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July 20, 2018, 11:39 a.m.
Business Models

Newsonomics: Newsprint tariffs are a Black Swan event that could speed up the death of U.S. newspapers

The tariffs increase the cost of newsprint by as much as 30 to 35 percent, though the impact on publishers is highly uneven, with some chains in better shape and the dwindling independents most at risk.

People have been forecasting the “death of newspapers” for more than a decade now. They see a kettle of vultures amid the ever-darkening clouds of print advertising collapse, slowed digital advertising, and the difficulty of signing up new digital subscribers.

Now the battle is heating up on Capitol Hill over tariffs that the Trump administration imposed on Canadian groundwood paper earlier this year.

The tariffs increase the cost of newsprint by as much as 30 to 35 percent, though the impact on publishers is highly uneven, with some chains in better shape and the dwindling independents most at risk. The predictable impacts already in motion: more newsroom layoffs, thinner (and reshaped) print products, fewer Sunday preprints, and an overall further diminishing of the value proposition newspapers are offering their readers.

The Pittsburgh Post-Gazette will reduce its printing days from seven to five next month. The Nevada Appeal in Carson City, Nevada, moves from six to just two days, while its parent cuts frequency on three adjacent papers.

Within the industry, there’s talk of “dropping Mondays” and replacing print editions with e-editions on other days as well. It looks as if newsprint tariffs will force more publishers to take the path Advance Publications first took six years ago, swapping daily print for digital.

One big question: Are these dailies much more ready in 2018 than they were in 2012 to “go digital?” Can they “transform their businesses and still keep any semblance of sufficient news-producing capacity in place?

Black swan events — like sudden oil shortages, 9/11 strikes, stock market meltdowns, volcanic eruptions, the Black Death of medieval Europe — unexpectedly and sometimes catastrophically swoop in, causing, exacerbating, or proliferating great change, as author Nicholas Taleb wrote in his bestseller The Black Swan. “Most vulnerable to such natural or man-made disasters: those individuals or companies already ailing,” he wrote. Exhibit A: the newspaper industry.

Behind this tariff battle

The genesis of this particular tariff battle — distinct from Donald Trump’s wide-ranging attack on the global trade status quo — is quite arcane. Newsprint manufacturer NORPAC brought its “newsprint dumping” case against Canadian newsprint manufacturers in August 2017, a little less than a year after private equity company One Rock Capital Partners took control of the company. It alleged that Canadian government subsidies allowed Canadian manufactures to sell paper at prices 16 percent to 65 percent lower than the market.

The Longview, a Washington–based company, is the sole complainant. Now allied against it: all the major newspaper publisher organizations, two key unions and 19 testifying bipartisan members of Congress. The tariffs imposed thus far now range up to about 22 percent, and could rise as high as 50 percent. They will stand unless at least three of four U.S. International Trade Commission (USITC) commissioners vote to overturn the tariffs at a vote scheduled for August 28.

There is no guarantee that the newspaper industry will be able to get the tariffs reversed. If they are, NORPAC could appeal; process (if the publishers lose, they can also appeal).

“You got two years of litigation,” said Paul Boyle, SVP of public policy of the News Media Alliance (NMA), the newspaper industry’s largest trade group, of the potential lingering impacts. “You’re going to see more newspapers cut pages. They’re going to cut days of delivery. They’re going to lay people off.”

NMA receives good marks from its members for its early and organized opposition to the tariffs.

“NORPAC is an outlier. It doesn’t have multiple operations. It is not doing the steps that Resolute or Kruger [two large Montreal-based paper companies] or others have been doing,” Boyle said. “They’re closing inefficient machines because the demand has fallen, given the shifts toward digital. So, this private equity firm comes in and buys the company while everybody else is managing to the lower demand.

“They’re basically trying to use current trade laws to get an advantage or improve their financial condition at a time in which every newsprint mill has been facing declining demand and had to close or convert mills. It’s had nothing to do with pricing. There’s no smoking gun, but everybody thinks that that’s the genesis of it.”

Long-time free enterprise advocate Steve Forbes agreed with that analysis, telling the Wall Street Journal, “NORPAC’s petition is an example of protectionist cronyism. Among U.S. paper producers, the company is conspicuously alone in its petition for protective tariffs.”

“It’s not pricing from Canada. It’s the overall shift in demand for newsprint,” Boyle said. “So, what the ITC is looking at is: Was there material injury by Canadian imports during the period of investigation [2016–17]? Are [U.S. newsprint manufacturers] threatened with material injuries? We try to point out that these tariffs are more of a threat to the U.S. newsprint industry than Canadian imports because newspapers are cutting back demand.”

Why would that be the case? Why would these steps that are supposed to advantage U.S. manufacturers actually hurt them?

Boyle says that’s simply a recognition of how companies behave. Publishers, he says, will find multiple ways to cut newsprint consumption and those cuts will be permanent, not to be reversed even if the tariff decision gets reversed.

“If these tariffs are removed, you’re not going back to seven days. In Ohio, the Madison Press, with 1,300 weekly circulation, just moved completely to digital. They’re not going back to print.”

It’s not just the cost hit here. There’s a parallel revenue one as well.

“What people are missing is the impact on preprints [advertising inserts],” said Tonda Rush, public policy director of the National Newspaper Association, a major group of smaller dailies and weeklies. “We’re seeing a 20 percent reduction in preprints as well.” Why would advertisers cut back on those still-lucrative-to-newspapers Sunday circulars? The cost of paper drives their own volume reduction.

That business, too, may have a hard time returning even if the tariffs get turned back.

Speeding the downward spiral

This potential black swan won’t cause the death of newspapers — at least not in the short term — but it may well deepen the incontestable downward spiral of the traditional local news business. As publishers and CEOs grapple with a major unexpected new cost of operation, they quickly look for ways to offset the new expense.

Even among those who prize their newsroom staffing as both a business and community essential, the choices are becoming fewer and fewer.

What’s at the top of their lists? Fewer pages of newsprint to print, of course. Some reconfigure the page itself, to use less paper. Others look to charge subscribers more for the pages they do print, even with the acknowledgement that further raising prices may be suicidal.

Some will accept lesser profit, a commodity narrowing over time as well, and some won’t.

The prospect of further cutting news product, coupled with new price increases, reminds me of the metaphor I’ve often used to describe the downward trajectory of the industry: “It’s like selling a 20-ounce bottle of Coke for a buck — and then three years later hawking a 10-ounce bottle for $2.”

Charging more for less seldom works in the long term for any business or industry. Besides, reported company financials tell us that many publishers have already hit the wall. They’ve more than doubled their prices and halved their products — and their circulation revenue results are, for the most part, flat at best, and in some cases, trending downward.

Make no mistake: Newsprint itself is still what makes newspaper companies possible. For most companies, more than 70 percent of all revenues in 2018 still remain print-based, with too many companies still seeing only 15 to 20 percent in digital revenue. That’s despite the unending decline of print-driven dollars.

How big an expense is newsprint? It can be the second largest expense after staff. Inland Press Association, which represents hundreds of largely non-metro press titles, says that its 2016 survey showed that newsprint made up 10.5 percent of total operating expense. Of those respondents, 75 represented papers with an average daily circulation of less than 25,000. At larger chains whose representatives I’ve spoken with, newsprint makes up between four and eight percent of expenses. What accounts for the difference between the larger and smaller papers? Chains’ volume of newsprint buying helps lower costs per ton. In addition, smaller papers may be running comparatively larger “news holes” than chains.

In any event, the hit here is uneven. For some chains, we can count the impact in low millions. For others, it will amount to $20 million or more. That could be 200 jobs within a single company. One CEO who asked for confidentiality told me that, with these tariffs, “There’s no extra revenue product being created. It’s all cost.”

For chains like Gannett, Digital First Media, and McClatchy, which maintain partial ownership in newsprint companies and have longer-standing big deals, the impact may be more manageable. For other chains, it is less so.

For the little guys, it’s both a question of cost and, potentially, of unavailability.

“The financial sustainability of the Black Press of America is now facing a catastrophic and a possible deadly impact, because of these new tariffs,” Ben Chavis, CEO of the National Newspaper Publishers Association, wrote this week. His association represents more than 200 African American publishers.

“During the past 191 years, the Black Press has survived, endured and overcome past firebombing and improvised explosive attacks, as well as other deadly manifestations of racial violence,” he wrote. “Given that newsprint and labor account for most of the cost of running a newspaper, it is easy to see how jacking up the price of newsprint by more than 30 percent could spell the difference between these publications eking out a modest profit or going out of business.”

In an era when the foundations of democracy and press meet daily new challenges in the homeland, we may encounter one of the hallmarks of non-democracies — a scarcity of the very stuff that newspaper printing depends upon. Here, even as a president assails the press nationally as the enemy of the people, and as Congress members now use the same mantra against publications like the Fresno Bee, that’s just collateral damage. Yet, it’s damage nonetheless, with the same impact of such newsprint-restricting moves in Russia and Turkey: less newsprint, less news, fewer journalists.

Publishers now find themselves even more boxed in than they were six months ago. What will that prompt? More selling by independent publishers, for sure.

Remember that 2018 marked the biggest year for the sale of newspaper properties in almost two decades. This expense hit — and future uncertainty — will only exacerbate that trend.

For those who stay in business, what will be the result?

Consider that still-continuing reliance on print for revenue. The great majority of newspaper companies have not found a model that will sustain stable newsrooms if and as they go more digital. They can, and will, cut days and shrink product, but unless they can produce mobile products that themselves produce mobile-centric subscriptions, there’s little there out there. One dirty little secret: many metros now know that more than a third of their print subscribers are 70 years or older.

Amid multiple crises, newspaper publishers and journalists struggle to keep their heads high and their notions of public mission intact. In this current drama, we may see their dignity further challenged.

“I’d be surprised, with all that is going on, if all the companies that are making newsprint today will do so tomorrow,” one CEO told me Thursday.

Tariffs create chaos for the manufacturers, even as they react to declining worldwide demand. Maybe there’s a more stable market for the pulp they process.

“Why not just make more tissue or toilet paper?” said the CEO. “That would be easier.”

Photo of newsprint by newsprint“>Amanda Graham used under a Creative Commons license.

POSTED     July 20, 2018, 11:39 a.m.
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