot of people are going to make the wrong decision. The conclusion they are drawing is to batten down the hatches, drastically downsize and become something other than a newspaper. But I think the future of newspapers is in being newspapers.”
Leonard Downie Jr., October 1996, then and still executive editor of the Washington Post

“Newspapers can still deliver the largest audience in any given community. We don’t see online as a threat, we see it as a way to leverage content—our strength—to make newspapers even more of a fixture on the American scene.”
Erwin Potts, November 1995, then chairman and CEO of McClatchy Co.,who was replaced the next year by Gary Pruitt

… the reality today
Leaders now acknowledge difficult times

“People say, ‘Newspapers are dying.’ They are fuddy-duddy. Guess what? We are the leading local Internet company in all our markets.”
Gary Pruitt, chairman and CEO, McClatchy Co., April 2006

“I think newspapers will be around for decades but will change. I think investigative journalism and other unique content are key to long-term survival. Newsrooms will have to run on multiple tracks—immediate postings through the Web, daily paper, and paper and Web longer-term projects. I think other niche products that repackage the news and distribute it in various ways will continue to grow.”
Rick Rodriguez, editor, the Sacramento Bee, July 2006

“The 40-year marriage of journalism and the modern corporation has failed. At the very time newspapers need enlightened stewardship, they are being actively harmed by their owners. Newspapers need a different form of ownership, one that values journalism, believes in public service and is unwilling—as a matter of principle and of long-term business strategy—to strangle newspapers for their short-term cash.”
John Carroll, former editor of the Los Angeles Times and first Knight Professor of Journalism at Harvard University, July 2006

“We find ourselves in difficult times. We’re not a dying business. We’re in a changing business … and it’s changing very rapidly. We are going to have a period between the old and the new that’s going to be a bit choppy. And it may last a year or two or three or four.”
William Dean Singleton, vice chairman and CEO, MediaNews Group, October 2006

“Newspaper companies do, however, have real assets to bring to the table. Despite declining circulation, the daily paper still produces cash flow that many other industries eye with envy. The core content produced by newspapers is the basis for many of the industry’s disruptors. Without newspaper content, there isn’t much news for television to report, bloggers would have less to blog about, and Yahoo! News and Google News would be blank pages. Furthermore, newspapers have strong brands and highly skilled employees.”
Clayton M. Christensen and Andrew B. Davis, Forbes online, October 2006

“A good three decades before the newspaper industry began blaming its declining fortunes on the Web, the iPod and game machines, it knew it was in huge trouble. In the mid-1970s, two of its trade associations [which have since merged]—the American Newspaper Publishers Association and the Newspaper Advertising Bureau—sought to diagnose the causes of tumbling newspaper readership since the mid-1960s and recommend remedies.”
Jack Shafer, Slate, November 2006