Not Dead Yet   

Despite the gloomy news about newspapers, many smaller dailies still make money.

Lost amid the barrage of downbeat news about newspapers closing or filing for bankruptcy is this central fact: There are a thousand daily newspapers in this country — 70 percent of the total — that for the most part remain solidly profitable and are in no danger of collapse, despite a lot of loose talk about newspapers being on the verge of extinction.

These are the newspapers with circulations of 50,000 or less — their average circulation is less than 12,000 — that serve readers and advertisers in the nation's smaller towns and cities. For millions of Americans and across great swaths of the nation, they are the newspaper business, not the larger metropolitan dailies whose troubles we hear so much about.

True, there are pockets of the nation where even small dailies are suffering; Michigan, with its grossly depressed automobile economy, is a notable example. But in the main, based on my own consulting for companies that own small dailies and conversations with others, the typical smaller newspaper continues to prosper, albeit at a lower profit level than two or three years ago.

There are a number of reasons for the disparate fortunes of small and large dailies, which I will explain below, but first I want to clear up some misleading impressions fostered by the closings of the Rocky Mountain News in Denver, the Seattle Post-Intelligencer and the Tucson Citizen. Invariably news accounts about the faltering newspaper business cite the closings as symptomatic of what ails newspapers.

In fact, the only thing notable about these closings (pale versions of the Seattle and Tucson papers continue online) is that the papers lasted as long as they did. Weaker newspapers in two-paper markets have been shutting down for more than 50 years, ever since television became ubiquitous. These three hung on solely because they were in joint-operating agreements with the Denver Post, the Seattle Times and Tucson's Arizona Daily Star. True, the recession pushed them over the edge, but their closings really have little relevance to the fate of other newspapers.

What does have relevance is the collapse of classified advertising at large metropolitan dailies, which is the major cause of the differing fortunes of large and small dailies. In normal, non-recession years, large dailies garner 50 percent or more of their advertising revenue from classified; the percentage of profit is even higher, since classified has a high profit margin.

The three major sources of classified advertising are automotive, real estate and help wanted, and all three starting tanking in the final months of 2007. They dropped in smaller markets as well, but not by as much, and the impact on smaller dailies was less severe because in normal times they get only about 30 percent of their advertising revenue from classified.

Moreover, smaller dailies operate in less complex and competitive markets compared with large dailies. Smaller dailies also tend to be closer to their readers and advertisers than large dailies are. The combination of these factors means that smaller newspapers are just not as vulnerable as large dailies are to the national economic meltdown.

None of this is to say that all newspapers, large and small, do not face formidable challenges for the future. In all past recession recoveries, the newspaper industry was able to recapture almost all the advertising it had lost. The last recovery year was 2002. There of course was an Internet in 2002, but in the years since, the Internet has become far more competitive for eyeballs and advertising.

This likely means that in the next recovery, newspapers will not be able to recapture all the advertising they have lost in the current recession. Whether they will lose 15 percent or 75 percent of what they had I don't have a clue, and I don't think anybody else has either. But they are sure to lose some, with large dailies suffering more than smaller ones.

What does this portend for the future? For certain, newspapers will be less profitable. Assuming that the publicly reporting companies can serve as a proxy for the industry, average newspaper profitability peaked at 22.7 percent in 2000 and has been declining since. Last year, it was just over 10 percent, thanks to massive cost-cutting in the form of layoffs, newshole reductions and circulation cutbacks.

Going forward, the large metro dailies will be thinner in size, content, distribution and just about everything else, continuing a trend already under way. Smaller dailies will become even more hyperlocal. One can only hope that newspapers will figure out a way to stop giving away information online that they charge for in print and that they will be more successful than they have been in capturing Internet advertising.

My greatest fear is that newspapers' diminished journalism will cause permanent harm to their market strength and their ability to succeed on the Internet and in print.