The headlines sound grim. “U.S. newspaper groups cut costs as ad revenues fall” in the Financial Times. In the United States, the words were more precise: “Knight Ridder To Cut 1700 Jobs; Cuts Follow Earlier Losses of 400.” The stories reveal that in response to drops in advertising revenue and increases in the cost of newsprint, papers are cutting staff in order to reduce costs. The subplot is that they might be cutting newsroom staff and thereby cutting quality. But a New York Times story on this topic by Felicity Barringer, appearing as a frontpage business story, concludes that papers—publicly or privately owned—have displayed varying strategies as far as commitment to quality news, and those differences continue to play out over this business cycle as in the past.
What is the appropriate investment in gathering and presenting news remains a continuing question of importance for newspapers. And the correct answer is not independent of the economic equations that newspaper publishers must confront. If the dissemination of news is not going to depend on the philanthropic spirit of wealthy individuals, then the newspaper business has to generate profit. Since 75 percent of newspaper revenue comes from advertising, and staff at 16 percent (of total cost) is the most important cost after newsprint, it is not surprising that publishers resort to layoffs when advertising turns down. And since a large proportion of a newspaper’s staff is in the newsroom, it is also possible that some of the cuts occur there. The questions, of course, are how deep and where are the cuts, and whether they are really necessary.
A look at the numbers suggests that the industry is healthy but facing challenges. The balance sheets are strong when judged against history. But circulation is declining, readership is declining, and classified ads—the core revenue source for the local newspaper—are also declining. Young adults do not get their news from newspapers, middle-aged adults have less time to read, and the Internet has proved an important competitor for employment listings and person-to-person sale of items. These trends suggest that publishers should examine their long-term strategies as well as their income statements. The current downturn hurts, but a look into the future reveals fundamental challenges to present-day revenue streams.
Three questions appear central: Will people continue to buy newspapers? Will advertisers continue to believe that newspapers are a good place to reach potential consumers? And how will news reporting at newspapers change in response to these economic and cultural pressures?
Why do people buy newspapers? To begin, they are a uniquely good place to get easily accessible, timely information necessary for everyday life. Within their pages, most papers offer reasonably comprehensive local news, retail and entertainment ads, radio, TV and other schedules, interpretative sports reporting, and the comics. The latter two may not be necessities, but they are a regular aspect of everyday life. Along with this package of information come investigative reporting and national news. Former Washington Post publisher Katharine Graham captured the relationship between the two packages neatly when she explained to me several years ago that it was the wonderfully intrusive and gossipy Style section of the Post that attracted the readers who, in turn, attracted the advertisers that paid for the first section of national and international news.
But another point is clear from Graham’s autobiography. The mission of a newspaper goes beyond simply making money and to earning credibility through its content. The Post is not People magazine precisely because of the dedicated readership of its front sections.
For local advertisers, retailers and purveyors of entertainment and sports, newspaper readers are their target market, and papers provide a cost-effective way of reaching them. If Internet sites become “friendlier” places to buy food, household goods, and tickets, that relationship could change. Newspapers are also a natural place for classified ads—especially when it is easier to find what one is looking for. But Monster.com and eBay pose real challenges. Their search engines are a competitive advantage over the crowded small print of the classifieds. Papers might need to create friendlier formats.
In this broader business context, what is the role of news? Pretty fundamental. Properly selected, edited and presented, news differentiates the newspaper from other sources of useful information. Comprehensive local news is what TV news doesn’t have. Nor does television devote special coverage to sub-sections of a metropolitan area. And investigative reporting is not the strength of either TV news or the Internet. While some of the TV news analysts provide useful analysis—CNN carried a marvelous 15-minute interview with Robert Zoellick on trade matters the weekend that I am writing this article—it cannot compare with the featured and in-depth analysis possible on a daily basis in a newspaper. The Internet has developed a reputation for carrying anything, anywhere, which has made it difficult to establish credibility. With newspapers, credibility has been established through decades of reporting and editing.
Now, consider the budget for news. My conclusion would be that most of the news gathering, writing and editing that does not contribute to a newspaper’s unique mission for its community of readership is strategically vulnerable. For example, it is hard for me to understand why any newspaper other than those competing for the national audiences would assign its own reporters to gather national or international news. This is particularly true for those who belong to a large group of papers, as well as for newsmagazines. As long as there are three or four high quality international/national news services, why create a small reporting team of one’s own? It is, however, essential to have local figures—byline reporters or the equivalent—who can interpret these national and international events in local terms. But not reporters in the field. The typical news conference in which hundreds of reporters compete to ask questions of the same celebrity, politician or entertainer is economic nonsense. Quality is not enhanced by these huge numbers of journalists assembled to hear and disseminate similar news.
In business, we are entering an era in which General Motors and Fiat will compete with each other by selling cars that use identical engines and power trains made in jointly owned factories. A Gateway computer is an Intel motherboard with Microsoft operating systems and application software, assembled in a third party’s factory. Compaq might or might not use precisely the same components. In this kind of an environment, companies have had to be very clear as to what activities they should conduct for themselves; it is those activities, and only those, that create value.
Newspapers are no different. There is no reason for the fifth or the 35th report of a political crisis in Indonesia, usually written by a journalist far less skilled and experienced than those writing for Reuters or the Far Eastern Economic Review. Newpapers can contribute unique value through their reporting of the events in their territory, especially when it comes to helping readers judge the quality of local governance.
If the cuts in staff include cuts in the newsroom made in response to strategic conclusions of this sort, then whether or not they work out, they can be judged sensible by intent. But if they are simply cost cutting, and they actually reduce that paper’s ability to differentiate itself as a source of information, then it will be the owners, the journalists whose jobs are impacted, and citizens who are dependent on an effective press who will pay the price.
A recently published exploration of this very question, “Taking Stock: Journalism and the Publicly Traded Newspaper Company,” provides no grounds for optimism. The authors conclude that in response to the pressures of public ownership, particularly by institutional investors seeking short-term financial return, newspaper groups have tailored their product and cut their expenses with revenue in mind, not focusing on their unique abilities to gather and disseminate news. With reporters and editors motivated like business managers by incentive compensation structures, owners have focused on the profitability of the news business, eincreasing profit margins to new heights.
Like banks that do not provide loans or automated teller machines for those who live in poor neighborhoods, newspapers have adjusted their product and circulation to address the needs of advertisers. Where they have enjoyed a local monopoly, it is the local news that has borne the brunt of cost cutting. These authors argue that economic incentives have led papers to seek a target audience of consumers rather than the “public audience” and that the news is chosen for these audiences based on their stated preferences. In places where audiences are not attractive to advertisers, that segment of circulation is not sought.
The logic of their analysis is pretty powerful, and they use cases to document how the pressure for earnings penetrates the structural arrangements of certain publishing groups. But they offer no systematic assessment of the quality of the news. Nor is there any empirical study of the size of the newshole. The authors argue these points without providing specific examples or references to their data. This is a problem, since a strategic focusing of news resources and imaginative use of technology could be associated with better news, lower costs, and variable compensation based on profit.
Neighborhoods and communities do get involved in civic activities when they are informed about forces affecting their situation—a polluter, a new road, new opportunities to shop, and the accomplishments of their neighbors. In some localities, this need is currently being met by local newspapers or Web sites. It is not the fate of the nation that is in the balance, but strong local coverage might be a first step to restoring public interest in politics. And if national and international news were assessed for local impact, rather than just packaged as small news blurbs, that could also make a positive difference.
Gathering and interpreting news is a distinctive competence of newspapers. Intelligent business management should not pose a threat to that activity, but that certainly doesn’t guarantee that any particular newsroom assignment is safe. Credible news presented to attract readers is the golden goose. For that reason it should be at the core of any sensible economic decision-making about the newspaper business.
Joseph Bower is Donald Kirk David professor of business administration at Harvard Business School. He researches, writes and consults extensively on top management challenges and public policy. Since the 1970’s, he has worked with Nieman Fellows to understand changes in the world economy.