Why Newspapers Were Doomed All Along by Justin Fox

Posted on June 18, 2012

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The best job I’ve ever had was as an editorial writer at The Birmingham News in Alabama in the early/mid 1990s. It was a perfect combination of boss, colleagues, place, subject matter, and time of life. I left in 1995 because my then-fiancée (now-wife) had taken a job in Washington, D.C., and I was getting ambitious. But every once in a while I’ve wondered half-wistfully what it might have been like to stay at the paper, buy a Craftsman bungalow in one of the lovely neighborhoods that sprang up during Birmingham‘s early-20th-century boom times, and burrow deep into the strangeness and charm of Alabama.

After Tuesday, when News management told 60% of its editorial staffers, including several old friends of mine, that they were being fired, I think I can finally and conclusively forget about that little dream. The News, along with the two other Alabama papers owned by the Newhouse family, in Huntsville and Mobile, and the New Orleans Times-Picayune, is switching to a digital-first model in which the print newspaper only comes out three times a week. (To further complicate my relationship to this story, the apparent mastermind of this plan, Advance.net chief Steve Newhouse, was my boss at the Jersey Journal in Jersey City, N.J., and helped me get that job in Birmingham.)

Birmingham and New Orleans will become the first significant U.S. cities (each has a metropolitan-area population of a bit more than a million) without daily newspapers — another landmark in the sickeningly fast and sure-to-continue collapse of the once money-gushing U.S. regional newspaper industry.

We are seeing, as Jack Shafer and others have pointed out, a death spiral in which newspapers react to their loss of readers by cutting back on their news-gathering resources and raising prices, thus making themselves even less attractive to readers. Yes, Warren Buffett has recently bucked the trend with his purchase of the Media General chain. But I doubt he’s reversed it. And I’m not sure it ever could have been reversed. Dealing with disruptive innovation is difficult at any time, in any industry. But the business models of metropolitan daily newspapers in the U.S. pretty much set them up for failure once the Internet arrived. And even if they’d succeeded, their news operations would be endangered anyway.

The business model that the owners of the metro dailies gravitated toward in the decades after World War II was this: 1) establish monopoly, 2) milk that monopoly. The monopoly was on the delivery of printed advertising messages into homes in a given city or (better) metropolitan area: department store ads, supermarket ads, car dealer ads, and, most of all, classifieds.

Notice that I didn’t mention news. That’s because, once a monopoly was established, the editorial content of a newspaper had no detectable impact on its financial success. News gave a paper legitimacy, and some protection from antitrust laws (in the form of the joint operating agreements that the Justice Department allowed newspapers to set up to maintain editorial competition while consolidating business operations). Big news, especially sports news, even sold some extra papers from time to time. But even that didn’t really matter, since circulation wasn’t a profit center. The business of the metro monopoly papers simply wasn’t about news.

Some of those papers nonetheless invested lots of money and effort in producing great content to squeeze between the ads. Most didn’t, at least not when measured against profit margins that averaged more than 20%. Newhouse was long considered a cheapskate among newspaper chains, although in the 1980s and 1990s it did allow for — and in some cases instigate — editorial revitalizations at many of its papers, including the News and the Times-Picayune.

Over the decades, the monopoly dailies saw some signs of trouble: newspaper readership kept declining, and new retailing giants such as Wal-mart often bypassed the papers in delivering ad messages into homes. When the Internet came along in the 1990s, though, they were still big and profitable — and, it turns out, profoundly vulnerable. As the account above should make clear, the challenges that the Internet posed to these newspapers had much less to do with new sources of news than new channels of advertising.

If the newspaper companies had been nimble, well-managed organizations (news alert: monopolies usually aren’t) trying to follow Clay Christensen’s playbook for dealing with disruptive innovation, they would have set up separate ventures aimed at exploiting new digital advertising opportunities. Norway’s Schibsted did just that in 1999, and has remained a classified-advertising power. In the U.S., two newspaper chains bought the job site CareerBuilder in 2000 (a third joined them in 2002), and have built it into a successful online/print hybrid.

Not surprisingly, though, the biggest digital advertising successes have been claimed by baggage-free newcomers such as Craigslist and Google. And these digital natives have seen no reason to attach expensive news-gathering operations to their efforts. The Internet has unbundled the various businesses that made up a metro daily newspaper, and there’s no putting them back together again. And since selling news never was a profit center for metro dailies, there’s been no great surge of well-funded digital upstarts clamoring to take over their editorial tasks. In Birmingham the main online competitor to the News has three full-time editorial staffers.

On the national and global levels the equation is different. Brand-name newspapers like the New York Times and Wall Street Journal appear to have a real future (although not necessarily on paper), and digital upstarts can actually make some money. But the sustainable online business model for serious local reporting has yet to be discovered. The future presumably lies with some mix of nonprofits like the Bay Citizen and local public radio stations, distributed national operations like AOL’s Patch, and low-overhead local upstarts. If former monopoly newspapers are to succeed in remaining part of that mix, they’ll probably need owners who don’t really care about making money. That is, they’ll effectively become non-profits.

Charging for the news online may be part of the new local equation, too, but it’s hard to see subscription fees paying the bills for anything but quite modest local news operations. The metro daily that’s had the most success with a paywall, the Arkansas Democrat-Gazette, has succeeded by getting people to maintain their print subscriptions, not by making money online. That feels more like a rearguard operation than a plan for the future.

The most charitable way to look at the Newhouse moves is as an attempt to get ahead of the collapse, and do it in a decisive, all-the-bad-news-at-once sort of way that’s got to be less cruel (to those who were fired) and less demoralizing (to those who remain) than endless smaller rounds of layoffs. By getting out of the daily newspaper business in Alabama and Louisiana, Newhouse also appears to get out from under current restrictions on joint ownership of local TV and newspapers, opening the way for a more multimedia approach. But the current state of the papers’ online alter egos, nola.com and al.com, the fact that Alabama and Louisiana aren’t exactly teeming with digital early adopters, the huge cutbacks in editorial staff, and the basic truth that the papers will never reestablish online the monopoly position they once held off makes it hard to get too excited about their prospects. This may be one business where the only real Innovator’s Solution was to get out a decade ago.

Justin Fox

Justin Fox is editorial director of the Harvard Business Review Group and author of The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street.

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