Newspapers and their publishers are freighted with too much bad business judgment and lack of vision. We have arrived at a turning point where either newspaper companies will crash and die under their own poor business acumen, or owners and publishers will risk every asset they have on untested business models with each new model experiencing varying success. The innovators will be those who decide they have nothing to lose and everything to gain.
For over one hundred years when someone talked about "the news media", they meant newspapers. Television and radio (and for a short time newsreels) played a part, but newspapers were the main game.
Those who operated newspapers in this golden era knew their publications rested on two three-legged stools. On the cost side it was printing, people and delivery. On the revenue side it was display advertising, classifieds and subscriptions. Forward thinking publishers tried to tinker with the three-legged stools, like advertising on the plastic bags in which papers were delivered, or sharing printing presses and delivery with other newspapers, but those were just changes in the margins.
This is worth repeating: The three-legged stools of costs and revenues for newspapers lasted for over one hundred years. More than four generations of newspaper publishers and editors learned these rules, came to believe them and knew them to be true.
Meanwhile newspaper publishers racked up 25% average annual profit margins - for over one hundred years. As a comparison, most stock portfolios would be considered wildly successful if they kept a 15% annual average.
It was hard to tell newspaper publishers and editors that they did not know what they were doing. After all, their businesses were considerably more successful that most. Tremendously profitable newspapers built monumental office buildings in the center of every city and town, sponsored numerous charities, and made huge payouts to owners and unionized employees.
When the Internet came along, it did not arrive with a splash. It creeped into their (and our) consciousness. For fifteen years it remained a curiosity to newspapers - and most certainly a cost center. Two of the three legs of the newspaper revenue stool: display advertising (online ads) and delivery (paid access), did not work well with the Internet. Searchable classified ads seemed like they could work well, but the print version worked so well, publishers reasoned, why would we willingly destroy our great and profitable product?
What's Changed
OK, OK. You probably know how this story goes. Craigslist shows up, then Google News, reader fragmentation, then all kids of blogs, etc. etc. In a very brief period of time - let's say between 2001 and 2008, the whole newspaper house of cards falls apart and we end up where we are today, with newspapers hemorrhaging cash and the two three-legged stools looking battered and missing a couple of legs.
In less than a decade, newspapers went from one hundred years of 25% profit margins to becoming the biggest money-losing industry in America.
While this is some seriously cold-water shock therapy, the newspaper business as a whole remains unprepared for this very sudden change. Media owners - along with everyone else interested in media - are struggling to understand the nature the change and to understand what comes next. Forward thinking newspaper publishers and owners are trying to understand these changes and getting ready to make a big leap.
Probably the most basic aspect to understand about the media business is that the change is not on a single axis. Back to our three legged revenue stool: News delivery is changing because readers don't just want to read it on paper in the morning, they want to read it when it happens, or in the middle of the night, or on the train, or during a break at work. They want it when they want it.
Classifieds have burst free of individual location and the slow going of reading long lists of items you aren't looking for. Buyers and sellers are instantly connected - worldwide through search engines and focused listing through Craigslist, Ebay, cars.com and hundreds of similar specialized sites. And display advertising, once the best way to find out about supermarket and department sales or the new Mustang at your Ford dealer, have lost their punch as consumers are increasingly disseminated over dozens of mediums in hundreds of media channels whether it be broadcast television, radio, cable, websites, print or in-game advertising on the X-Box.
Everything about how people consume media has changed: Consumer habits, when people want news, the amount of information they expect and what consumers are willing to pay.
Breaking Apart Newspaper Value
This last point is probably the most important: media consumers are considerably more educated about the value of what's offered to them, so they have higher expectations. Because media consumers have so many choices, they are more choosy. Why pay for something you don't want?
And here's where the traditional newspapers are in real trouble. If you're over 40, you probably remember a time when big department store chains were the place to go for everything. From clothes to washing machines, places like Marshall Field's and Winthrop & Lauder were the place to go. And then Best Buy and Lands' End, "category killer" stores, showed up and everything changed.
The core value of newspapers was always the one-stop shopping aspect. On a Sunday morning you could read a story about traveling to Japan and then check out both airline and ticket consolidator prices to Tokyo, check the classifieds for a cheap used air conditioner, then flip to the movie section, read a review and find the best time to see that same movie in your neighborhood - and get the latest news from city hall and Europe. Each of these components offered different levels of value to different people, but packaged as a whole the sum value was much higher.
Individually they all have different cost structures. I recently read that the New York Times' quarterly fashion magazine, T, makes enough revenue each quarter, to cover the annual cost of the paper's entire foreign bureaus. Imagine if there was a way to separate those two publications.
The Internet has done that - in a major way. It has separated the money-making components - travel ticketing, classifieds, even lists of sales, and broken it out from the money-losing components, like news gathering and book reviews. Imagine HotJobs and Orbitz as the new Best Buy and Lands' End category killer stores.
Now, only newspapers with big money makers like the New York Times' T magazine are earning enough cash just to cover the operations of their news gathering loss-makers. Smaller papers, or ones that don't have diversified content offerings, have fewer and fewer revenue streams to which to turn.
The Walking Dead
Because most big newspapers only a few years ago had 25% margins, large holding companies and ego-investors snapped them up in the 1990's and early 2000's through debt-fueled acquisitions with the expectation that with just a little tweaking, these papers would start generating cash through operations in a short time.
But we all know what really happened: Readership crashed and newspapers lost both their display and classified advertising base. All of a sudden newspapers couldn't generate enough cash to pay for operations and were forced to sell off assets (like real-estate or profitable TV and radio stations) and shed jobs just to stay alive. Bigger, cash rich operations like Washington Post Co. and Tribune have enough money to experiment with alternative news operations, but what about smaller papers?
The Chicago Reader alternative newspaper faces such a dilemma. Privately held and operated by the founders for four decades, by the new millennium the paper owned valuable real estate in Chicago's downtown, a fleet of delivery trucks, maintained an editorial staff of 75 people, a widely recognized brand and had a weekly circulation of 135,000.
But in 2007 the Reader was acquired by the Creative Loafing group of alternative newspapers through a leveraged buy-out. The sale price was never disclosed beyond "eight figures", but as someone who has looked at a few newspaper balance sheets, I would guess it was somewhere between $35-$50 million - including at least $5 million for their property on West Illinois Street. We can assume then, that maybe half of the sale price was leveraged - meaning Creative Loafing owes from $15-25 million in debt for the Reader, with a likely monthly loan payment of $250,000 to $800,000!
Since the purchase, Creative Loafing has sharply cut printing costs through reducing the size of the paper, cut the editorial staff by more than 50%, sold the pricey Illinois Street building and reduced its delivery area. And it is still in bankruptcy.
What assets does the Reader have left? Basically, the nameplate. A brand. A brand that is gradually losing luster as the paper gets smaller and less value is delivered with each weekly edition.
The best course of action for the Reader would be to shut everything down and reinvent itself as a web-only publication. But its creditors won't allow that. Most of their value is locked into it continuing as a going concern newspaper.
Too strong to die, too weak to run, the Reader limps along, its dwindling editorial staff trying to make lemonade out of lemons with every issue.
The Small, The Fleet, The Unpredictable
Not surprisingly, the biggest innovators in the news media have been the ones with the least to lose. Think of Talking Points Memo, Chi-Town Daily News or (the much maligned) Huffington Post. Talking Points Memo went from a solo blog by Joshua Micah Marshall in 2000, to a multi-person editorial staff with reporters in New York and Washington, DC. Chi-Town Daily News, a non-profit focused on hyper-local news coverage in Chicago, has built a readership of tens of thousands with a trim editorial staff. And Huffington Post, through the glamour of its founder, has combined news aggregation and original content to attract hundreds of thousands of liberal readers.
Free of debt payments and legacy costs, these publications have been innovating as fast as they can think of new ideas. Chi-Town Daily News has been blogging local political events, Talking Points Memo recently added a daily news update video podcast. Maybe the ideas will be popular and make money, maybe they won't. As long as they can keep innovating, these nimble operations get closer to becoming the next profitable media model faster than behemoths like Tribune Company every day.
Dad, husband, MBA, homeowner, publisher of hyperlocal 
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