Can newspapers transition to digital?

Last in a series. Previous installments are here, here and here.

It is all but certain that falling advertising sales, declining readership and rising costs will begin killing off some print newspapers in a matter of weeks, months or years.

If so, the choice for their publishers will be either to migrate to strictly digital operations or to shut down altogether. The problem for publishers hoping for digital reincarnation is that most are seriously unprepared to be full-on interactive competitors.

In but one measure of the staggering challenge they face, analyst Tom Corbett of Morningstar calculated that publishers recaptured just 1.7 cents in online ad revenue for every $1 of print advertising that they lost in the first nine months of 2008. In other words, publishers last year took 100 steps backward and 1.7 steps forward.

To be sure, not all print operations are doomed. Where there is sufficient demand for printed papers among readers and advertisers in the future, they will continue to be manufactured (though not necessarily on all seven days the week).

Where the expense of producing and distributing the physical product outstrips the ability of publishers to profitably produce it, then printed papers will succumb. How long can even the mighty Hearst Corp. afford to spend $10 per copy to print and deliver the Sunday San Francisco Chronicle to subscribers who pay only $20 for a weeks-long promotional subscription?

As discussed in the earlier installments of this series, newspaper companies in a post-print world would have to rebuild almost every fundamental aspect of their businesses, from their capital structures and revenue streams to their audience bases and products. (For a second opinion, see this prescription from Dr. Mark Potts.)

It is difficult to imagine how a newspaper company forsaking print today could avoid defaulting on the billions it borrowed to fund ill-starred acquisitions or avoid further erosion in the deeply discounted values of their franchises.

In light of the highly constrained economic resources likely to be available to them, digital-only newspapers would be hard pressed to maintain the depth and breadth of professional journalism produced by even today’s most minimally funded newsroom.

If newspapers are going to be saved in a semi-recognizable form – whether in print, online or some other way – then a number of changes have to happen fast to restore the economic well being of an industry that has failed for nearly two decades to adapt to radical changes in technology, demographics and consumer behavior.

Here’s what needs to be done, urgently:

:: Newspapers should do everything they can to sustain a profitable print business as long as they can to fund the development of a diversified portfolio of media-agnostic publishing brands. While it is fine for them to produce papers (ideally in outsourced production facilities), they should be equally open to exploiting web, mobile and other delivery platforms. The only factor that should matter is whether the medium is profitable.

:: Newspapers should leverage their content-creation and marketing resources to create cost-effectively produced niche products geared to carefully selected audiences attracting a sufficiently large group of advertisers to assure commercial success. Newspapers that find it unprofitable to publish Monday or Tuesday should endeavor to develop new weekly niche products to replace them. They may or may not carry the flagship newspaper’s brand.

:: Newspapers have to abandon their all-but-exclusive dependence on display and classified advertising in favor of modern interactive formats than enable marketers to efficiently target customers on a pay-per-acquisition basis. The new media should include, but not be limited to, contextual advertising, search advertising and Yellow Pages-style directories. Newspapers should be leaders, not followers, in deploying (but not building!) advertising-delivery systems targeted to the demographics, expressed preferences and behavior of consumers.

:: Because the revenues associated with cost-per-acquisition advertising are going to be lower than the print and online rates typically charged by newspapers, publishers will have to sell advertising to far more small and medium advertisers than they historically have done. Because the value of those orders will be smaller than the schedules purchased by large advertisers, newspapers will have to develop efficient inside sales teams, rather than making the costly in-person sales calls they favored in the past. Telephone sales can be readily outsourced, affording significant cost savings in many cases.

:: Publishers also can reduce their sales expenses by developing Google-style systems that empower merchants to create, buy and pay for advertising without human intervention. To get there from here, newspapers will have to invest in acquiring (but not building!) the systems to support such services. They also will have to market aggressively their do-it-yourself ad services to both customers and potential customers.

:: Newspapers should become interactive media consultants, providing content-creation and marketing services to their client base. This would include everything from producing videos and blogs for customers to managing their search-engine optimization and keyword advertising campaigns on third-party sites. Papers should outsource SEO and SEM services to companies with that native skill.

:: The unlimited distribution of free content has to stop. While teaser snippets may be offered to strategically whet the interest of casual readers who can be turned into paying customers, newspaper companies must reassert their right to be paid for the content they create. It makes no sense to focus on driving page views when banner ad rates are deteriorating because advertisers favor targeted interactive formats whose results can be verified and measured.

:: With generic news and information freely available on the web, the only way newspapers can successfully charge for content is by creating unique and valuable information. To do this, they have to adequately staff their newsrooms. Starving this vital operation will be strategically disastrous, because weak content will turn off loyal readers and repel new ones.

:: Newspapers cannot afford to author everything they publish. They must develop compelling content by aggregating and editing data that can be easily and appealingly acquired by consumers who are overwhelmed with too much information. Aggregation sites should be combined with personalization technology and smart ad systems, thus giving consumers control of the user experience and the publisher targeted advertising inventory that can be sold at premium rates. Newspapers also should acquire algorithmic publishing systems to turn government records and other raw data into compelling new products like Everyblock. In each case, the newspaper should buy and not try to build the relevant technology.

:: Newspapers have to make their sites truly interactive. There is a strong desire among consumers – particularly young ones – to contribute to and comment on the news. Newspapers can leverage the crowd for everything from investigations to self-help forums and from hyperlocal news to restaurant reviews. In developing the portfolio of products suggested above, the middle-aged managers who make most of the business decisions would be well advised to consult young staffers – or students at the nearest high school or university – for insights into the types of products that are likely to fly.

If newspapers have a prayer of getting where they need to go, their managers will have to abandon their stubborn attachment to print-centric thinking. Here’s what I mean:

The Poynter Institute, which rightly is esteemed as a major thought leader in the newspaper industry, owns Congressional Quarterly, which is exactly the sort of profitable and growing niche publication that a publisher would be thrilled to operate.

But the Poynter Institute also owns the St. Petersburg Times, which, like other newspapers, reportedly has been losing money as a result of the long-running secular decline in advertising and the particularly nasty downturn in the economy in Florida.

So, what does Poynter do? It puts the profitable and growing CQ up for sale to raise money to subsidize the newspaper.

Because the Poynter Institute is organized as the sort of non-profit foundation that so many people think can save newspapers (a belief I do not happen to share), the institute’s charter may leave its directors no choice but to sell CQ to support the paper. Or, the decision may reflect the desire to support the paper at all costs because it probably generates 10 to 20 times more revenue than CQ.

Whatever the reason Poynter was forced to act, it shows how an over-dependence on print for too long has brought the industry to the biggest crisis in the 300 years it has existed on this continent.