Wall Street Squeeze   

Will rising newsprint prices and an increasing focus on the Internet trigger more newsroom cuts?

Newspaper staff reductions, especially in newsrooms, are always unsettling for those who care about the industry's financial health and especially the quality of newspaper journalism.

Reductions announced recently at the New York Times, the Boston Globe, the Philadelphia Inquirer and the San Jose Mercury News attracted a lot of attention because of these newspapers' high status in newspaperdom, yet I suspect a lot of what is going on at the rest of the nation's smaller and less prominent dailies we never hear about.

When I began analyzing newspapers in the early 1970s, it was almost unheard of for newspapers to slash staff during economic adversity. Instead, newspapers accepted somewhat lower profitability knowing that the economy would improve.

A lot has changed since then, including increased pressure from Wall Street for higher profits from publicly owned companies and the possibility that the economic model of traditional newspapering faces a transformation because of the Internet and the reluctance of young people to read newspapers.

The reductions at the papers were not draconian. All have larger than customary news staffs if you accept the old rule of thumb that a newspaper should have one news employee for every 1,000 in circulation (not everyone accepts the rule, and we suspect many aim for a lower number. See "Rule of What?" July/August 2002).

Even after the reductions — 35 at the Globe, 75 at the Inquirer, 52 at the Mercury News and 45 at the Times — staffs at the first three will still be somewhat greater than the formula would suggest based on average daily circulation, the Times only slightly below it. While the affected editors doubtless would prefer not to have reductions, their staffs still are large enough so that journalistic quality is unlikely to be greatly affected.

Why reduce staff now? Growth in advertising revenue is sluggish this year, rising slightly below the inflation rate for the publicly reporting companies. At the same time, newsprint prices have been rising for most companies by 10 percent to 15 percent per year. The eighth price increase since mid-2002 was imposed October l, bringing the average price to about the $625-per-ton peak last reached in mid-2001.

The newsprint industry, which collectively has been unprofitable for years, seems determined to correct this by reducing supply, shutting down some newsprint mills and converting others to different grades. The combination of sluggish revenue and the rising cost of newsprint, which accounts for 15 percent to 20 percent of most newspapers' operating expenses, naturally put downward pressure on profit margins.

Which brings us to the possible transformation of the newspaper economic model. So far, Internet revenue at most newspapers is small — 4 percent to 5 percent of total advertising revenue. But it is growing by 25 percent to 30 percent a year, with some of the growth at the expense of newspaper print revenue (see "Adding a Price Tag").

An excellent analysis by the New York Times' Katharine Q. Seelye notes that Ford Motor Co. intends to shift 30 percent of its $1 billion advertising budget to nontraditional media (in short, away from newspapers and broadcast), with half of that going to the Internet. This is in recognition, Ford says, that 80 percent of its customers shop online.

Moreover, newspapers are beset by reduced advertising from the consolidations of major department-store chains and other retailers, by increased advertiser spending on the Internet and by the emergence of online competitors like Craigslist and eBay. The outlook for growth of advertising revenue for print newspapers is not sanguine.

But newspaper Internet revenue can be highly profitable, since it does not require printing plants, newsprint, distribution systems and the like. In a conversation with Dean Singleton, chief executive of MediaNews Group, he estimated that 40 cents of Internet revenue actually would be more profitable than a dollar of newspaper print revenue.

The problem will come in managing the shift of dollars from newsprint to the Internet, which may not always have a salubrious effect on newsrooms. More staff reductions could be the result.

Yet it is vital, not only for newspapers but for society, that newspapers' overall economic model remain strong enough to support gathering and distributing mass amounts of news. No other media do it now or are likely to in the future. This will require newspaper managements to recognize that Internet revenue is a part of the whole and not some separate cash cow.

Addendum: In my last column about the ownership swaps in Detroit, I suggested that the Detroit News would have fewer resources to compete with the Detroit Free Press because its new owner would have a smaller claim on the joint operating agency's profits than the previous owner's 50 percent share. Subsequently it was revealed that news funding of the two papers will come before the profit split and will be equal in all respects, the better to maintain the agency's overall circulation coverage.