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Guest commentary

Newspapers can't cut their way back into Wall Street investors' hearts

Media economics professor responds to Alexander

Stephen Lacy

Retired San Jose Mercury News advertising executive Lou Alexander argues that publicly traded newspaper companies can't accept 10% profits and plow the remainder into better journalism.

The problem with this argument is that the arithmetic seems odd. A wide range of profit exists between 10% and the 25% that is roughly the target of corporations such as Gannett and Knight Ridder. This is not an either/or situation. The New York Times Company has averaged in the mid-teens over the years and does well with quality at its many newspapers.

Perhaps the real myth is that public companies will continue to make 20 to 25% profit margins 25 years from now.

Newspaper economics is far too complicated to explain in so short a space, but we can address it at a simplistic level with two propositions about newspapers:

These two situations have put tremendous pressure on publicly owned newspaper companies. In a time of revenue uncertainty, the only way to maintain required margins in the mid-20 percent range is to cut costs. When that happens to the newsroom, circulation will be lost, which will make it harder to maintain the high margins across time.

So I propose two scenarios as counter to Mr. Alexander's two scenarios:

In the long run, the growth of competition will cut into profits more and lead to publicly held companies either selling their newspapers or adjusting their profit expectations downward.

The difference between scenario one and two is that under two, the newspapers will have lower profit expectations and lower newspaper quality. This will make it more difficult to attract new readers and readers who already dropped the paper. I call this the short-run scenario.

Twenty years of research have taught me that good journalism is good business, at least in the long run, and that a company can produce good journalism while still producing profit margins much higher than 10%.

Perhaps the real myth is that public companies will continue to make 20% to 25% profit margins 25 years from now. But the current managers won't be running the companies in 25 years, which might affect which myths they cling to and which they dismiss.

To paraphrase Kurt Vonnegut, we live by the myths that serve us best.

Stephen R. Lacy is professor at the Michigan State University School of Journalism. His research on media economics is known worldwide.

Mr. Alexander responds

Quality of journalism may not help circulation

I am delighted to have been able to spark such a spirited conversation about the future of newspapers.  But I regret that so much of what has been written has focused on what is being seen as hyperbole in my original commentary. 

That issue is newspaper company margins being cut to as low as 10%.   I did not suggest that as hyperbole.  I suggested it because John McManus asked:  “What would happen if Tony Ridder announced that he was going to lower margin expectations to 5% and plow the rest of the money back into journalism?”  McManus wanted to know whether newspapers could accept margins similar to those in the supermarket industry—famously below 4%--since in some ways the cash flow model is the same.  The supermarket model was also suggested in a December 1995 article in American Journalism Review by Philip Meyer. The first draft of my commentary included some of this info. Since the first draft was about 2,700 words it had to be cut.

Prof. Lacey also comments that “Circulation is related to content.”  I completely agree with that statement.  But at the same time the evidence that circulation is related to quality content is very tenuous.  There are some markets—San Jose and Washington, D. C. for instance—where there is a highly-educated populace that demands quality.  In other markets, particularly smaller communities, newspapers that would make journalists cringe have circulation penetration [copies sold divided by number of households] several times that of the nearest metro paper.


Two final points:


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Site highlights


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


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...


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