News-Record.com

Some background: As you are no doubt tired of hearing us say, the newspaper industry, in general, is struggling with declining circulation and stagnant (at best) ad revenue as younger people (and the advertisers who covet reaching them) turn more to the Internet as a news nad information source. The industry also is facing new challenges to its existing revenue base, such as free classified being offered by CraigsList and being tested by Google.

Historically, newspapers have been a very profitable business compared with other industries. Many newspaper chains in recent decades have reported pretax profit margins of 20 percent or more (better than double the Fortune 500 average), with some monopoly small-market papers topping 40 percent. But the stock prices of publicly-held newspaper companies aren't where investors think they should be. Companies have responded by cutting staffs, including news staffs, significantly, starting during the '91 recession and continuing since 9/11. Recent weeks have seen a wave of job cuts not only at Knight Ridder papers but also at The New York Times Co. and elsewhere as chains try to boost their stock prices. As James Naughton, a former executive editor of Knight Ridder's Philadelphia Inquirer and retired president of the Poynter Institute for Media Studies, a journalism think tank, put it: "Anytime journalists would protest that they were doing bad things to journalism in the interest of business, [management] would say they need to do it in order to fend off a takeover."

(The N&R is owned by Landmark Communications, whose stock is not publicly traded.)

The two biggest expenses for newspapers are paper and people. Cutting jobs is one way to boost the bottom line -- and thus, presumably, the company's stock price -- fairly quickly. The problem is, the more you cut, the more you damage a newspaper's ability to produce its franchise, quality local news. Readers can tell when that happens, and they stop reading, which only exacerbates the problem. That problem is particularly acute in the newspaper business, in which tangible assets such as presses and computers constitute only a small part of a newspaper's market value. The bulk is an intangible accountants call "good will," which, in the context of newspapers, is the habit the community has of getting its news from, and placing its advertising with, the newspaper. When staffing cuts start to affect quality in ways readers notice, they stop reading. The value of the good will, and thus the market value of the newspaper, drops accordingly, just as it would if someone were selling its computers out the back door.

Any comparison of the industry now with its late-1980s heyday would show that the industry's good will has taken a big beating. But investors still haven't been satisfied, whence PCM's ultimatum.

Now before anyone asks, I understand that the duty of the board and management of a for-profit corporation is to maximize returns for shareholders. But even that unambiguous statement leaves a lot of questions unanswered, such as: Over what time frame do we wish to maximize those returns? Does the corporation's leadership have any other duties, particularly those that might conflict with the duty to maximize return in the short term? If so, how best does it legally and ethically resolve the conflict?

Those questions are different for every industry, if not every corporation.

My friend David Allen suggests that for-profit ownership is fundamentally incompatible with the First Amendment mission of journalism businesses and has suggested (sorry; he just redid his site and I don't have a specific link handy) that news organizations be owned by charitable nonprofits. (One current example is the St. Petersburg Times in Florida, a well-regarded newspaper that is owned by the Poynter Institute.)

Such an arrangement would help in the short run, certainly. But even newspapers owned by nonprofits are going to have to generate enough revenue to be able to pay for quality local journalism, a labor-intensive product that can't be offshored.

"The mystery to me is why communities don't rise up in anger at what's being done to their media in the name of profit," Naughton is quoted as saying. I would answer that question with another: As much of a warm, fuzzy feeling as such an uprising would give me, how much good would it do? To what extent, if any, are shareholders, their boards and managers obliged to listen to such protests and temper their profit expectations accordingly?

One possible solution is for groups of local investors in each market to band together to buy local newspapers from their chain owners, with the understanding that although newspapers can be very profitable, the kinds of margins the industry historically has enjoyed are no longer compatible with quality local journalism. A variation might be for newspaper chains to advise stock analysts and potential stock buyers that the corporation's long-term viability depends on a quality of journalism that is not compatible with the kinds of margins the industry has enjoyed in the past, and only sell to those buyers who are OK with that. Such an arrangement might make hostile takeovers less likely, although they certainly couldn't prevent them. Such an arrangement also is likely a fantasy.

I predict that if cores of for-profit local-journalism businesses survive at all, and I am far from sure they will, they will do so primarily as online news operations with reduced or eliminated print components. The best possible outcome of this financial pressure on publicly held newspaper chains is that it will force them to make such a move far more quickly than they otherwise would have. But it is far from clear that they will make such a move at all. That is unfortunate; not only jobs but also a significant aspect of our democracy hang in the balance.

My work here is aimed at helping the N&R and its parent company find a way to make the most graceful transition possible to that new state of profitable, community-focused equilibrium, and I know we certainly aren't going to be able to do it without your help and guidance. As always, we welcome your suggestions.