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Feb. 24, 2009, 11:54 a.m.

Bankruptcies: What kind of changes will they force on newspapers?

Four major newspaper firms have now declared bankruptcy.  The rest of the industry is on the ropes — sources of credit or equity funding have virtually dried up; there is basically no market into which to sell publishing assets to raise cash; the ability to maintain quality and to innovate is seriously hampered by continual cost-cutting necessary to maintain positive cash flow and meet debt service obligations.  Many individual newspapers, especially in metropolitan areas, are reportedly operating in the red.   Further bankruptcy filings seem inevitable.

We’ve seen this before in other legacy industries, most notably U.S. railroads.  In 1920, trains carried a total of 1.2 billion passengers, the peak year for rail travel in this country.  Despite a few upticks during the late 1930s and World War II, it was all downhill after that as personal automobiles, buses and airplanes siphoned off traffic, and as government policy failed to encourage rail travel as it did in Europe.  For five decades, railroad companies struggled against the tide but failed to adapt.  By 1970, much of the industry was bankrupt.  Today, the government-owned Amtrak system carries a grand total of 29 million passengers a year, about 2.4 percent of the 1920 level.

The discerning reader will notice some parallels with long-term trends in the daily newspaper industry:

  • Printed daily newspaper circulation (as reported by the NAA) hit a peak of 63,340,000 in 1984 (having been virtually flat for the previous 10 years), and has since declined to 50,742,000 in 2007.  (Undoubtedly, the 2008 level will be reported under 50 million.)
  • Like the railroads of yore, newspapers are challenged from multiple sides by disruptive innovations, as well as by a long demographic shift away from printed news consumption that has raised the age of the median printed newspaper reader to nearly 60.
  • Newspaper print advertising revenue, in actual dollars (no inflation adjustment), hit a peak of $48.67 billion in 2000.  For 2007 revenue was down to $42.21 billion, and when 2008 is reported (any day now), the figure will be about $35 billion.
  • Online advertising at newspaper sites has grown from $1.22 billion in 2003 (the first year reported by NAA) to $3.17 billion in 2007.  It will come in roughly unchanged in 2008.  However, (a) online revenues include a questionable level of forced “upsells” from print, and (b) online revenues don’t cover the cost of online operations. And what really points to their insignificance is the fact that Google’s 2008 online ad revenue topped  $21 billion and grew 29 percent over 2007.
  • The ad numbers appear bad enough viewed in those terms, but a more realistic measure is to look at the newspaper industry’s share of total advertising dollars, over time, across all media.  This eliminates the effect of inflation and puts the numbers in context.  I can’t find numbers prior to 1948, but it seems likely that newspapers hit their share of market peak around 1920 just as rail travel did.  In my previously published chart showing share of total advertising for individual media, newspapers owned 37 percent of total ad dollars in 1948 and have fallen steadily ever since, sliding at 15 percent in 2007, with an accelerating drop in the last few years.

With a 10 percent share of overall advertising obviously ahead this year or next year, and all the other trend lines pointing ominously toward catastrophe, the sustainability of the industry is in serious question. Bankruptcy, as a legal mechanism, is not intended to encourage innovation, and doesn’t often result in a newly-conceived enterprise ready to meet the challenges of a new age.  It’s possible that only a few more newspaper firms make Chapter 11 declarations, but the rest of the industry will be teetering at the brink.  Restructuring is a problem for the industry as a whole, not just for bankrupt firms.

The industry has a narrow time window in which to consider some drastic moves not only to simply survive through bankruptcy or skate around its edge, but to emerge from this recession with a structure that can enable a thriving news industry.  Here are some of the options that need to be considered in the next weeks and months, not years:

  • Consolidation at a corporate level. There may not be many more economies of scale to be had by combining multiple newspaper companies into a single entity, but some savings are better than no savings.  A large consolidated entity with a new vision might attract new investment.  The downside, of course, is that big corporations will get even bigger, more inflexible, and further removed from local realities.
  • Consolidation at the city and regional level. As we’re seeing in Denver and Seattle, fewer areas will sustain multiple newspapers.  Given the economic climate, antitrust issues are unlikely to get in the way of fully combined operations and publications to replace JOAs or competing papers.  This has its downside also, but it’s probably the most inevitable development.
  • An accelerated move to online-first (and only-only in some instances).  When big-box store chains go bankrupt and avoid liquidation, they generally shed a slew of unprofitable locations.  Rather than locations, newspapers should shed unprofitable days.  In many markets, a good hard strategic analysis would result not just in trimming a day or two, but in an online-first news organization publishing in print only once or twice a week.  To me, this actually would be the most promising development that could emerge. You can read some of my previous elaborations on this topic:  “The bottom line: how it fares when you nuke your newspaper“; see also here and here.
  • Vertical de-layering. This would be a natural consequence of any newspaper firm that truly decided to focus on being a digital enterprise.  A delayered organization would keep the capacity to generate content and to sell advertising, and would let someone else own their buildings, their presses and their distribution organizations.
  • Merge or collaborate with other local mediaI’ve pointed out that once a paper decides to publish less than four days a week, it can bypass the cross-ownership rules and get in bed with local TV and radio stations.  The opportunities for content sharing, cross-selling and administrative efficiencies are huge.  There would be endless handwringing about the need to maintain multiple independent points of view, but the reality is that there are more “voices” in any market today than ever before, and anyone can launch a new one on their proverbial kitchen table.

Unfortunately, only the first two options are likely to be pressed by bankruptcy courts and creditors; the last three require strategic vision that’s not going to emerge from the offices of lawyers and accountants.  But one can hope that somewhere in the industry there is some capacity for far-sighted thinking.

What won’t happen:  (a) a government bailout (there’s no cash or appetite for this); (b) rescue by non-profit foundations (they have no cash or appetite for this, either); (c) Pay-for-content on a subscription model (see Matt Ingram on this subject); (d) pay-for-content on a micropayment model.  (Micropayments can’t be implemented in the newspapers have left to find solutions.  But there are opportunities in the longer run, I believe, for an innovative two-way micropayment model.)

POSTED     Feb. 24, 2009, 11:54 a.m.
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