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Guest commentary

Newspaper critics don't understand the business

Profits aren't too high; future isn't rosy; professors should stop whining

Lou Alexander

Many people writing about the future of newspapers are getting it wrong.

Who am I to say so? I recently retired from a director's job in the San Jose Mercury News advertising department. Early in my career, I was a reporter and editor. So I know both sides of the ethical "firewall" in journalism.

Let me address three prominent misconceptions about newspapers:

Myth # 1: Newspapers should cut profit demand

It might be fun to fantasize about cutting newspaper margin expectations to something under 10%, but the way the world works makes it impossible.

Michael Socolow, a professor of American Studies and journalism program director at Brandeis University recently wrote: "Daily newspapers should drop the consultants, lower their unrealistic earnings targets and do what they do best. If they fail to do this, they will have nobody to blame for their demise but themselves."

It might be fun to fantasize about cutting newspaper margin expectations to something under 10%, but the way the world works makes it impossible. Journalists need to understand this and quit wasting time talking about it.

If the CEO of Knight Ridder, Gannett, Tribune Company or one of the other major newspaper companies announced they were going to cut margin expectation and plow massive additional money into journalism, they would set off a chain of events that would likely lead to the demise of these companies.

Unquestionably the immediate result of such an announcement would be that the value of the stock would fall, maybe as much as 30% to 50%. Such a move would surely cost the CEO his job. The board would have to fire him because they have a legal obligation to protect shareholder value. And if they did not fire the CEO and restore sanity to the boardroom they would likely face legal action by the shareholders. It is very easy to imagine the legal bills and settlements soaring into the millions overnight.

But since we're paying a visit to Fantasyland here, let's pretend that the board and shareholders shouted, "Well done; we'll be happy to take smaller dividends while we sit back and wait for the Pulitzers to roll in."

Then what happens? Here are a couple of scenarios:

I'll begin with the better outcome. If the value of Knight Ridder stock, to stick with my old company as an example, fell by a third there is a good chance that one of the other cash-rich public companies would start buying KRI stock with the intent of taking over the company. To another media company some of the KRI newspapers are worth having in their own right. They are profitable and could be clustered with existing parts of the company executing the takeover. There would be considerable savings to be had by eliminating most of the KRI corporate staff. Some of the newspapers could be sold or traded to other companies to create new clusters.

New company would be tougher

And, despite what the folks who work at Knight Ridder believe, a tougher operator could come up with ways to save many millions of dollars. Foreign bureaus, travel, layers of management, community-service efforts, reporting and copy editing resources are generous in comparison to some other news companies.

There are many millions in savings that could be realized if the folks at corporate headquarters were only interested in driving profit and stock value. A new owner, who had the cost of an unfriendly takeover to recover, would go after those savings with passion.

That's the better outcome.

There is another scenario that newspaper people need to bear in mind when they suggest their corporate owners pay less attention to creating shareholder value. Knight Ridder could be taken over by an investment consortium, which has profit as its only goal. It would generate extraordinary profit by breaking up the company, selling off the various newspaper and electronic media companies one by one.

Selling off Knight Ridder properties

Here is a back of the envelope estimate of how that would work. On Sept. 2 there were 73.66 million shares of Knight Ridder outstanding, at a closing share price that day of $63.80. That means the value of all the company stock (market capitalization) was $4.7 billion. But friends at Knight Ridder corporate told me on more than one occasion that the break up value of KRI was between $90 and $95 a share. At $90 a share the break up value would be $6.63 billion. That is a profit of $1.93 billion compared to the market cap.

Even in the world of mega billions that is enough to get an investment consortium's attention. But if KRI stock fell drastically because Tony Ridder announced that the company was going to forgo profit in favor of journalism then the breakup value could be between $4 billion and $5 billion, certainly a big enough number to get an investment consortium's attention.

Knight Ridder newspapers sold off willy-nilly is not a pretty prospect.

Myth #2: Newspapers have a bright future

People of every age bracket --except those over 65 -- are starting to read newspapers less.

Paul Farhi, a Washington Post reporter who writes frequently about the media, opined in the June/July issue of American Journalism Review that newspapers will survive into the future because by-golly we're best and all the other media have their problems.

Farhi blithely dismisses the impact the loss of young readers will have on advertising sales. He says: "The major fear in the newspaper industry is that today's young people won't grow into the next generation of readers. That's a reasonable concern, but the evidence suggests it's far too narrowly focused. If young people are less interested in consuming news of any kind, isn't this a problem for news organizations of all types, including those on the Web?"

What Farhi and other journalists need to understand is that if young people do not read newspapers, or use other types of media, the result will be the loss of advertising dollars. People who make and sell "stuff" are going to keep making and selling stuff. If they cannot use the media -- traditional or new -- to attract customers they will do something else to sell their stuff. Advertising dollars are a subset of sales promotion budgets. If the dollars spent on advertising do not generate sales these sales promotion dollars will go to other activities that do.

Farhi also asserts that "some of the 'young reader' problem is self-correcting; people tend to become more interested in the world around them as they buy houses, pay taxes, raise families and generally settle down. Some of these people will probably read the paper, someday."

Unfortunately, the self-correcting nature of the loss of 18 to 34 year old readers has been happening less and less in the last few decades.

Broad readership loss

Readership has already declined among the people in the next age cohort, 35 to 64 years old. Journalism.org pointed this out in its State of the News Media 2004: "The problem for the newspaper industry is not just young readers. People of every age bracket -- except those over 65 -- are starting to read newspapers less…The more important trend today may be what is happening to readers between the ages of 34 and 64, the people who should be the prime target for becoming citizens engaged in civil society. These are the people buying houses, having children, worrying about schools, building their careers, running for office, becoming leaders in their communities. Their numbers are declining as well, and in some cases at a faster rate than for people under 34."

Part of the reason for the decline is the migration of classified advertising to the Web. These ads traditionally introduced young people to the newspaper to find their first car, rent their first apartment and eventually buy their first house. Along the way they saw news, sports and features they enjoyed and became long-term subscribers.

Myth # 3: Newsrooms are joyless factories

Writing in Editor and Publisher, Denny Wilkins, an associate professor of journalism and communications at St. Bonaventure University, says the desire to create shareholder value has sapped the joy from today's newsrooms. He asks, "Should I tell my students they will enter a profession as it undergoes a corporate shift from a traditional mission -- providing news -- to a profit-maximizing service, providing, often in unedited form, information without context?"

Even before Katrina brought out the best of the media world, the dozen or so newspaper Web sites I monitor had daily examples of top quality reporting, great writing and spectacular photojournalism.

An initial thought I had after reading his column was that if he is really this embittered I have concerns about his fundamental ability to teach. I do not think people in the newspaper business can afford the luxury of being unhappy.

Journalists need to quit wasting time, ink and intellectual capacity talking to one another about how horrible the people who run their companies are. The people who run their companies are paying little attention to this petulant whining. Maybe a professor has the luxury but for folks still involved in producing newspapers there is too much work to be done if newspapers are to survive. I leave you with two things to consider:

Suggestions

What it meant then and now was that your stinkin' newspaper is not interesting or important to me. Even busy people who are not normally newspaper's best customers take time to read the publications important to them. If you do not believe this, head off to Barnes and Noble and look at the size of magazines that would not normally make your reading list. Home books, skateboarding magazines and titles like Vanity Fair are hundreds of pages long. They are devoured by people who would rarely be caught dead reading a newspaper.

Lou Alexander spent 20 years in the advertising department of the San Jose Mercury News, rising to the top jobs in both display and classified before retiring in 2004. Before turning to the business side, he was a journalist for eight years. He lives in San Jose.

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A project of the School of Journalism and Mass Communications at San Jose State University, Grade the News is affiliated with the Graduate Program in Journalism at Stanford University and KTEH, public television in Silicon Valley.

Monitoring the Bay Area's most popular news media:

Contra Costa Times

Knight Ridder

San Francisco Chronicle

Hearst

San Jose Mercury News

Knight Ridder

KTVU, Oakland (FOX)

KTVU, Oakland (FOX)

KRON, San Francisco

KRON, San Francisco

KPIX, San Francisco (CBS)

KPIX, San Francisco (CBS)

KGO, San Francisco (ABC)

KGO, San Francisco (ABC)

KNTV, San Jose (NBC)

KNTV, San Jose (NBC)

 

Bay Area media advocates:

Media Alliance
Center for the Integration and Improvement of Journalism at SFSU
Maynard Institute
Youth Media Council
Project Censored
New California Media
Society of Professional Journalists, Northern California chapter
National Writers Union Bay Area chapter

Site highlights

THE GROWTH OF FREE NEWSPAPERS

The three-part series follows the rise of three Bay Area handouts:
• Part 1: At free dailies, advertisers sometimes call the shots
• Part 2: Free daily papers: more local but often superficial
• Part 3: Free papers' growth threatens traditional news
• See also: SF Examiner and Independent agree to end payola restaurant reviews
• And: The free tabloid that wasn't: East Bay's aborted Daily Flash

FATE OF KNIGHT RIDDER NEWSPAPERS

Lou Alexander started a firestorm with his original guest commentary predicting the company would be sold. Several other experts on newspapers have weighed in:
Newspapers can't cut their way back into Wall Street investors' hearts, by Stephen R. Lacy; Alexander responds
Humbler profits won't encourage buyouts, by John Morton; Alexander responds
Newspapers can't maintain monopoly profits because they've lost their monopolies, by Philip Meyer
Knight Ridder in grave jeopardy, by Lou Alexander...

KQED-FM AUDIO PERSPECTIVES BY JOHN MCMANUS

Leakers and plumbers: There's no difference between a good leak and a bad leak? Journalists need a shield law. 11/22/05
Unintended consequences: How Craigslist and similar services are sucking revenue from faltering newspapers. 9/13/05
Is CPB irrelevant? As Congress moves to cut public broadcasting funds, has CPB become obsolete in the modern marketplace. 6/26/05
The paradox of news: There's more news available and its cheaper than ever before, but fewer young people are interested. 5/12/05

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