Last December, the American Journalism Review ran a piece called “Slimming Down” that foresaw what we’ve recently been experiencing in the newspaper business. “After four well-fed years,” the story began, “a number of big-city newspapers around the country are deciding it’s time to slim down. They’re spending more for newsprint and, in some markets, seeing a slowdown in advertising. In some cases, their parent companies’ stock prices are flat or falling.”
David Cole, editor and publisher of Newsline, a newsletter covering the newspaper industry, puts it more directly. “As the economy goes, so goes the daily newspaper business.”
David Lieberman, who covers the news media for USA TODAY, reported that 2001 is shaping up as “possibly the most turbulent since the media recession of 1991 for newspaper publishers. “Nearly all of the major chains have been surprised how steeply some ad sales have fallen. The numbers look especially bleak for major papers that benefited most from last year’s strong market, boosted by the entry of Internet companies. The biggest surprises have been in national and classified ads, which account for more than half of most paper’s ad sales.” Classified ads historically have been the most profitable advertising for newspapers. They are also an accurate barometer of the nation’s economy, reflecting a decline in hiring across the country.
In the past several weeks, newspaper headlines and internal memos posted on Web sites, such as Jim Romenesko’s MediaNews Extra!, have opened as never before a fascinating window on the internal workings of news organizations attempting to deal with the pain caused by the slowdown. There we can read memos from publishers announcing cuts, notes from editors explaining to the staff how the cuts will be made, and reactions from working journalists whose ideals clash with the realities of the marketplace.
The most startling of these, or course, is the memo to his staff from Jay Harris, publisher of The San Jose Mercury News, saying that he was quitting because the cuts that the newspaper’s parent corporation, Knight-Ridder, was demanding risked “significant and lasting harm to The Mercury News as a journalistic enterprise.” Jay Harris is known to many of us as an honorable and thoughtful man who has been a persuasive force for improving the credibility of newspapers, for the need to diversify our staffing and our coverage, and for providing the resources to support editorial excellence. His decision to walk away rather than implement decisions he believed would damage the quality and reputation of the paper is being intensely discussed by journalists and should be the basis for wider discussions with the reading public.
A series of online postings leading up to Jay’s resignation gave the public a rare glimpse at one publisher’s struggle in attempting to balance the demand for higher profits with the desire to maintain the newspaper’s investments in journalism. Two weeks earlier, Harris had sent a memo to his staff that began:
“This is a letter I have worked very hard not to have to write to you. It is a letter that brings news you will not be pleased to receive. But the information that follows reflects reality and, as always, I want to make sure you know what’s ahead… To understand the speed and size of the decline in recruitment advertising, consider this: In January, our recruitment revenue fell $103,000 short of the same month last year. In February, recruitment revenue fell about $2.5 million below the same month last year. I have concluded with regret that we will be unable to achieve the levels of expense reduction we are seeking to achieve without layoffs.”
The San Jose story reinforces the hard truth about the cyclical nature of the newspaper business. When Silicon Valley was roaring along just a year ago, The Mercury News added about 30 reporters as the newspaper ambitiously expanded its coverage of the high-tech story. Other online postings tell similar stories of news organizations that, some critics said, were putting the interests of shareholders ahead of the interest of readers.
After the Akron Beacon Journal announced it would eliminate two long-time Sunday features, Beacon magazine and the News & Views section, employees quoted in an alternative paper complained that “Wall Street and the paper’s parent company are slowly killing one of Akron’s proudest institutions.”
At the Kansas City Star, a hiring freeze and significant cuts in news hole were only a start. Now more was being demanded, editor Mark Zieman explained, spelling out that the bulk of the cuts would come out of the Monday paper because it is the day of lowest readership. A while later, Zieman told his staff that he had shown readers a prototype of the proposed changes — a reduction in national news and elimination of the Monday op-ed page — and they didn’t like them. So he would propose something else.
The Philadelphia Inquirer is eliminating its aggressive zoning efforts in some surrounding communities. And at the Sarasota Herald-Tribune, a New York Times regional newspaper, publisher Diane McFarlin explained these reductions in her news operations:
- Two pages a day would be cut from the paper.
- Prior approval would be required for all overtime.
- Non-essential travel and entertainment were to be avoided.
- All expenses over $1,000 would require publisher approval.
Last December, Gannett executives told Wall Street analysts that among its first moves after acquiring Central Newspapers was the elimination of 198 jobs at The Arizona Republic and Indianapolis Star.
One of the good stories about long-term investments newspapers are making is the progress in building online operations that strengthen their domination of local news. People who go to the Internet for information are increasingly relying on the mainstream news organizations that have built a strong brand identity in the public mind. Over the long term, these investments in the Web will help make the local newspaper package an unbeatable combination.
But for now, the online revenue and profit has been sluggish, forcing layoffs and delaying ambitious plans for growth. Knight-Ridder and the Times envisioned spinning off their online operations into separate companies and capitalizing these ventures through IPO offerings. These plans are on hold.
The first hint of tough times ahead was signaled by increases in the cost of newsprint. Last September, it rose about $50 to $610 a ton. This is well below the recent high of $750 in 1995. But analysts are predicting a continuing trend that will take the price to $660 a ton this year and $710 by late 2002. Even before the price increase, many newspapers had made their newssheets smaller by cutting the page width to 50 inches — a change that results in 8 percent less news but saving millions of dollars.
Last December, at the Credit Suisse First Boston Media Conference in New York City, Doug McCorkindale, president and CEO of Gannett, told the analysts that “volatility in newsprint pricing over the last few years has been enormous. I know of very few commodities, he said, that will go from $750 a metric ton in one year to $400 or so within two years. Frankly, newspaper companies have been the overwhelming beneficiaries of this volatility for the last 15 years or so. This as the expense of newsprint producers attempting to earn reasonable returns on their investment,” McCorkindale recalled.
“Back in the early 1990s, I stood before a group of our fellow industry executives and suggested that the trough in newsprint prices, being enjoyed by publishers at that point, would soon come to an end. I went further to say that our best interests would be served by creating an environment of price stability that would reduce volatility in earnings and financial returns for both publishers and producers. I was booed and chastised by my colleagues at the time. Now, consolidation is placing both production and consumption in the hands of fewer companies. Newsprint producers and publishers would be well served by dampening this volatility.”
After Jay Harris had announced the layoffs at the Mercury News, but before he resigned, Mike Cassidy, a columnist for the newspaper, wrote a letter to Tony Ridder, the chairman and CEO of Knight-Ridder, asking him “to stand up to irrational markets and redefine financial success.” Cassidy spoke for many journalists and, probably, for many readers as well. But the plea to redefine financial success runs against two hard realities:
- We’re still a business.
- Markets rule.
Markets are a triumph of democratic capitalism. But they extract a price, particularly when things are not going well. In the case of newspapers, they extract a price even when things are going well. The newspaper business is a more complex business than a decade ago, but the basic fundamentals remain: Those who continue to have strong profit margins and growth will fare well in the markets. Those who don’t will have to look at such options as consolidation and merger.
The reality that markets can be irrational has been demonstrated in the experience of newspaper companies whose stock prices did not benefit in any significant way from the markets’ upward ride of 1999 and early 2000 — a time when their earnings performance was impressive. Conversely, newspaper stock prices have held up reasonably well during the recent market slump.
As Doug McCorkindale asked the analysts in New York: “Why does the market under appreciate the newspaper sector? In all my years in the industry, I have never seen better numbers and a worse reaction on The Street.”
So, it is fair to ask: What does The Street expect? Is the expectation rational?
There is no simple answer. The expectations of the investment community for newspapers as a business generally fall into one of two categories. Some investors are looking for short-term profits. Others are looking for value in the stock price, particularly in how shares of newspaper companies compare with other cyclical industries. Value investors are shopping for bargains and want to be able to buy newspaper stocks at or near the bottom of the cycle.
The problem newspaper companies face today is one of expectations. Wall Street’s expectations for profit growth have been heavily influenced by the extraordinary success of profit growth in newspapers over the past two-plus decades. Year after year, newspaper companies have demonstrated that this is a highly profitable industry, regularly achieving profit margins of more than 20 percent. In 1999, for example, the average profit margin for all publicly reporting newspaper operations was 22.2 percent.
One can argue that the margins are unnecessarily high; that a lower profit margin, say 10 or 15 percent, would be sufficient. Such a standard for success would enable news organizations to put more resources into newsgathering and still give shareholders a handsome return. If that seems a sensible course of action, it is not persuasive on Wall Street, where the prevailing expectation is for profit margins above 20 percent, based on the long-term trend of newspaper earnings.
Lauren Rich Fine, a newspaper industry analyst with Merrill Lynch, dismissed the meaning of the Jay Harris resignation, telling The New York Times: “If you have a publisher that resigns himself rather than cut costs, it’s a strong sign that they have a culture there that is not comfortable cutting costs.”
The historic pattern of compensation for key news industry executives is tied to profit performance, the very thing that most influences the stock price, rather than journalistic performance, which is the heart of the local newspaper franchise. Thus, when newspaper executives go to Wall Street, their presentations to the analysts are heavily focused on numbers and business trends that evoke images of growth in revenue, advertising, circulation, market share and technology.
News is why advertisers find newspaper so attractive. News is what sells newspapers to most buyers. News drives market share.
But newspaper executives have little to say about the value of news when they are making their pitch to the market analysts. In the transcript of the December presentations to the Credit Suisse First Boston Media Conference by Gannett executives, the word “journalism” does not appear. Newspapers are spoken of as products and stories as content.
There is no mention of investments to improve coverage. There is no mention of the value advertisers derive from enterprising coverage. Nor of how newsrooms are serving readers, helping communities make critical decisions. Nor of the company’s efforts to raise ethical standards newsroom by newsroom. No examples are cited of exemplary journalism that distinguish newspapers from any other source of news and information.
Wall Street needs to understand why enterprise and investigative reporting is expensive, why reporters need time and space for their work, why coverage of the growing and increasingly complex aspects our society demands more newsroom resources.
At least one newspaper publisher did speak to the analysts about the values of journalism to the business of newspapers. Donald Graham, chairman of The Washington Post:
“Our journalism, which I know is not the focus of your interest but is the focus of mine, is better than ever.” Graham believes that building the value of our business is going to pay in the long run.
The St. Petersburg Times, one of the few remaining privately held major newspapers, has the ability to manage a downturn without making drastic cuts. “Producing a good quality newspaper happens over time,” Chairman and Editor Andy Barnes told Editor&Publisher magazine recently, “and taking radical action makes it much harder to run a good newspaper.”
Against the background of tight cost management and a Wall Street mindset that only understands earnings, the newsroom story is better than it has been for some time. Among other things, reader trust in newspapers is improving. Individual editors and organizations such as the American Society of Newspaper Editors, the Associated Press Managing Editors, The Freedom Forum, and the Committee of Concerned Journalists have been examining such core values as credibility, fairness and journalistic performance with the purpose of building greater trust among readers.
This reform movement is registering with readers and is making a difference in the way the public perceives the local news media. A new AJR survey funded by the Ford Foundation indicates that newspapers’ efforts to rebuild credibility are paying off. This is particularly true among young people and minority groups.
One key finding is that 31 percent of those sampled said they thought their local newspapers are becoming more accurate. And, nonwhites age 18-29 rated newspapers higher on improving believability and accuracy than the general public did.
Last Sunday, the Akron Beacon Journal published a new measurement of reader satisfaction showing that 73 percent of its readers believe the newspaper accurately reports the facts of local stories — a gain of 10 percentage points since the survey was last taken in 1998. These are numbers and trends that Wall Street needs to hear, in addition to projections for profits and growth.
In previous down cycles, newspaper executives who chose to cut staff and resources, rather than accept lower margins, were reflecting the uncertain thinking of the times:
- That the best years of newspapers had passed.
- That the fundamentals of the business had changed, perhaps forever.
- That there was an urgency to diversify, to invest in other businesses
There is no such crisis of confidence today. Nor should there be. Newspapers are stabilizing their market shares, emphasizing daily and Sunday readership rather than daily and Sunday sales, rebuilding reader trust, making the Internet an ally and a resource, and strengthening their dominance in most local news markets.
It is an enviable position — one that invites owners to rethink their value systems to strike a better balance between the demand for consistent growth in profits and the obligations inherent in managing a public trust.
The story in San Jose may not be typical. The Mercury News has abundant newsroom resources and has made significant investments in coverage of its growing market in Silicon Valley. In this sense, it has enjoyed a special status.
Still, Jay Harris’ resignation is a powerful moment.
A moment in which editors must find their own voice:
- To explain, very publicly, the true nature of newspapers as a business.
- To explain, very publicly, why the newspaper business is different from other businesses.
Editors must find their own voice to talk and write, very publicly, about the core values of newspaper journalism and why newspapers are a public trust. Editors must use their own voice as leaders in their own newsrooms to insure that the work reflected in the paper every day is credible and fair.
Editors must use their own voice to seek public engagement in the issue, to initiate a dialogue to educate the public about the realities of newspapers as a business and the role of newspaper journalism in our democratic society.
Jay Harris, a good man, should not leave newspapers in vain.