The Washington Post was an icon during the heyday of print journalism. Whether it was stories based on the Pentagon Papers or its investigative reporting on the Watergate scandal, the Post was a powerful national voice. Over the last decade, however, the newspaper has been buffeted by the same brutal forces besetting its print competitors: declining ad revenues and a shrinking subscriber base.

These days, the Washington Post Co., owner of the Post, is struggling to find a new direction as print continues to wither and its education business, Kaplan, shrinks in the wake of questions about the business practices of for-profit universities. The company’s recent deal to acquire a hospice company may have left some observers scratching their heads. But the move was clearly a signal that the firm is looking for new sources of growth as its two core businesses decline.

“Clearly the print-to-digital shift is a major cataclysmic event across the board,” says Wharton management professor Daniel Levinthal. “But the real challenge isn’t just a technological shift. The problem is that the business model in that industry is changing. How you can profit from the original content that the Post and others were created to develop is now problematic.” Among the casualties in that shift: Newsweek magazine, once owned by the Washington Post Co., which announced on October 18 that it will shutter its print operation at the end of the year and move to an all-digital format.

The magnitude of the challenge facing the Washington Post Co. is evident in its stock price. Five years ago, shares in the firm, which is controlled by the Graham family and led by CEO Donald Graham, were at $850. Today, the stock trades at just over $360. The precipitous drop reflects the double whammy of the falloff in revenues at the newspaper and setbacks at the once highly profitable Kaplan education division. In 2011, the company posted net income of $116 million, a 58% decline from the previous year.

The ongoing headaches in print have caused the Washington Post Co.’s newspaper publishing operation, which includes and Slate, to rack up steady losses in recent years. For the first six months of 2012, the newspaper division’s operating loss was $38 million. As advertising spending has shifted to the web and as readers have increasingly found other sources for news, the Post and other regional papers have contracted. “[Newspapers] were like local monopolists,” Levinthal notes. “There was a certain amount of local advertising, and some went to television, radio and print — [newspapers] were guaranteed some of that. But the web blew up those geographic boundaries and there went the economic model.”

Wharton professor of business economics and public policy Michael Sinkinson says the challenge facing journalism outlets like the Post is exacerbated by the tendency of readers to favor news sources that reflect their personal opinions. Research by Sinkinson and others has shown that “people like reading news that conforms to their own views,” he notes. And with the growth of digital media, “now there is a huge variety of viewpoints online, and consumers can seek out a source that matches their own perspective.”

The Post has had some digital successes, including its popular Social Reader application that allows users to share what they are reading on Facebook. But critics argue that the Post failed to exploit the brand equity the paper built up during its glory days. While digital advertising was up 8% in the most recent quarter to $26.3 million, Bradley Safalow, founder and CEO of PAA Research based in New York City, says that it is still a small slice — about 17% — of the newspaper division’s total revenues. “They didn’t take advantage of their brand awareness 10 or 12 years ago. Politico, The Hill and Huffington Post have taken tremendous mindshare in terms of where people go for political information. I would argue that [these media outlets are] really who the Post competes with.” Ken Doctor, a Santa, Cruz, Calif.-based media industry analyst for Outsell and Newsonomics, agrees that the Post should have been more aggressive about staking out its turf when it comes to online information about politics. “I think they missed a big opportunity,” he states.

According to Wharton management professor Daniel Raff, online retailer Amazon is a great example of a company that has successfully capitalized on its brand equity. “There are ways for newspapers to generate revenue that are not confined to [charging readers for access to the site],” Raff says. “Amazon started out selling books and got itself in the position of being the most prominent address on the web. They then … started renting that address and became a mall in which they owned some of the stores, but also leased space to others.” While that approach may not translate directly to journalism, it clearly suggests that the key to survival for the Post and other media outlets is to think beyond the model as it existed in print, Raff notes. “The question is, ‘Are there new ways of taking advantage of their brand equity in this setting?'”

As readers shift to the web, the Post has faced a critical decision on whether to join The New York Times and The Wall Street Journal in charging for access to its content. So far, the paper has declined to do that. Doctor says the Post has resisted out of fear that it will lose too many national readers, losses that would hurt online ad revenues. This concern, he adds, reflects an even bigger problem — the Post remains a regional publication. “The Post is not benefitting from the same economies of scale as the Financial Times, Wall Street Journal and New York Times,” Doctor points out. “Those [outlets] can monetize national and global audiences through advertising and digital subscriptions. But the Post is focused on the Washington, D.C., metro area so there is a relatively small digital upside it can wring out of that market. It is a regional paper with national ambitions.” PAA Research’s Safalow contends that the Post would have difficulty charging for access to its site. “Are they bringing anything to the market that is truly differentiated?” he asks. “The answer is ‘no.'”

A Two-way Conversation

As suggested above, and echoed in a recent Knowledge at Wharton interview with Raju Narisetti, managing director of The Wall Street Journal Digital Network and deputy managing editor of The Wall Street Journal, the print-to-digital shift is changing the ways that content is reported and presented. “The interplay of technology and content is becoming more and more critical because in The New York Times, The Washington Post, WSJ, Financial Times, and USA Today, 70% to 80% of what we write and what we cover is fairly common,” says Narisetti, who formerly was managing editor of The Washington Post, where his responsibilities included mobile and tablet initiatives. “In the newspaper world, we had a geographically captive audience. In some sense, they did not have much of a choice if they lived in Washington but to read The Washington Post in print.”

But when it comes to digital, he says, “there is immense portability of your reader. And they have become more promiscuous in where they can go and what they can sample. So the only way you’re going to be competitive, the only way you’re going to build engagement and loyalty, is if you take your great journalism and create an amazing experience around it. By that I mean give readers a much more visual experience, whether it’s video or galleries or audio, or the ability to engage with your content, co-create content, or use the databases more effectively. None of this could be done in print. That whole experience is what will bring them back to you versus going to another site. And I think that requires journalism to be hand in glove with technology. That hasn’t been the case all these years in most media houses.”

Now that web 2.0 has allowed media companies to converse with their audience rather than simply push content onto them, one could ask whether this new model improves discourse or weakens it. According to Narisetti, “There are both good and bad implications. Most newspapers — the Post was a pioneering website — basically took the print edition and put it up on the web. In some aspects that hasn’t really changed. For example, most newspapers still have this idea that they’ll have one front door, the home page, and once you come in they will give you a lot of other options. But I think a lot of niche sites, for example Politico in politics, have really gained ground by not having this single home page approach. So that has changed.”

It has “become much more of a two-way communication as opposed to treating readers like we would treat them in print, which is to tell them: ‘Here are the five most important stories. That’s why we’re putting them on the front page,'” Narisetti adds. “The ability to co-create content, to engage readers, create responses that are interesting and intelligent, and allow other people to think create a little bit of a conversation. So it’s moved from disseminating to having a conversation. And the web and mobile technologies have really allowed us to do that.” (To read a transcript of the full-length interview with Narisetti, click here.)

Cash Cow Collapse

Even as the Washington Post Co. has been trying to find a winning formula in the digital world, it has seen income from its once lucrative education business collapse. The company bought test preparation firm Kaplan in 1984 and oversaw the expansion of the company into higher education programs and professional training courses. Kaplan grew explosively as it enrolled more and more students in its programs for entry-level degrees in fields like health care and information technology. But that heady growth came to a halt in 2010 after a federal sting operation called attention to Kaplan’s aggressive practices in encouraging students to take on debt to cover tuition. What followed was intense scrutiny of the for-profit education sector in Washington and surging default rates among Kaplan students.

The Washington Post Co. responded with a new program that allows students to drop a Kaplan course within one month of starting without owing any tuition. While the program should silence some of the criticism of Kaplan’s aggressive tactics, it is clear that the education division will be less of a money maker. Safalow says that Kaplan’s higher education programs had 120,000 students at its peak, but in the latest quarter that figure had fallen to 67,000.

“Overall demand is down, there is more competition and there is a negative halo around the for-profit space,” Safalow notes. “The likelihood that Kaplan will return to [high levels of profitability] in the near future is extraordinarily low.”

The Kaplan experience highlights the dangers of buying into businesses outside a company’s area of core expertise. But the Washington Post Co. management is betting it can find new businesses to boost financial returns. On October 1, the company announced it had struck a deal to acquire a majority stake in Celtic Healthcare, a provider of skilled home health care and hospice services. In announcing the deal, CEO Donald Graham said the deal fit well with the company’s “ongoing strategy of investing in companies with demonstrated earnings potential and strong management teams.”

Levinthal says that given the Graham family’s strong commitment to supporting the Post newspaper, the diversification supports that goal. “They may view [diversification] as cross subsidization,” Levinthal notes. “So they can buy entities that generate profit and allows them to make the whole corporate entity work given that they are committed to the Post. Those kinds of choices are not uncommon in a family-controlled enterprise.”

Such moves are also not uncommon in the media world. “It represents the Graham family’s desire to diversify their revenue sources,” says Doctor. “They hit a lucky strike with Kaplan before the recent woes. Until the last few years, Kaplan sustained the Post and gave the paper a lot of room in this age of digital disruption. If you use the model of doing high-level, expensive journalism, that it is very hard to sustain. So what else can you do to sustain it? Rupert Murdoch can invest in The Wall Street Journal even though it generates a modest profit because he has other sources of [money]. So as the Post becomes a smaller and smaller part of the profit mix [at the Washington Post Co.], they hope to find other sources of profit to prop the paper up.”

Of course, Murdoch’s other businesses are still media-centric. And the Washington Post Co. is going much further afield in moving into health care. But Wharton management professor Arkadiy Sakhartov suggests this disconnect is not necessarily a problem. “It seems to many people that only diversification into a related field creates value,” Sakhartov notes. “But there may be other attributes of success.” Among those factors is counter cyclicality. “There may be a rationale to invest in an unrelated, counter cyclical business that has performance that is systematically different from the core business.” 

Still, Sakhartov says diversification into an unrelated field creates real challenges. Investors, for example, may be unclear about the company’s strategy. That in turn can depress the stock price and raise financing costs. “It is very important to maintain investor relationships and communicate how value will be created,” he points out.

Filling Holes

According to Doctor, it is critical for the Post‘s newsroom management to address holes in the paper’s current strategy. For one thing, he argues, the paper should be following the lead of Hearst Corp. and offering local digital marketing services. He notes that while the Post provides marketing services through SocialCode, which helps companies build their brands on Facebook, the firm should go further. “SocialCode does marketing services on a national level,” he says. “But they are not offering that on a local level.”

Doctor suggests that the paper should also reconsider its decision not to ask visitors to its site to pay for content. Despite the risk that putting up a pay wall could drive away some national readers, newspapers that have made this switch have seen up to 10% revenue growth, he adds. “Those without a digital circulation strategy are at a severe disadvantage.”

Sinkinson agrees that there may be some opportunity for the Post in requiring online readers to pay. “I wonder if there is a way to offer a premium service where readers pay for access to the Post‘s coverage on politics. I would be surprised if there wasn’t a way to monetize their strength in political reporting.” While Sinkinson notes that other online organizations are focused on political coverage, he argues that the Post still has a competitive advantage there. “It might not be too late” to charge for that content, he says. “But if they keep cutting the size of their newsroom, at some point it may be too late.”