Urgent Deadline for Newspapers: Find a New Business Plan before You Vanish

If 2008 were an ordinary year — one during which iconic American firms like General Motors didn’t teeter on the verge of bankruptcy, the stock market didn’t lose a third of its value, and foreclosures, hemorrhaging 401(k)s and holiday retail blight weren’t in every headline — the precipitous decline of the nation’s newspaper business might have been the biggest financial story.

Positioned at the intersection of commerce and mass culture, big daily newspapers for more than a century could outshine in popular cachet what they lacked in industrial size. Like movies, radio or television, they were part of the rhythm of American life. And like those industries, they have had to grapple over the years with new technologies that complicate their old business models: Radio bulletins made newspaper extras less urgent, for example, while the nightly news hastened the death of the evening paper. Neither of those killed the industry, though. By the mid-1990s, newspapers were fetching unprecedented prices in the string of mergers that created behemoths like the Tribune Company, which in 2000 bought up the Times-Mirror Company for $6.45 billion.

All the while, the various Wall Street darlings of American newspapering were struggling to adapt to the most disruptive technology of all, the Internet. And by this fall, it was clear that this was a challenge of an entirely different magnitude. Tribune, whose holdings include The Los Angeles Times, Chicago Tribune and Baltimore Sun, declared bankruptcy, unable to meet massive debts that owner Sam Zell took on to buy the chain. The venerable New York Times saw its stock value fall by 60% and borrowed against its gleaming new headquarters off Times Square in order to meet its obligations.

Experts predicted that there would be big cities without daily newspapers in the very near future. In December, Detroit’s two dailies nearly proved them right, announcing the end of home delivery on all but three days of the week. The Christian Science Monitor had already done the same thing, slashing its print edition to one issue a week while directing readers to its website.

Selling Sacred Real Estate

“It’s fair to say that newspapers will disappear and I don’t think we should shed that big a tear for them,” says Wharton marketing professor Peter Fader, co-director of the Wharton Interactive Media Initiative. And unlike the traumas of automobiles or real estate, the change is fundamental, not cyclical. A down economy may have sped it along, but the business model itself would have been troubled anyway. “My kids can’t imagine why anyone would read the newspaper,” Fader notes.

To be sure, newspapers have tried to adapt. They were late to the Internet, but have embraced the online environment with multimedia content, blogs and headlines pumped to mobile phones. The New York Times this month swallowed a bitter pill, joining other newspapers in selling ads on its most sacred real estate — the front page — in an effort to squeeze more revenue from its traditional product. Says Fader, “I don’t think it’s the fault of the newspaper; it’s just technology moving on.”

So does this mean the news business will simply die out? That’s unlikely. But according to a number of Wharton faculty who have followed the subject, someone will have to come up with a new business model that pays for the sometimes costly work of gathering news while also squeezing a profit out of a readership whose options include the entire world wide web.

The paradox of the great newspaper crack-up of 2008 is that the nation’s appetite for information remains ravenous. Millions more people consume free online reports from The New York Times‘ global news bureaus than ever paid to do so back when the firm’s finances were riding high. Indeed, that very phenomenon has added to the challenges facing smaller metropolitan papers, whose monopoly status once obliged readers to either settle for the attenuated version of the world offered by their local daily, or seek out expensive out-of-town papers.

Of course, the web doesn’t simply pit one media firm against another. A number of major stories in the past few years — from November’s Mumbai terror attacks, which featured real-time online updates from eyewitnesses, to the 2007 pet food recall, where a few pet-oriented web sites became the most credible sources about what foods were killing dogs and cats — demonstrate that trustworthy, independent sources of key information can quickly elbow established brands aside by winning readers who are as eager as ever to follow the story.

The Internet’s impact is likewise not limited to global stories: It enables neighborhood-level blogs and web sites that offer a degree of detail no traditional newspaper can offer to every corner of a metropolitan area.

Broccoli vs. Red Meat

The problem, from a business point of view, is that few of today’s eager, fickle readers are willing to pay for their online news. So far, consumers have been lucky, getting free of charge the information essentially underwritten by a dwindling number of print subscribers and advertisers. The vertiginous declines of major dailies suggest this won’t always be the case, leaving newspaper firms in the dangerous position of having to cut the staff whose reporting attracted readers in the first place. (Online advertising is growing fast, but per-reader revenue on the web remains far smaller than for print.)

So how can a professional, reliable news product turn a profit — or at least break even — for its investors? No clear route back from the abyss has emerged. But Wharton’s media-watchers offer a few ideas:

  • The Philanthropic Route: Wharton business and public policy professor Joel Waldfogel has researched the impact of news media on society and fears that a decline in serious reporting about public affairs will harm our democracy. Of course, that reporting, especially at the local level, is precisely the sort of expensive undertaking that cash-strapped news firms have often slashed as unprofitable. Waldfogel notes that in Minneapolis, San Diego and a number of other cities, laid-off newspaper staffers have turned to charitable sources to underwrite reporting for new online ventures. “We subsidized the healthy vegetables with the red meat,” Waldfogel said of the old newspaper model, where many readers would buy the paper for late sports scores, enabling important public interest reporting in the process. “Now there’s been this decoupling. It’s really hard to support the broccoli at all.”
  • The Niche Route: Forget Capitol Hill. Forget the State House. Maybe even forget City Hall. Steve Ennen, managing director of the Wharton Interactive Media Initiative, says one key to success is to provide news and information for the most local of levels. “I’m talking block-to-block,” says Ennen, citing localized web presences that have proved successful in Europe and Latin America. The problem with devoting your own resources to covering popular topics like Hollywood or national politics is that someone else is also doing so — in the process, swiping your readers. A news business that gets down to the nitty-gritty, though, can quickly have the field to itself. The same goes for other niches, from ideologies to narrow interests ranging from news about pets to the latest on Pakistan. Waldfogel predicts the online news market will eventually look like the politically polarized newspaper market of a century ago, before monopoly status encouraged most publications to seek middle ground.
  • The Pay Route: The New York Times famously cancelled its policy of keeping parts of its web site off-limits to non-subscribers. But Wharton marketing professor Eric Bradlow, co-director of the Wharton Interactive Media Initiative, says subscriber strategies aren’t always doomed. Companies from Dow Jones, which publishes the Wall Street Journal, to any number of small trade magazines that offer highly specialized information to affluent subscribers manage to keep content behind a for-pay firewall, defying the conventional wisdom about an Internet audience that demands freebies. The key is a degree of specialization, whether by locality or by subject matter, that the traditional general-interest paper didn’t deliver. Newspapers could, Bradlow suggests, “release partial information or certain stories through e-mail or other media as a way to get traction and then drive people towards the web site, which could be a pay model. It’s a classic, ‘we’re going to give some stuff away for free model.’” Bradlow notes that pay satellite radio has flourished despite the availability of free AM and FM radio and the ubiquity of iPods.
  • The Participation Route: One way the Internet differs most dramatically from print is readers’ expectations of being able to interact with one another — and with the source of the information. But this contrasts with the traditional newspaper idea that content, even content that is labeled “opinion,” is produced by professionals with specific training and standards. Wharton management professor Lawrence Hrebiniak says that’s something news companies are going to have to get over as they transition to an online existence. “Newshounds are looking for interactivity,” he says. “Whatever gives him or her a chance to say something, to have an opinion, even if 90% of it is self-serving, it works.”
  • The Commercial Route: Fader, like most observers of the media business, says survival online will require rethinking basic values about things like bias, opinion and, especially, advertising. As an example, he cites book reviews. At most newspapers, book sections have been killed off for lack of profits. But Americans still consume book reviews in large quantities: It’s just that they do so on Amazon.com, where readers’ sometimes-withering opinions about books for sale are included on the page. “Where a lot of people go to find ‘journalism’ is on commercial sites,” he says. “They go and read the reviews and ratings on Amazon…. It’s going to be a tough struggle and very few newspapers as we knew them yesterday will exist in five years. Those that [survive] will do so by getting off their high horse and doing things that would have been commercial heresy. Imagine a New York Times book review with a link to Amazon.”

As their stock values have plummeted, the harshest critics of newspaper firms have compared them to the railroads of a half-century ago — unable to cater to customer desires, even as technological change threatened to wipe them out. A more charitable comparison, Waldfogel says, might be to the music business, which saw its profits dissolve in the face of free downloading. “It’s not exactly piracy that’s killing newspapers, but it’s something like it.”

Of course, there’s another parallel: The music business, criticized for bland, generic acts, was flawed in ways that left customers broadly unsympathetic to its plight, just as daily broadsheets, after two decades of cuts and Britney Spears coverage, have lost much of their claim to nobility. The question is whether there’s a model that can revive the good pieces — the investment in people who consider it a professional duty to spread the word about everything from local traffic disruptions to national political chicanery — while giving customers the whole world of options they now expect.

Either way, Fader predicts, at least some newspapers will remain — as boutique products for a niche market willing to pay a premium for the charmingly old-fashioned idea of a hand-delivered piece of paper printed with news stories. “The kooky luxury boutique item will exist in a niche form for a long, long, long, time, until our generation fades away,” he says. “Some people still like vinyl records.”

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