The Biz Blog

The remarks below were prepared for testimony offered Dec. 1, 2009 at the FTC workshop "How Will Journalism Survive The Internet Age?" and have been adapted for this format.

My assignment is to talk about the state of the news business, newspapers in particular, right now and in the near future. I guess that makes me the Ghost of Christmas present. And there are some unfortunate parallels between the finances of the industry and those of Bob Cratchit's family. The health of several once robust metropolitan newspapers is now as fragile as Tiny Tim's.

I am not among those who think that newspapers are dying. But these have been excruciatingly hard times for the news business, and more of the same is in prospect for at least the next six to nine months.

Very quickly, what went wrong? Three things:

1. Internet competitors like Monster, Craigslist and, less directly, Google search, took away much of newspapers' classified advertising. A decade ago, classified made up half the advertising revenues at some large papers, even more of the profits since it was inexpensive to sell.
2. A second problem may be less obvious. Early this decade industry leaders had hoped there would be an orderly transition of readers and advertisers to the online format. Audience has migrated gradually, but advertisers much less than anticipated. As you probably know, general online display rates have fallen sharply for several years now. Basic questions linger about the effectiveness of ads that digital users may view as an annoying interruption. There is insider talk now of "banner blindness." Digital revenue growth has stalled.
3. Add to these two trends the deep recession, which has impacted all kinds of advertising, especially categories like real estate, employment and auto –- the latter critical both to newspapers and to local broadcast.

The sum of these troubles is that by the end of 2009, newspaper ad revenues will have declined roughly 45 percent in three years.

By necessity, newspaper organizations have cut deeply just to stay in business, even more deeply if they are to maintain profitability. Newspapers have been busily outsourcing all sorts of things from office functions to printing. Many metros have cut circulation to outlying areas and spend much less than they used to on selling new subscriptions. As a result, paid daily circulation was off more than 10 percent year-to-year in the most recent reporting period.

Also, at a time when aggressive investment in new ventures is clearly indicated, newspaper organizations have scarce resources for start-ups and limited access to capital.

But the visible edge of the cutting is in the newspapers themselves -- many fewer reporters and editors, downsizing of the physical dimensions of the paper, sharply curtailed space devoted to the news report.

		RELATED
		FTC agenda for "How Will Journalism Survive The Internet Age?" Watch the workshop Select FTC presentations Dec. 1, 2009 Opening Remarks of Chairman Jon Leibowitz, “Creative Destruction” or Just “Destruction”, How Will Journalism Survive the Internet Age? Mark Contreras, Vice Chairman of the Executive Committee, The Newspaper Association of America; Senior Vice President/Newspapers, E.W. Scripps Co. Ken Doctor, Media Analyst, Outsell Lem Lloyd, Vice President, Channel Sales, Yahoo! Josh Cohen, Senior Business Product Manager, Google News Mike Bloxham, Director of Insight and Research, Center for Media Design, Ball State U niversity Susan Athey, Professor of Economics, Harvard University David Evans, Lecturer, University of Chicago Law School; Managing Director, LECG Dec. 2, 2009 Remarks of Honorable Henry A. Waxman, Representative, 30th Congressional District, California, United States House of Representatives, "As Prepared For Delivery" Matthew Gentzkow, Professor of Economics, Neubauer Family Faculty Fellow Booth School of Business, University of Chicago Bill Buzenberg, Executive Director, The Center for Public Integrity Reed Hundt, Principal, REH Advisors & Former Chairman, Federal Communications Commission Lisa George, Assistant Professor of Economics Bill Densmore, Vice President, Director & Co-Founder, CircLabs Inc.

Several months ago I sought to quantify these losses, using available data on lost revenue and some survey information on news budgets as a percentage of revenue.

The result: By a conservative calculation, newspapers are generating $1.6 billion less in annual spending on news, headed into 2010, than they were three years ago.

Granted, some of that spending may have been inefficient, even unnecessary. But one alarming implication of that number is that we really don't know what investigations, insight and basic civic coverage simply didn't happen and won't. A second is that the explosion of exciting new ventures, still finding their way to sustainability, does not match the scale of the work lost.

Well, we do know a bit of what is missing. Let me highlight two areas. Specialty beats, including coverage of arts, higher education and state government, are being closed down all over the country.

Science is a particularly good example. Not so long ago, any decent metro had a weekly health and science section and or sometimes one of each. Now, only the largest of newspapers have more than one or two science reporters, if that. The biggest topics -- environment, climate change and health -- still are covered, but the rest of science isn't, except in national newspapers and specialized publications.

Much of what we do get comes lightly filtered from the public information arms of universities or companies. The experienced science journalist, who can assess claims critically and treat complicated concepts clearly and accurately, is an endangered species in mainstream media. Citizens with intense interest in these topics increasingly turn to government Web sites -- like NASA's -- or those of advocacy organizations for depth and detail.

A second type of news that has taken a sharp hit is metro newspapers' coverage of their extended region. In better times, the big metros fielded bureaus in dozens of suburban town and school districts. That type of coverage is deemed too expensive now. There isn't space for it either.

As the editor of the San Francisco Chronicle put it to me a few years ago, "We can't afford to cover the Richmond City Council any more." (Richmond is a close-in East Bay suburb.)

So residents of these communities -- and there are millions of them -- no longer have the basic news of their community covered by metro level reporters and editors. If they are lucky, the slack may be picked up by a local weekly or a hyper-local citizen-initiated online start-up. Otherwise, they do without.

So that's the present. I should say that magazines, network broadcast television and local broadcast all are experiencing revenue pressures that translate to decreased editorial ambition. The challenge is not as life-threatening as for newspapers, but it is very real.

I'd like now to turn to three concerning trends for newspapers as they close this year and head into next.

First, the advertising picture is improving only in the sense that it is less bad, not that advertising is yet bouncing back. Public newspaper company reports and industry estimates put the declines at 30-35 percent in the first half of the year. In the third quarter, the rate of decline was more like 25 to 30 percent. The fourth quarter may be a little better than that.

Cost-cutting actions cycle through the year. So layoffs or other expense reductions instituted in June will turn up as savings in January. But as long as advertising revenues continue to fall at double-digit rates, newspaper companies have little choice but to cut more.

So we are headed into more waves of layoffs and buyouts -- not to mention furlough programs, pay cuts and benefits reductions -- in the months ahead. That won't stop until revenues begin improving rather than just falling a little more slowly.

These cost pressures are perilous for a second reason. In my view and that of others, many papers are close to a tipping point where there is so little in some editions that they fail to satisfy loyal customers who still like a print format newspaper and are willing to pay for it.

That hastens the departure of readers on the margin to the less lucrative newspaper Web site some days of the week, or to other sources of news entirely.

Phil Meyer of the University of North Carolina identified this vicious circle several years ago in his book, "The Vanishing Newspaper." A weaker product leads to circulation declines (currently 10 percent, remember). Lower circulation decreases the value to advertisers and drags down ad revenue. The lost revenues force further reductions in news space and news staff. Repeat indefinitely.

So further cutting for newspapers -- now and in the months ahead -- is risky as a business proposition, even leaving aside public service considerations. But further cutting will be hard to avoid, and there is no date certain for improved revenues.

That brings me to a third point I would like to highlight briefly. In this difficult year, some newspapers -- The Washington Post and Boston Globe are good examples -- have lost money, and by dint of aggressive cutting, expect to get back to break even or a modest profit in 2010. Breaking even in 2009-2010 is not a bad result for this year, especially if that preserves a strong news franchise for better times.

But a great many papers are additionally burdened by debt, typically taken on earlier this decade to finance acquisitions at what, in retrospect, were inflated prices. These newspaper companies may still be making double-digit operating margins -- on much reduced revenues -- but generating only enough earnings to make interest payments and pay down debt.

Such is the situation of McClatchy, the second largest public newspaper company, which absorbed most of Knight Ridder in 2006.

For others, the debt is overwhelming, and so we see a number of individual newspapers -- those in Minneapolis and Philadelphia -- and several newspaper companies, notably Tribune, owner of the Chicago Tribune, Los Angeles Times and others, in bankruptcy proceedings. A few other papers like the San Diego Union-Tribune have been sold at a very modest price to private equity firms without previous news experience.

As these proceedings run their course, we are seeing some papers pass into the hands of secured lenders, including specialists in distressed assets. A lenders group, headed by the New York firm Angelo, Gordon, now owns the Star Tribune of Minneapolis.

Angelo, Gordon also has a leading role among the secured lenders groups seeking control of Philadelphia Newspapers and Tribune. Management at each of those companies still are fighting in court for a reorganization plan or auction that will keep them in control. The result is uncertain.

But long story short, private equity owners will be running several or many of our biggest metro papers in the next several years. There is no record to say they will be bad owners, but the situation introduces one more form of instability to the industry.

Despite this admittedly gloomy take on the industry, I see its current state as discouraging but not hopeless.

Newspapers have been increasing their subscription and newsstand prices aggressively. There has been some loss of audience, but overall the price increases have been received well and several companies are reporting at least modest circulation revenue growth.

That corrects a historic imbalance in which American papers have typically sold for half or less the going rate in other industrialized countries. So an over-reliance on advertising as a share of revenue is being fixed.

The coming months are almost certain to see some experiments with charging for online content as well. Getting a better deal from news aggregators and search-engine companies is a real possibility. I'll reserve that story for Mr. Murdoch and other speakers.

While this recession gives no signs of ending quickly or completely, it will end. Advertising revenues will come back.

Better targeting and partnerships are already to show some encouraging improvement in the effectiveness and rates for newspaper digital advertising.

The extent of the ad recovery is an open question. Will auto dealers and retailers resume traditional media spending or see the recovery as an occasion to transfer budgets to other digital formats? I don't know, and I'm not sure the businesses and agencies know for sure either.

But thanks to the aggressive cost-cutting, even a modest recovery of revenues will tend to drop to the bottom-line. It should replenish profits and leave some money left over to rebuild news efforts and undertake new ventures.

These considerations may explain why Wall Street has already bid up newspaper shares from the rock-bottom levels of earlier this year to at least a little better.

Newspaper organizations have diversified their portfolio of products with new offerings in both print and digital formats. Another open question is whether newspapers will be able to command a share of new revenue streams, for example advertising to mobile devices if that indeed develops.

Realistically, newspapers will not regain the dominance in news or commerce they enjoyed in the latter half of the 20th Century. Most print newspapers will be smaller, more expensive and targeted to an older, educated and affluent audience. But there is room to serve younger audiences and a range of advertisers with alternative products.

Best case, newspapers and other traditional media will retain a critical role in an expanding and diverse media ecosystem (whose potential other speakers today and tomorrow will be describing).

To succeed, newspaper organizations will need a sharpened focus on what they do uniquely well and a consistent, high-quality execution of their chosen editorial strategies.

We need more newspapers like The New York Times, Wall Street Journal and Financial Times that cost $2 but reliably deliver $2 of value.

A happy ending that would be. But it won't happen by Christmas and is far from a sure thing. There remains a hard transitional path ahead to travel for traditional and new media -- and for the vitality and civic contribution of American journalism.