Costly Mistakes   

What, if anything, could newspapers have done to slow down their decline?  Posted:  Thu, Dec. 9 2010

Could the nation's daily newspapers have done something to stave off the worst effects of the shift of advertising to the Internet that began toward the middle of the last decade?

Clearly whatever they did do didn't work. Newspaper advertising revenue fell more – more than two to three times as much in percentage terms – during the 2008-2009 recession than during the two worst previous recessions for newspapers since World War II, in 1991 and 2001.

Indeed, I would argue that what most newspaper companies did to counter weakening advertising revenue in the years leading up to and during the recession only made matters worse. Because of their actions – chiefly cost-cutting that grievously diminished the quality of newspaper journalism – the industry now is in a much weaker position than before as it confronts the growing challenges of the Internet.

There is no mystery about what motivated the cost-cutting: an effort to preserve the high profit margins the industry has long been known for, even as newspapers were being challenged by a wide array of new competitors. Some companies, mainly those that had borrowed heavily to acquire more papers when the future seemed brighter, probably had no choice if they wanted to avoid bankruptcy – and several didn't.

Otherwise, though, it's as if the industry refused to acknowledge that it was operating in a vastly different environment, one in which newspapers will be fortunate to be half as profitable (a third might be closer to reality) as they were as recently as 2004. Back then, the average operating profit margin of the publicly reporting companies was more than 20 percent.

What the industry partly sacrificed with its cost-cutting is the one attribute that has protected it against all previous competitive threats – the overall quality of its journalism. No other form of media is organized to provide broad and deep journalism so vital to our democracy – not radio, not television, not bloggers, not even the excellent online investigative journalism operations that have sprung up (See "Investigative Shortfall," Fall.) I'm talking about reporters' feet on the ground in towns and cities, producing the information local residents depend on to keep them informed about their governments, schools, crime and all other aspects of public life.

Of course, cost-cutting was not the only effort newspapers made. While there's no doubt most newspapers reacted too slowly to the advent of the Internet, almost all of them, large and small, ramped up development of their Web sites, recognizing that an increasing number of their readers were turning to the Internet for information. Unfortunately, newspapers were sandbagged in this effort by two parallel developments, one self-imposed and another that they couldn't do much about.

The self-imposed one was the earlier decision made by all but a handful of papers that information posted on Web sites should be free, under the widely held belief (including initially by yours truly) that large numbers of people taking advantage of free information would attract large amounts of advertising. That didn't happen. Lots of people came, but lots of advertising didn't. Last year, only 10 percent of newspaper advertising revenue came from online – this after a 10-year effort.

Advertising didn't come commensurate with the growth of visitors because of the major shift, beginning in 2004, of advertising away from newspapers to competing Web sites whose growth was fueled by the rapid expansion of high-speed broadband Internet access (See "The Newspaper Business," Fall.) Among the competing sites are aggregators that gleefully pluck newspaper-gathered news there for the taking on free newspaper Web sites. Only now are newspapers rethinking this disastrous strategy.

Not all of this catalogue of woe has affected all newspapers equally. Hardest hit have been the big metropolitan dailies, which also have been the newspapers that have been most draconian in cutting back. Smaller dailies – the 70 percent of the nation's newspapers with circulation under 50,000 – generally have suffered less in advertising and circulation losses.

The simple reason for this is that smaller newspapers operate in markets far less complex and competitive, online and off, compared with the ones where big newspapers operate. They tend to be closer to their readers and advertisers, and usually reach a much higher proportion of their markets' population than do larger papers. But they will not be immune from the negative trends, which usually hit big cities first and hardest and then trickle down.

So what should the nation's dailies have done to combat the Internet onslaught? Erecting paywalls to protect their most valuable resource- – the information they gather – is obvious. What also should have been obvious was not to diminish their journalism, for their strong purchase on journalism is the only thing they can leverage as they try to succeed online. Finally, they should have accepted that the cost of maintaining quality journalism in tough times inevitably means lower profits.

It's called public service.