Go Big or Go Under   

Consolidation and collaboration might be the best bet for preserving the nation’s struggling mainstream news outlets.

The problem with the newspaper business, says Steven Pearlstein, is that there are just too many newspapers. More of them will have to die, he says, before the rest can thrive. And the sooner they start dying, the better. Pearlstein, a Pulitzer Prize-winning financial columnist (and a longtime colleague of mine) at the Washington Post, has some tough-love ideas about how to save daily journalism. Most of them can be boiled down to one word: Consolidate. Cull the news herd. Rationalize--i.e., eliminate--inefficient and redundant parts in the merged operation. Repeat. Newspapers, he says, "are in desperate need of a wider base of business to spread their fixed costs."

A heartless prescription for a business that is already black and blue and bleeding a little more every day? Maybe, but also quite possibly inevitable and ultimately beneficial--not just to the bottom line but to journalism. Just as other industries--steel, coal, autos, airlines, you name it--have combined into fewer and more powerful players, so, too, may the troubled news business be in for an era of contraction and consolidation.

It's not just because economic forces are working against newspapers (and the rest of the mainstream news industry, too). It's because, in its current form, the newspaper industry is highly fragmented. Even with the loss of afternoon papers and the death of multi-newspaper towns over the past few decades, newspapering remains practically a mom-and-pop business. According to the Newspaper Association of America, there were 1,408 daily newspapers in the U.S. last year. Most of those papers are small; only 395 dailies have circulation over 50,000, according to the Audit Bureau of Circulations. The largest newspaper company in the nation, Gannett, operates 84 dailies, which account for a modest 12.5 percent of the nation's daily newspaper circulation. As a business matter, few newspaper companies dominate a particular region or state. Gannett's 10 largest papers (outside of the nationally distributed USA Today) are literally all over the map, stretching from Rochester, New York, to Detroit, Des Moines, Phoenix and Honolulu.

As a result of this balkanized structure, newspapers have never enjoyed what economists and business-school types like to call "scale efficiencies." Unlike Wal-Mart or Home Depot, which can squeeze lower prices from their suppliers, newspapers have never had such advantages. They could afford not to: Sky-high profits meant every publisher could maintain its own presses, distribution operation, promotional campaigns, ad-sales and newsroom staffs, even though some of those functions and their costs could conceivably have been shared with another publisher just down the road.

But that world is rapidly fading. The recession and the movement of news to the Internet have changed the competitive landscape. As the lights go out on America's few remaining two-newspaper towns (Seattle, Denver and Tucson in the just the past year), the real question is which major city will be the first to become a no-newspaper town (see "Cities Without Newspapers," June/July). Consolidation could help TV stations produce news at lower cost, too, but getting bigger is more problematic in broadcasting than in newspaper publishing. For decades, federal laws and regulations have set limits on how large a broadcast company can be. Among other things, rules prohibit companies from operating more than two TV stations in most cities or owning the licenses of stations that collectively reach more than 40 percent of the country's population. Also banned: cross-ownership of a TV station and a newspaper in the same town. Big broadcast companies have lobbied for years to eliminate these rules over objections from smaller broadcasters and grass-roots groups who say that deregulation would destroy "localism" and ownership diversity.

But the opponents' arguments seem outdated in an age of cable, satellite and Internet alternatives, says Ken Ferree, a senior fellow at the Progress & Freedom Foundation, a libertarian think tank in Washington, D.C. Eliminating the rules would help newsrooms, he says, by expanding the potential profit base of their parent companies. "If you love journalism and journalists, you've got to love the [companies] that pay them," says Ferree, who once ran the Federal Communications Commission's media bureau and the Corporation for Public Broadcasting. "You need more consolidation if you want to sustain a real journalistic organization."

Cost-sharing--a tentative step toward an outright merger--has already begun to pick up pace in the newspaper industry. A few papers have cooperative printing arrangements, but the real innovation is taking place in newsrooms. The three largest papers in South Florida--the Miami Herald, Sun-Sentinel of Fort Lauderdale and Palm Beach Post--now share local news reporting. The Pittsburgh Post-Gazette and Philadelphia Inquirer cooperate in covering their home state. Papers in New Hampshire, Maine, Oklahoma and Texas are sharing their work. My own paper, the Post, cooperates with a one-time rival, the nearby Baltimore Sun, on sports coverage. The most elaborate news co-ops are emerging in the New York-North Jersey area and in Ohio, where the state's eight largest papers last year formed the Ohio News Organization to coordinate coverage of some news events and to share features, editorials, graphics and photos. (See "Share and Share Alike," February/March)

The co-op arrangements do more than save money, says Columbia University journalism professor Michael Schudson. Without the obligation to cover routine stories, reporters are free to produce enterprise stories and investigative work. "It makes a lot of sense to me," says Schudson, coauthor of "The Reconstruction of American Journalism," a report on emerging models for accountability journalism released in October. "People have always asked me, 'Why do we need a hundred reporters at White House press conferences?' The answer is, maybe we don't."

If newsgathering--a newspaper's most important function--can be shared over a statewide base, why not manufacturing and marketing costs, too? Take Pearlstein's hometown, Boston. Its newspaper market exhibits both inefficiency and opportunity. What if the city's metro dailies (the Globe and the Herald) aligned with smaller dailies in Lynn, Quincy, Framingham, Lowell and beyond to form regional newspaper clusters? That way, instead of each paper operating its own printing plant, one or two regional plants could do the job for all.

Newsprint could be bought in bulk. Instead of separate ad sales staffs, one could serve the entire group. Newsgathering could be centrally managed, too. A couple of region-wide news clusters might offer more comprehensive and competitive news products than the present market. "All those little papers don't compete now" on news coverage, Pearlstein says. "Each one is a monopoly in its market. There never was any competition to cover the Amesbury selectmen's meeting. There was competition to cover the statehouse, but not anymore." (See "Statehouse Exodus," April/May) Larger, more efficiently run news groups might have the wherewithal to go head-to-head with each other on some kinds of coverage, he says, much as a dozen or so national papers in Great Britain do now.

The drawbacks of such an idea are obvious and strike at the heart of the way the news has been covered in America for a few centuries. Local news coverage--and the local identity of each constituent paper--would no doubt suffer under such an arrangement. But neither would be entirely diminished, given that technology makes it possible to zone a regional paper and to tailor Web pages by a subscriber's Zip code. Pearlstein acknowledges that there would be a loss of ownership and control, community focus and character--the same complaints that have marked consolidation in the restaurant, banking, hotel, hardware and bookstore businesses. But those may be acceptable tradeoffs, he says, particularly when the alternative is losing a local paper altogether.

Many of these dynamics have occurred to Walter Hussman, the feisty owner/publisher of the Arkansas Democrat-Gazette in Little Rock. Hussman is something of a legend among newspaper publishers for outlasting mighty Gannett in a head-to-head battle in Little Rock back in the late 1980s and early '90s. In recent years, the Democrat-Gazette and two other Hussman-owned dailies have taken on the Morning News, owned by Stephens Media, in northwest Arkansas. The competition has been a bloodbath; both companies say it has cost them millions of dollars in losses.

The solution: An unusual merger of the two operations. Under a partnership announced in early September (and approved by the Justice Department in late October), Stephens will handle local news and the Hussman-owned papers will be responsible for regional news. Production, distribution, advertising and other business functions will be handled by the Democrat-Gazette.

Hussman says the competition was good for readers, advertisers, journalists and the communities the papers covered. But that was before the Internet and the recession. "Realistically, we could have gone on losing money for a long time," he says. "Our competitors have deep pockets, and they could do it, too. But that's not a productive endeavor. Today we need more competitive structure." Hussman says he doesn't know precisely how much the merger will save or how much of the overlapping newsroom and business operations will ultimately be cut as operations are merged. But he says, "We know intuitively that this makes sense and this will be much more economical. We could still lose money. You don't know what business conditions will be. But we will be a much more efficient operation."

The publisher is quick to point out what the partnership with Stephens is not: a joint operating agreement. Under a JOA, two competitors merge their business operations and split revenue and profits while continuing to publish separate newspapers. Congress explicitly permitted this exemption from antitrust law by passing the Newspaper Preservation Act of 1970, which was designed to prop up ailing papers and maintain competing voices in American cities. And for a while it did. At its peak, there were 28 JOAs, keeping alive declining papers (typically in the afternoon market) in such cities as San Francisco, Miami, Denver and Seattle.

Unfortunately, JOAs couldn't suspend the laws of capitalism (see "The Death of the JOA," September 1999). During good times, when the profits were rolling in for both JOA partners, the continued decline of the weaker paper could be ignored or downplayed. But in the craigslist and Google era, the cost of sustaining an otherwise nonviable daily is a millstone for both partners. This has led to efforts to unwind JOAs and to sell or close the money-losing paper--hence, the deaths of the Rocky Mountain News and Seattle Post-Intelligencer earlier this year.

Hussman says the newly formed company, Northwest Arkansas Newspapers LLC, won't repeat the same mistake. Unlike in a JOA, it won't be keeping a moribund publication alive indefinitely. The company, owned equally by the two partners, will take all. "Even if our revenue goes down 10 percent in a year, one entity is still going to get [the remaining] 90 percent," he says. "We have a lot better chance of breaking even than if you have two companies" splitting the pie.

To be sure, anyone who thinks consolidation is such a great idea should keep two names in mind: AOL and Time Warner. The 1999-2000 merger of the two media giants may have been the media M&A crowd's Waterloo. The marriage's theory--that Time Warner's old-media content would create magical synergies with AOL's new-media distribution--never panned out. As it happened, AOL offered dial-up Internet access to a world that increasingly wanted broadband. Throw in the inevitable turf battles among managers from vastly different corporate cultures and you had a recipe for corporate dysfunction.

This makes consolidation among media entities "a two-sided sword," says Robert G. Picard, an economist who edits the Journal of Media Business Studies. Picard points to subpar results for other mergers, too. The wave of newspaper deals that crested just before the recession hit--most prominently, Sam Zell's takeover of Tribune Co. and McClatchy's acquisition of Knight Ridder – saddled buyers with heavy debt just as the news media's fortunes plummeted.

"At one level, [mergers] may bring efficiencies that reduce operating costs, but the processes of mergers and acquisitions also incur costs and may require making investments or incurring short- to mid-term debt in order to gain long-term benefits," he says. "Some companies can't afford to do that now." Picard says it's possible that a few daily newspapers in close proximity might merge, "but there is often animosity between the papers that makes that difficult."

The real action, he thinks, will be in striking cooperative agreements across different kinds of media and among different media companies. Big companies already coordinate the Web operations of their own properties, feeding the same ads and news to all of them at once. NBC, for example, does this for all of its TV stations' Web sites. Picard says the next step is for several companies to collaborate on--but not merge--their Web sites. "In some locations, you will be seeing cooperation among newspapers, television, radio and online that are not cross-owned because it will be jointly advantageous," he says.

Bigger could indeed be better if news producers someday hope to get paid for their work over the Internet. It's not farfetched to imagine major news organizations joining forces to produce a high-quality Web site, or a collection of Web sites, that could be put behind a pay wall. What if, for example, the New York Times contributed its text reporting, graphics and photography, ABC News contributed video reporting and National Public Radio offered its audio programs to a jointly owned site? Quality reporting and familiar brand names might make the sum of the parts worth more to consumers than the parts alone.

The notion of such news cartels makes sense to Gordon Borrell, a veteran media researcher and forecaster, because of the increasing demand for multimedia content. "Looking at the Web 10 years from now, we're all going to laugh at this period when everything was text and pictures," he says. "We face a very videocentric future. Homepages are going to look like interactive video screens some day." But Borrell, a former newspaperman who helped launch weather.com in the mid-1990s, suggests the money for such ventures won't come directly from news consumers. More likely, Internet access providers will market the cartels and hand over a piece of the revenue to the content providers, much as cable and satellite companies sell entertainment packages today. "The idea will be, 'If you get FiOs, you'll get the XYZ [news] Bundle. Only on FiOs!'"

One way or another, it suggests there's more value in joining rather than going it alone. In the end, consolidation and collaboration may happen because the alternative--a steady decline in quality and profits, an inexorable march toward the financial brink--would be worse. As Steve Pearlstein puts it, "I don't know how it's going to happen. But I'm pretty sure it's going to happen."