Sun-Times outlook dire; break-up possible

The financial condition of the Sun-Times Media Group is far more dire than that any of the four newspaper companies that have preceded it in bankruptcy.

The company’s bankruptcy filing today signals that management may be planning to break up the Sun-Times Group by selling a number of its 59 Chicago-area publications – if buyers can be found.

Unlike the four other newspaper publishers that were at least marginally profitable when they filed for bankruptcy in recent months, the Sun-Times in 2008 lost $344 million on sales of $324 million, according to an affidavit submitted in connection with its Chapter 11 petition in a federal court in Delaware.

Absent expense reductions of unimaginable proportions, the company would appear to be headed for an even deeper loss of $381 million in 2009, according to projections based on the details contained in the affidavit.

Because the 2008 loss dwarfs the approximately $100 million in cash that the company had on hand at the end of September, the company would be seriously under water even in the unlikely event the Internal Revenue Service rescinded the entire $510 million tax bill that the company gave as one of the reasons for seeking bankruptcy protection. The tax lien dates back to the criminal mismanagement of the jinxed company by Conrad Black and David Radler.

In filing for Chapter 11, the Sun-Times joined its cross-town rival, the Tribune Co. in seeking protection from its creditors. The Tribune is listed in the Sun-Times bankruptcy papers as being owed $614,618 for the newspaper-delivery services it has been providing in recent months.

Beyond Tribune, the other publishers now operating under Chapter 11 are Minneapolis Star Tribune, Journal Register Co., and the Philadelphia Newspapers LLC. They filed for bankruptcy because they were not making enough money to service the heavy debt levels they took on. The Sun-Times, on the other hand, is losing money and appears to have exhausted its cash reserves.

Based on financial information in an affidavit filed by general counsel James D. McDonough in support of the bankruptcy petition, it appears the Sun-Times operating loss could grow substantially in 2009.

McDonough said the company fears its ad sales may plunge 30% this year on top of a 13% drop in revenues between 2007 and 2008, thus putting the company’s top line at approximately $226 million for 2009. To offset some of the anticipated $97 million drop in sales this year, the company has identified $60 million in savings, according to the affidavit. Even if the cuts were fully implemented, however, the company’s loss for the year would rise to $381 million.

In apparent recognition of this untenable trend, the management of the Sun-Times evidently intends to begin trying to sell off assets to raise cash.

While the company did not name the publications targeted for potential disposition, its 59 titles include such dailies as the Chicago Sun-Times, the Southtown Star, Aurora Beacon News, Elgin Courier-News, Joliet Herald News, Lake County News-Sun, Naperville Sun, and Gary-Merrillville (IN) Post-Tribune. The company also publishes numerous weeklies through Pioneer Press and Fox Valley Publications.

The Sun-Times retained Rothschild Inc., an investment banker, to attempt to sell the properties under Section 363 of the U.S. Bankruptcy Code. The section enables a company operating under bankruptcy protection to sell assets in a way that leaves them free and clear of such obligations as the IRS lien.

In ideal circumstances, a Section 363 sale can be accomplished in a matter of months, according to attorney Daniel M. Glosband, a bankruptcy specialist at Goodwin Proctor LLP in Boston. The bankruptcy court would distribute the proceeds of any sale among the company’s creditors, including the IRS.

While the sale of the assets through the bankruptcy court would make them more appealing than they otherwise would be, there is reason to question the strength of the market for newspapers.

No serious buyer for all or part or the Sun-Times group has emerged since it was put up for sale more than a year ago. The outlooks for both newspapers and the economy have deteriorated significantly since then.

To date, papers like the Miami Herald and Austin American-Statesman have attracted no acceptable offers for their respective owners, the McClatchy Co. and Cox Enterprises. The San Diego-Union Tribune is scheduled to be sold for a price reported by the Wall Street Journal to be $50 million, even though its real estate is conservatively believed to be worth twice as much.

Thus, the Sun-Times Group faces twin challenges: It not only has to find acceptable buyers but also has to generate enough cash to stay in business until those deals can close.

Who’s watching the statehouse?

Repeated budget cuts have gutted news coverage in state capitals across the country, creating the potential for what Paul Starr called a “new era of corruption” in this must-read article in the New Republic.

Dunstan McNichol, who took a buyout at the Newark Star-Ledger in December after a 30-year career in newspapers, describes in this guest contribution the collapse of coverage in New Jersey. He now is working on a new venture to restore at least some of the coverage that has been lost.

By Dunstan McNichol

The New York Times and the Trenton Times are delivered to my home each morning, but more of the news from our state capital these days comes to me in emails from friends and former sources.

It happened again last week, when a judge issued a ruling in a long-running controversy over how billions of dollars in state aid are apportioned among the state’s poorest schools.

Despite the fact the ruling marked the closing act of a drama that has dominated public debate and helped determine our tax bills for 30 years, there was not a syllable about the case in either of my morning papers. I found out about the order when someone tipped me off in an email.

I wasn’t the only newspaper reader in the dark. Of the 15 daily newspapers that circulate in New Jersey, only six carried the school-funding story.

A grand total of four reporters provided the stories to the 15 papers that carried it. A few years ago, that’s the kind of turnout that would have attended a sleepy statehouse press conference on beach access.

This was the latest symptom of a statehouse press corps in steep decline.

While more than 50 reporters covered New Jersey’s state government when the governor’s office set up a contact list about 10 years ago, there are only 14 names on the list this year.

The New York Times folded its Trenton tent more than a year ago. Gannett, which had kept six people handling statehouse dispatches for its network of six New Jersey papers, laid off all but two late last year.

And the Star-Ledger, which won a Pulitzer Prize with its largest-in-the-nation statehouse bureau in 2005, lost nine reporters and about 150 years of Statehouse experience in a buyout last December. I was one of those reporters.

This year, the Ledger merged its statehouse bureau with that of its once-bitter rival, the Bergen Record. Now, one 11-person bureau has replaced what once had been independent, competing and locally focused Statehouse staffs from The Herald-News, the Bergen Record, the Trenton Times, the Easton Express and the Star-Ledger.

The result of the contraction was apparent when the school-funding story failed to show up last week in the papers delivered to my home.

Newspaper editors grudgingly have conceded that their shrinking staffs are limiting their ability to handle time- and resource-consuming investigative and analytical pieces. But last week’s oversight shows the Trenton press corps has shrunk so much that its ability to cover even basic news has been compromised.

The same holds true in Hartford, where Connecticut’s secretary of state publicly lamented the decline of press coverage last year. The story is similar in almost every statehouse in the country.

In the absence of general-interest coverage and analysis of government policy, the creation of the rules, laws and budgets that affect everyone’s wallets and lives is bound to become more and more of an insider’s game.

Special interests will become the only interests unless a new delivery model is devised to restore the public’s seat at the public policy debate table.

I covered state government for the Record and the Ledger for 15 years, so I knew enough about the school-funding issue to learn more about it when it failed to appear in my newspapers.

But how much more unreported news is happening? I don’t even know what I am missing.

How can public debate be informed, or even initiated, without a sustainable press corps capable of covering and broadcasting credible information on important public policy developments?

The historic model for covering statehouse news is in rapid retreat. The time is ripe for a new model, a model that recognizes the value of the information that is being lost.

Newspaper sales slid record $7.5B in ’08

Newspaper advertising sales in 2008 fell by a record $7.5 billion, or 16.6%, according to yearend figures reported today by the Newspaper Association of America.

Print and online ad sales for the industry last year totaled $37.8 billion, as compared with a bit less than $45.4 billion in 2007.

Sales declined at an accelerating pace in each quarter of 2008, tumbling nearly 20% in the last three months of the worst year in the history of the industry.

The industry has shed nearly $11.6 billion in sales since achieving its all-time peak of $49.4 billion in 2005. Thus, 23.2% of its revenue base was vaporized in just three years.

Sales fell in every revenue category in 2008, including online, which the industry had hoped would offset mounting losses in print sales.

Although online advertising gained 7% in the first three months of 2008, it fell in each successive quarter, tumbling 8.1% in the final period. Total online bookings for the year came to $3.1 billion, or 1.8% lower than the prior year.

Here are the annual results for the other categories:

:: Classified tumbled $4.2 billion, or 29.7%. Employment plunged $1.6 billion, or 42.5%; real estate fell $1.5 billion, or 37.8%, and automotive slid $949.5 million, or 29.1%.

:: Retail dropped $2.2 billion, or 14.9%.

:: National fell $1 billion, or 15.8%.

A $7.5 billion sales plunge for 2008 was forecast here in October. The Newosaur forecast for 2009 suggests sales will fall by least 17% this year to approximately $31 billion, a level not seen since 1993.

SeattlePI.Com, starting up from behind

The closely watched online incarnation of the Seattle Post-Intelligencer is starting its new life with a number of disadvantages – and almost certainly well in the red.

Crisp and rapid execution, including an aggressive sales effort abetted by an uptick in the economy, will be required to enable SeattlePI.Com to reach its full potential. At best, that would seem to be about $7 million a year in sales, according to the projection detailed below.

Because initial sales will be nowhere near that theoretical number, the Hearst Corp. almost certainly will face multimillion-dollar losses in the early days of an experiment being monitored by publishers eager to learn if life after print will be worth living.

There are too many variables to try to guess how deep the losses might run at the P-I or how long it would take to overcome them. So, we won’t try.

But we do know Hearst has elected to limit its exposure by staffing the site with 20 journalists and 20 advertising sales people who probably represent a total of $4 million a year in operating expenses. In the unlikely event the site generated zero sales, the maximum potential hit of $4 million would be better than the $14 million the company lost on publishing the print product in 2008.

The new site is being watched widely in the newspaper industry because it represents the first major metro to go paperless. Publishers thinking about trimming or eliminating their print production schedules will want to see the sort of audience and advertising the P-I attracts.

As valuable as feedback from the Seattle experiment will be, it is worth noting that it is a decidedly atypical situation.

Because the P-I is exiting from a joint operating agreement managed by the Seattle Times, it is starting its newly single life without an ongoing classified advertising business.

With the Times in possession of the existing classified business, the P-I hastily affiliated with Kaango for free ads, Kelley Blue Book for cars and HotJobs for employment. There is nothing more than a link to Zillow on the real estate tab of its site. These relationships suggest few P-I visitors actually are placing or consulting many classified ads.

Classified advertising matters because it historically generated a significant portion of newspaper web sales. Given the collapse in the three primary classified verticals in recent years, this disadvantage may be less disadvantageous than it would have been in an earlier era.

A far bigger issue is that the P-I is starting with no ad sales operation, because the newspaper agency handled ad sales for the P-I prior to shutdown of the print paper last week. Hearst is in the process of hiring a sales staff.

Meantime, the site is heavily populated with the cheap banner ads that publications run in lieu of empty space, including pitches from a Google AdSense wannabe called Pulse360 that features tummy tighteners, teeth whiteners and colon cleansers.

It also is not clear the P-I is starting with all the web traffic to which it otherwise might be entitled. Because the Seattle JOA operated an umbrella website for both papers called NWSource.Com, it is entirely possible that some readers over the years became accustomed to going to NWSource and then clicking through to the P-I. If you go NWSource today, there is no route to the P-I.

Add these factors together and it is clear that the P-I is beginning life as more of a struggling start-up than a typical, standalone newspaper would be.

In trying to assess the potential of the business under these circumstances, the toughest part is figuring out the size of its audience.

Until the “About Us” page on the P-I site was removed last week, the publisher claimed 4 million unique visitors per month, a figure that is impossible to believe because it represents more than twice the adult population of the Seattle-Bellevue-Everett metropolitan area. Nielsen Online credited the site with 1.8 million unique visitors last month, but even this figure is hard to swallow because it is equal to the entire adult population of the metro area.

By contrast, SeattlePI.Com barely registered a pulse prior to the shutdown of the print paper on such popular online traffic-measuring services as Alexa, Compete and Quantcast.

So, I asked Greg Harmon of Belden Interactive, a marketing research service specializing in newspapers, to give me a realistic estimate of the potential audience for the new P-I. Here’s the result:

After studying the web traffic at hundreds of newspaper sites for years, Harmon says he generally has found that a paper will attract about 20% of the adults in its market. Out-of-market visitors, he says, boost the traffic of a typical site by 30% beyond the local audience. In the case of Seattle, this translates into potential traffic of about 732,000 visitors per month.

As the second paper in a two-paper town whose identity is confused by the former NWSource.com affiliation, Harmon says the 20% figure likely would be the best imaginable share of the local market for the P-I.

Harmon says the typical visitor at a metro site generates an average of 26.5 page views per month, which would put what he calls the “best-case” potential for the P-I at a bit less than 19.5 million views per month.

Assuming each of three ad positions on every page were sold at an average net rate of $10 per thousand visits per ad, annual revenue would come to a bit less than $7 million. (Classified advertising was not taken into consideration because its immediate contribution would be insignificant.)

If the expense of operating the site were $4 million, then Hearst would reap a profit of $3 million if the site achieved its full revenue potential. But the revenue number is distinctly theoretical.

Although the above analysis assumes every available ad will be sold, this seldom happens in real life – especially during the sort of difficult economic times we are experiencing today. The true percentage of the inventory likely to be sold will depend on the success of the P-I’s audience-building effort, its sales force and the future health of the economy.

Suggesting that scant time was allocated to planning the site before the presses were stopped in perpetuity, the P-I had a less than auspicious launch from an editorial point of view. It remains to be seen whether the comparatively small staff running the site can come up with an effective formula for efficiently producing compelling and viral content.

The average $10 ad rate may prove to be too generous because of the enormous amount of unsold advertising inventory all over the web. Online ad rates dropped by almost half last year as the result of the glut of unsold inventory, according to Pubmatic.Com, a company that specializes in online ad placements.

Pubmatic reported that the average cost per thousand for the sort of backfill banner ads appearing at the P-I was less than 40 cents in the final quarter of 2008. Once the P-I organizes its own, dedicated sales force, it should be able to do better than that.

Other Hearst newspapers have been having considerable success selling targeted advertising on Yahoo as members of the consortium of nearly 800 publishers who have partnered with the web portal. Assuming the P-I participates in the program, its share of those sales will help to enrich its revenue stream.

If traffic, ad volume and ad rates fulfill or surpass the above estimates, then Hearst would move from losing $14 million a year in Seattle to making a respectable, but modest, annual profit of a few million dollars.

If the economy doesn’t cooperate or the citizens and merchants of Seattle fail to embrace the site, the publisher will be faced with the choices of trimming the staff, funding another hefty operating loss or shutting down the experiment that many observers hope will show the way to the future.

Bridge to nowhere: Non-profit press ownership

Thanks but no thanks, Sen. Benjamin Cardin. Congress doesn’t need to pass a law to allow newspapers to be owned by non-profit organizations.

The St. Petersburg Times and the Christian Science Monitor already are owned by non-profits and they are struggling as much to make ends meet as most of their commercially operated peers.

The Poynter Institute, which owns the St. Pete paper in a trust established by the late Nelson Poynter, has put its prized Congressional Quarterly up for sale to offset slumping sales at the paper. The Monitor is discontinuing print production to trim an $18.5 million loss that no longer will be tolerated by its owner, the Church of Christ, Scientist.

While it was a nice gesture for the Democrat from Maryland to suggest a Newspaper Revitalization Act to enable non-profit ownership, he might as well try to repeal the laws of economics or gravity, instead.

Regardless of whether a paper is owned by a non-profit organization or an unreconstructed capitalist, it has to take in more money than it spends – or it will perish. The form of ownership doesn’t change this fundamental truth.

The problem at many newspapers is that their rich historic profits have been trimmed – or in some cases vaporized – by an average plunge of as much as 20% since the industry recorded all-time high advertising revenues of $49.4 billion in 2005. Some papers, like the San Diego Union-Tribune say their revenues have tumbled 40% in recent years.

The industry’s revenue collapse was exacerbated in two ways:

:: Over-borrowing by many publishers to fund ill-timed acquisitions caused the recent bankruptcies of such companies as Tribune, the Minneapolis Star Tribune, Journal Register Co. and Philadelphia Newspapers.

:: Even the most conservatively managed newspaper has been hammered by the worst recession in a couple of generations.

Non-profit ownership will not save a newspaper – or any other business – if it is consistently losing heavy amounts of money. Here’s a case in point:

Some civic leaders last week suggested that a non-profit group might step in to buy the San Francisco Chronicle from the Hearst Corp., which is about to axe a third if the paper’s staff to staunch a loss that probably came to some $70 million last year. The deficit likely would rise in 2009 without the upcoming personnel cuts.

While it is highly doubtful that Hearst would sell the Chronicle for the reasons described here, it would not be enough for local benefactors to create a charitable foundation to buy the Chronicle for even a mere dollar.

Absent a sharp increase in sales and a major reduction in operating expenses that Hearst has been unable to achieve over the nine years it has sunk more than $1 billion into the paper, the only way the Chronicle could survive as a non-profit would be if the civic leaders established a charitable fund capable of underwriting losses of more than $1 million a week.

A conservatively managed endowment of no less than $1 billion would have to be raised to generate the 5% annual return necessary to cover a $50-million-a-year burn rate. What are the chances of that happening?

Can WSJ pay model work at other sites?

Second of two parts. The first part is here.

Proponents and opponents of paid content often invoke the subscription model at the Wall Street Journal Online as the reason for why their point of view is right.

In the following guest commentary, Bill Grueskin, former managing editor of WSJ.Com, sorts through what he calls “a few common myths” to provide insights into why and how the Journal came to be the most prominent pay site on the web. He left the Journal last summer to become the dean of academic affairs at Columbia University’s Graduate School of Journalism.

By Bill Grueskin

Dow Jones has been strikingly consistent (some would say maddeningly stubborn) about its paid strategy.

While I was at WSJ.Com, we had many spirited discussions/arguments how much to raise the price, how many articles to make free, how to generate more outside traffic. But no one ever seriously considered making the site free.

Rupert Murdoch mused openly about lifting the subscription wall during his negotiations over Dow Jones, but changed his mind once he took over and realized how valuable the strategy was – and how irrevocable a change in that strategy would be.

And so, how replicable is the Journal’s model?

It’s hard to say, given how rarely others have tried to charge for content, and how half-hearted those efforts have been.

The Los Angeles Times, for example, tried charging for its Calendar section and listings a few years ago. It survived about as long as the New York Times TimesSelect experiment, which involved charging for opinion columns and several other online features.

One lesson from those efforts: It is a mistake to ask people to pay for chunks of content that previously were free, especially when the content – particularly something like opinion or entertainment content – is replicable elsewhere.

Which gets to the larger point, and to the Journal’s unbending decision to charge – and keep raising the price – for WSJ.Com. It is very hard to ask people to pay for something you’ve trained them to get for free.

This gets back to Alan Mutter’s concept of “Original Sin.” In that scenario, what argument would you make to your readers? Do you tell them that your current business model is failing so they need to support this other version of the same product? At that point, media companies become charities, not businesses. And charity isn’t going to support journalism.

The arguments also ignore the fact that most media companies have thrived on advertising, not circulation revenue. Even in flusher times, what readers paid for the newspaper generally covered the newsprint, ink and delivery. It was all those ads that kept the enterprise going. And, of course, that’s even more true in broadcast television news, where the subscription cost is zero.

One of the lesser-known benefits of WSJ’s subscription model was that it enabled the site to charge considerably higher rates for ads than free sites did. Advertisers were paying for the Journal’s audience, which, beyond being affluent, was in a position to buy Cisco servers and JP Morgan financial products. Ubiquity is great, but it doesn’t pay the bills by itself.

And this is where I think the paid vs. free argument gets lost.

Free-content advocate Jeff Jarvis, Alan and I would all likely agree that slapping a subscription fee on an existing free news site is going nowhere. Attaching micropayments, iTunes-style, is even more hopeless. Such tactics may temporarily reduce cannibalization of the print edition, but that erosion is well under way.

What’s missing is the more important quality: engagement. Readers’ time can be as valuable as their money – more so online, where options to flee to another news source involve clicking a mouse, not heading to the newsstand to buy a different newspaper.

You see this error in the way online publishers gauge their traffic. They usually cite monthly unique users, but, in fact, I’ve always thought total time spent per user, or page views per visitor, were more meaningful metrics.

If a news site gets 250,000 new unique users thanks to a link on Drudge, and that generates exactly 250,000 page views, the value of that traffic is minimal. All it shows is that those readers are engaged with Drudge, not the news site.

Engagement is important journalistically, too. Ask many reporters why they got into the business, and they say they wanted to have impact – on people’s lives, on government conduct, on foreign policy. You get impact by engaging readers, and, in a happy coincidence, you also get a better economic model.

What are the kinds of things readers that readers of a local news site would pay for?

How about a daily email that told them what traffic spots to avoid, or an authoritative reader-generated guide to the best and worst public schoolteachers? Or a regularly updated site that told readers how much and why local real estate listings had dropped or risen in the last few weeks, along with examples of how certain homeowners got appraisals lowered? Or innovative coverage of local government, providing sample bills every time property taxes go up and video clips of commission meetings intertwined with analysis and context? In other words, content that is truly of online, not just posted there. (Alan made much the same point, with his own examples, in his recent post here.)

Charging readers for content might work, but it needs to be a consistent approach, with targeted content that enriches the lives of readers. More fundamentally, online editors and publishers need to value their readers’ time, and make editorial and business decisions that fit that goal.

The Journal’s route may be unique, but the key to expecting readers to pay you – with their money or their time – is not.

The case for charging to read WSJ.Com

First of two parts

Proponents and opponents of paid content often invoke the subscription model at the Wall Street Journal Online as the reason for why their point of view is right.

In the following guest commentary, Bill Grueskin, former managing editor of WSJ.Com, sorts through what he calls “a few common myths” to provide insights into why and how the Journal came to be the most prominent pay site on the web. He left the Journal last summer to become the dean of academic affairs at Columbia University’s Graduate School of Journalism.

By Bill Grueskin

February 2005 was a tough month for those of us who worked at the Wall Street Journal Online, where I was in my fourth year as managing editor. A slew of media experts were telling the world that we were making a mistake of historic proportions by keeping WSJ.Com a paid site.

The criticism usually followed the same route. First, the author would invoke the obligatory paean to the Journal’s historic greatness. That would be followed by a tsk-tsking that the Journal had walled itself off from the “conversation” and thus was en route to irrelevance, followed by obsolescence.

Then, the elixir: Take down the subscription wall, make the site entirely free, and rake in those huge mounds of advertising revenue (time frame for that TBD, but trust us, it’ll come) that will more than compensate for the sudden absence of circulation revenue.

So, author Michael Wolff told a software trade group that February that the Journal was once “one of the truly astounding information franchises.” But then, he invoked ominously, “something happened” in the mid-1990s. “The Journal kind of disappeared. The Journal went out of the conversation as a point of influence…. It seemed to, if not stop existing, at least stop mattering.”

Wolff didn’t drop his argument there. He says he had “spent a lot of time thinking what happened because … it feels something of a puzzle and a little bit of a tragedy.” Applying the same rigorous research to his remedy as to his hypothesis, he determined thus: “The answer is the online thing. I think the fact that the Journal felt that it was powerful enough to charge, and for a long time everyone regarded the Journal's activities online as the ultimate. They had unlocked the puzzle. In fact, I don't think they did. I think they locked themselves into a puzzle.”

Shortly thereafter, Wired columnist Adam Penenberg warned, more in sorrow than in anger, that the Journal “is in danger of becoming irrelevant.” Penenberg applied more stringent standards to reach his conclusion than Wolff, not by quoting anyone from WSJ.Com or citing usage data, but by typing “Enron” and “Wall Street Journal” into Google search and finding only a few results. And so, Penenberg concluded, anyone doing research online (“and there are a lot of us”) were stymied from seeing Journal stories, and the Journal would become an unknown entity to a new generation of web users.

Penenberg made no mention of the fact that WSJ.Com’s subscriber base was growing more than 10% a year, or that overall Web traffic was growing faster, or that WSJ.Com had by then embarked on an aggressive effort to make individual stories freely available to bloggers and other third-party sites.

There was no need to, because he was able to quote blogger J.D. Lasica who was also thinking he might just (but hadn’t yet decided to) drop his WSJ.Com subscription because he was finding it so hard to link to Journal stories.

Four years later, the world is a different place. Major metro papers are closing or whittling back publication of their print editions. Most of their online sites are generating 10% or less of the advertising revenue that the print versions did. And suddenly, the Online Journal is being cited for its prescience and examined for whether it could be a model for struggling news organizations.

Amid all of that, I see a lot of theorizing about why the Journal now attracts nearly 1.1 million subscribers. Some of it came from a discussion last week hosted by the Los Angeles Times which involved two friends of mine, Jeff Jarvis (author and journalism professor) and Alan Mutter, who writes this blog. I asked Alan if I could use his excellent blog to offer another perspective.

There are a few common myths about how the Journal got to where it is.

The most common is that, as Jeff says flatly in the L.A. Times debate, “Its subscription fees are paid on expense accounts.” There. He just states it as if it is, channeling Jane Austen, a truth universally acknowledged. In fact, I recall several years ago that a Dow Jones executive said publicly that a survey of WSJ.Com readers showed less than a third of subscriptions were expensed. Of course, no one knows for sure, because subscribers aren’t required to disclose this to anyone other than the IRS. But the idea that the model is not replicable because of tax laws is unsupported.

Second, Jeff questions, as have others, how much the costs of acquisition, retention and commerce management weigh against online subscription revenues. In fact, churn was never very high at the Online Journal – far less than at most newspapers or magazines – and the marginal costs of new online subscribers were pretty close to zero. Most of the acquisition cost amounted to some cheap advertising and a couple of percentage points to the credit-card company. Otherwise, unlike in the print world, there’s no additional cost in delivery, paper, ink or such.

Third, many people dispute the idea of WSJ as a model because the site provides business information. There is both myth and truth to this. The truth is that, both emotionally and intellectually, readers can more easily find financial value (and justify paying a subscription) for a Heard on the Street stock analysis than a dispatch from the Baghdad bureau. Same goes for paying for someone plunking down $800 for a new refrigerator and deciding to subscribe to Consumer Reports. But if financial sites are such easy marks for subscribers, why are Fortune, BusinessWeek, Forbes, CNNMoney and even Bloomberg all free online?

One day last month, a Columbia Journalism student asked me in class why WSJ.Com had started as a paid site. This moment reminded me of the scene in Annie Hall (about two minutes into this), where Woody Allen produces Marshall McLuhan to refute (OK, I get the irony) a pompous Columbia instructor pontificating about the media.

At the class, I turned to my co-instructor, Peter Kann, former CEO of Dow Jones and the person ultimately responsible for the paid strategy.

“I made the site paid because I was ignorant, “ Kann told the class. “I didn’t know any better. I just thought people should pay for content.”

Next: Can the WSJ model work elsewhere?

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San Diego deal pales next to Peoria price

The San Diego Union-Tribune probably sold for a fraction of the price fetched just two years ago by a group of papers its parent company peddled in places like Peoria.

When the sale of the Union-Tribune was announced this week, owner Copley Press did not disclose the terms offered by the buyer, Platinum Equities, a private-equity firm in Beverly Hills that specializes in distressed properties.

Noting that the pending deal includes 13.5 acres of choice real estate worth some $100 million, industry analysts believe the Union-Tribune is slated to change hands in the best case for a price between $100 million and $150 million. The Wall Street Journal quoted anonymous sources that said the price is only $50 million.

Thus, the range of possible prices for the paper would go from a low of $185 to a high of $550 for each of its 269,819 daily subscribers. By contrast, Copley in 2007 realized $1,576 per subscriber when it sold for $380 million a group of Midwestern papers with a collective circulation of 241,060.

The Midwestern properties, which were acquired by GateHouse Media, included the Peoria (IL) Journal Star, the Springfield (IL) Journal-Register, the Lincoln (IL) Courier, the Galesburg (IL) Register-Mail, the Canton (OH) Repository, the Massillon (OH) Independent and the New Philadelphia (OH) Times-Reporter.

Signs of life – and more cuts – in San Diego

The pending purchase of the San Diego Union-Tribune by a financially oriented buyer signals that at least one investor sees signs of life in newspapers. But some serious cost cutting likely lies ahead – perhaps even before the transaction closes.

After some nine months on the market – an amount of time that would have been unthinkable for a trophy paper like this just a few years ago – the Union-Tribune today was sold to Platinum Equity, a Beverly Hills buyout shop that specializes in turning around distressed businesses.

Back in the day, would-be purchasers would have swarmed the Union-Tribune and bid the price to the stratosphere. Prior to her death in 2004, just about every publishing CEO in America would schlep to La Jolla on his private jet once or twice a year to beg the late owner, Helen Copley, to sell the paper to him, money being no object.

But the paper, which reports that its sales have fallen by a staggering 40% since 2006, had languished on the market since July, a triple victim of skepticism over the future of newspapers, the collapse of the San Diego housing market and the cratering global economy.

The price Platinum will pay for the paper was not revealed, but the Voice of San Diego said real estate experts pegged the value of 13 prime acres owned bythe paper at more than $100 million. San Diego City Beat said the sale price was approximately $15 million, a number too low to believe if the estimated value of the real estate is anywhere near correct. The Wall Street Journal put the price at “less than $50 million,” which sounds more believable.

The prospective new owners gave some insight into their likely operating philosophy by announcing they will be advised by David Black, the acquisitive and efficiency-minded Canadian publishing entrepreneur who in recent years scooped up papers from Akron to Honolulu and encircled the struggling Seattle dailies with a network of seemingly prosperous weeklies.

Shortly after buying the Akron Beacon-Journal in the summer of 2006, Black reduced the newsroom staff by 25% and eliminated jobs in other departments throughout the plant. Earlier this year, Black cut the newsroom of the Honolulu Star-Bulletin by 18% as the paper was turned into a tabloid.

Together, Platinum and Black are poised “to bring a strong operational focus” to the Union-Tribune, according to a statement issued by Louis Samson, the Platinum executive who is piloting the transaction.

That bit of finance-ese means the new management will be seeking ways to wring fresh efficiencies out of the newspaper, which has undergone a series of staff cuts for the last three years to both respond to falling sales and groom its bottom line to appeal to potential purchasers.

The newsroom has been chopped by about a third to about 250 individuals from more than 350 people in 2007. In January, the company warned it might have to make further staff cuts and imposed mandatory unpaid furloughs, froze merit pay increases and suspended contributions to 401k accounts, according to this article in the paper.

These and certain other economies may be required by Platinum before it closes the deal.

Private-equity buyers like Platinum focus on cost cutting in the early days after they buy a company to be sure they are able to produce sufficient profits to repay the debt they borrow to finance a deal. If they fail to do so, the deal can go sour, as occurred in the bankruptcies that quickly followed the buyouts of the Tribune Co., Minneapolis Star Tribune and Philadelphia Newspapers LLC.

In the fullness of time, Platinum also would hope to raise revenues through improved sales management and an eventual uptick in the general economy. Financially oriented buyers like Platinum generally plan to sell a refurbished company for a handsome profit within three to seven years after they buy it.

With such papers as the Austin American-Statesman, Miami Herald and Chicago Sun-Times on the block, other bargain-hunting investors will pay close attention to this deal to see if it is something they want to try for themselves.

Who knows? If Platinum turns the Union-Tribune back into the sort of prized asset it used to be, that might put some life into the flat-lining shares of the publicly traded newspaper companies.

Newspapers do matter, Princeton study finds

The shutdown of a newspaper has an immediate and measurable impact on local political engagement, according to a new study by economists at Princeton University.

Assessing the consequences of the closing of the Cincinnati Post at the end of 2007, the researchers found that fewer people voted in subsequent elections, fewer candidates ran in opposition to the incumbents and that, as a result, the incumbents had a better chance of being returned to office.

“If voter turnout, a broad choice of candidates and accountability for incumbents are important to democracy, we side with those who lament” the decline of newspapers, said economists Sam Schulhofer-Wohl and Miguel Garrido, who conducted the study.

As a onetime reporter and copyeditor who forsook journalism for a PhD in economics, Schulhofer-Wohl might be accused of having a soft spot for newspapers.

But he and his colleague ran a detailed, hard-nosed analysis of news coverage and voting patterns to determine that the political landscape in the Kentucky counties across the Ohio River from Cincinnati changed significantly after the Post ceased publication on Dec. 31, 2007.

“This paper offers a case study of the consequences of closing a newspaper,” wrote the authors here in describing their findings. “The closing was particularly important in the northern Kentucky suburbs, where the Post historically dominated circulation and, as we document, provided more than 80% of the combined local news coverage” between itself and the surviving Cincinnati Enquirer.

With the Post out of the picture, said the economists, “its absence appears to have made local elections less competitive along several dimensions: incumbent advantage, voter turnout and the number of candidates for office.”

Even though the Post sold only about 27,000 copies daily vs. 200,000 for the Enquirer, the Post contributed to making “local politics more vibrant” than they are today, concluded the study.

“By revealing incumbents' misdeeds or making it easier for challengers to get their message out, a newspaper may reduce incumbent advantage,” said the researchers. “Newspaper stories could also raise interest in politics, inspiring more people to vote or run for office.”

Although competing publications or other media such as TV, radio and blogs may take up some of the slack when a newspaper closes, said the researchers, “none of these appears so far to have fully filled the Post's role in municipal politics in northern Kentucky.”

A bright light in Seattle, about to go out

Jon Hahn, a colleague at the Chicago Daily News, joined the staff of the Seattle Post-Intelligencer when our paper closed in 1978. He retired as a columnist in 2003 to take up things like surf fishing, clam digging and felling trees. But he never stopped loving the paper that is closing with tomorrow's edition.

By Jon Hahn

When I was transplanted here in 1978, the Seattle Post-Intelligencer was a statewide paper to be reckoned with.

The distinctive, bright-orange P-I delivery boxes were everywhere as you drove through the rolling hills of the Palouse, along the hardtop roads in the San Juan Island group and the wheat country in eastern Washington.

In the rural counties, away from the Seattle metro area, many of those delivery boxes were the old metal style, indicating to me decades, and even generations, of faithful subscribers.

One of my favorite newspaper photos shows a Seattle Post-Intelligencer office – a ramshackle affair with a wooden sidewalk fronting a dirt street – up in Alaska during the Gold Rush.

They were everywhere. Firstest with the mostest.

But those days are long gone. Now, it appears the 146-year-old daily is going belly up. And no one is going to live happily ever after.

The P-I (it always has been affectionately called “Pee-Eye”) was considered the People’s Paper, with a feisty anti-Establishment reputation. And it was a power to be reckoned with, like Washington’s then U.S. senators, Warren Magnuson and Henry (Scoop) Jackson.

Our annual Sports Star of the Year gala was considered the high point of the athletic year. Our roving storytellers, such as the late John O’Ryan, were known to, and loved by, folks from the far-northeast Okanogon to the mouth of the Columbia River.

This was pretty good company for a young Chicago reporter who’d never been west of St. Louis. And something about the P-I smelled like a real newspaper when I arrived in 1978 after the shutdown of my hometown paper, the Chicago Daily News.

There was a newspaper bar – really a cocktail lounge, much fancier than Billy Goat Tavern on Lower Wacker Drive in Chicago – right across the street. Maybe not the kind or amount of social electricity that crackles in Chicago – Seattle never has had a lot of political corruption or chicanery – but it was a happening place that was on the rebound from an earlier downturn, called the Boeing Recession.

Downtown newspaper stands still did a land-office business. And the P-I’s street sales were very strong.

But the Hearst Corp. later claimed that, even then, the P-I was losing money. It wasn’t long before they joined the Seattle Times in an unholy Joint Operating Agreement. And the Times joined the P-I with morning editions.

Both papers made improvements and investments, if not to stem the tide, then to try staying ahead of it. The P-I went from a page-scanner system to Atex and eventually networked PCs. But they did it on the cheap, and many of us had to share PCs.

It took me most of a year to get permission to bring in my old Royal Standard to take notes when the desktop PC was being used by my cubicle partner.

The Times built a slick new office and printing plant in north suburban Bothell. I never saw the inside of it, but I spent a bunch of bone-chilling nights alongside a burn barrel with some Teamster Union sympathy-strikers during the 2000-2001 Guild strike against both papers.

Management put out smaller papers with imported Hearst scabs and we put out a nifty strike paper.

But no one’s going back to work this time. A handful of P-I staff has been offered jobs with the online edition, but most of the 170-odd journalists will be out on the bricks in a gawdawful unemployment environment.

Even before that strike, circulation at both papers had atrophied. Street sales dried up and both coverage and circulation concentrated on Seattle and the collar counties. Management even ordered me NOT to seek columns outside that area.

With the paper living what almost certainly will be its final days, comments from P-I staffers, former staffers, other media grunts and TV’s talking heads all use, and over-use, the word “sad,” and they don’t mean the Seasonal Affective Disorder that comes from the near-constant drizzle and gray damp here. The word seems to sum-up the frustration of not being able to do a damn thing to stop the inevitable.

But some synapse finally closed in my system and I am beyond sad. I’m pissed. Comes to mind a Dylan Thomas verse:

Do not go gentle into that good night.
Rage, rage against the dying of the light.

It’s NOT just the economy, stupid. The paper is closing in no small way because of those of us who’d rather get our “news” online, on our cell phones, on our car radios and other electronic media.

Those alternatives aren’t bad, or evil, or even the enemy, which is how we newspaper folks often characterized them. We grumbled but accepted the new media and admitted they were pretty slick.

But like thousands of (soon-to-be-former) readers, I’m something of a Luddite. I want the in-depth news of real, ink-stain-on-the-kitchen-counter newspapers that dig and sift for weeks and months and give you more information on one page than a full, half-hour news broadcast.

And I don’t want to sit in front of some damn terminal and click my way through copy bordered with blinking advertisements. Our dog brings the P-I into the kitchen after breakfast and we spread it out on the counter in that read’nfeed protocol common to many homes. But not enough homes.

So when the P-I’s three-story landmark globe-and-revolving equator sign stops spinning down there on Elliott Bay, we all have to share some of the blame for that. Sorta like that line from the old Pogo Possum comic strip:

We have met the enemy, and he is us!

When a not-so-long-ago recession hit Boeing and Seattle hard, someone posted a commercial billboard message:

Will the last person leaving Seattle please turn out the lights?

One of Seattle’s brightest lights is about to go out.

The best and worst time for journalism

It is the worst of times for the businesses that traditionally have funded professional journalism but the best of times to be a journalist, so long as you aren’t counting on a job at a media company to pay your bills, raise a family or fund your retirement.

As laid out in painful detail today at Journalism.Org, the state of the news business in the United States is the “bleakest” in the six years it has been tracked by the Project for Excellence in Journalism at the Pew Research Center.

Every indication for the immediate future is that things will get worse for the legacy media companies. But you knew that. What you may not realize is that journalism is thriving as never before, despite (or, perhaps, because of) the implosion of the businesses that traditionally have supported the press.

The challenge for those who are, or who aim to be, journalists is to find a way to afford to do what you ought to do, what you want to do and what society desperately needs you to do.

It won’t be easy, as underscored over the weekend in the searching questions about the economics of journalism raised repeatedly at a conference on the future of the profession at the Graduate School of Journalism at the University of California at Berkeley. Across the Bay at the very same time, staffers of the San Francisco Chronicle painfully voted 1o to 1 to allow management to summarily eliminate a third of the 445 newsroom and ad-sales positions covered by the Media Workers Guild of Northern California.

For all the fear and frustration among journalists today, however, the vision of next-generation journalism is beginning to materialize beyond the smoking ruins of the once-invincible business models that supported a vigorous and independent press in the decades since World War II.

With everything falling apart all at once, we’ll take a moment to sum up the damage. Then, we’ll get on to a more constructive discussion about where to go from here.

Audiences for most print and broadcast media are shriveling. Confidence in the press is collapsing. Newspaper revenues have plunged by 25% to 33% since 2005, thrusting many publications from comfortable profitability to bankruptcy in places like Baltimore, Chicago, Los Angeles, Minneapolis, New Haven and Philadelphia. Newspapers have closed or likely will shut soon in Albuquerque, Cincinnati, Denver, Madison, Seattle and Tucson.

News staffs, newshole and even publication frequency are shrinking, shrinking, shrinking at newspapers and news magazines. Coverage has been truncated to such levels that none of the Big Three networks has a full-time correspondent in Iraq and 27 states in the union don’t have a single, full-time newspaper correspondent stationed in Washington, D.C.

The forces that led the traditional media companies to this state of accelerating – and potentially irreversible – decline were unleashed for the most part before the economy toppled into the worst meltdown since the last Depression. (For another view of the devolution of newspapers, see this must-read from Clay Shirky.)

The forces of decline include, but are not limited to, the rapid adoption of disruptive interactive and mobile technologies; seismic changes in consumer preferences and advertiser behavior, and roughly equal amounts of arrogance, avarice and absence of imagination on the part of the Pooh-Bahs occupying the executive suites of the nation’s media companies. Amazingly, a great many of the shortsighted “leaders” who occupied the executive suites in 2005 remain on the job today.

If you define journalism as something produced by a traditional newspaper, magazine or broadcaster, then, yes, journalism is in trouble. But that’s a limited, if not to say anachronistic, definition of journalism in an age when cheap, easy-to-use and widely available interactive technology has democratized the creation, discovery and acquisition of information.

If you define journalism as the activity that allows people to learn from each other what is happening in their world, then journalism is alive and well at Facebook, Twitter, Slashdot, Moms Like Me, Last.FM and thousands of other online communities.

As but one example of the ferocious growth of participatory sites, the 1.5 million hours of video contributed to YouTube in the first six months of 2008 was greater than all the programming produced by the Big Three broadcast networks since their inception 60 years ago, according to Michael Wesch, a professor at Kansas State University whose landmark study of the phenomenon is here.

To be sure, not everything on Facebook or YouTube would be construed as journalism by even the most generous observer. But the value of the content is in the eye of the beholder. And those are the places, not mainstream media websites, that are being beheld ever more frequently by modern consumers.

If you define journalism as an activity where an intermediary tells people what is happening in their world, then journalism’s vital signs are somewhere between stable and strong at Muncie Free Press, Westport Now, Minnpost, and Crosscut – to name a few of dozens of alternative local news sites that have sprung up as staff cuts and shrinking news holes have compromised the coverage of news organizations across the land.

Not one, but two, online entities are moving into the void created by the relentless hollowing out of the San Diego Union-Tribune. Voice of San Diego, which debuted as a non-profit alterative to the U-T in 2005, will get head-on, online competition this week from the newly launched San Diego News Network. SDNN, a for-profit venture, will combine original reporting with content aggregated from several print and broadcast partners.

If you define journalism as something produced by citizens who step in where big-time journalists seldom tread, then journalism is registering at least a discernable pulse at places like Chi-Town Daily News, Patch, Bakersfield Voice and the new The Local section of the New York Times.

Spot.Us, an intriguing experiment that represents a variation on the citizen-journalism theme, encourages visitors to its site to fund stories they would like to see covered. When the funding target is met, journalists produce the articles for as little as $200 per story. That’s not enough, of course, for the downpayment on even a foreclosed condo in most places. But it is getting a bit of journalism done.

As diverse as all of the above new journalistic genres may be, they share a common problem: None to date has come close to generating the sort of monopoly-like revenues and profits that historically paid for the ample professional staffs fielded by the ailing legacy media.

In the cases where the new journalistic genres are merely an avocation for the tweeters and soccer moms, this is perhaps of little concern. But the comparatively thin revenues generated by most of these enterprises are not at the moment providing anything close to the compensation that professional journalists receive at even the stingiest traditional news organization.

With the toxic economy and sweeping secular changes in advertising grinding away at the economics of the legacy media, the need to discover new business models to support journalism grows more urgent by the day.

In that vein, it is with high hopes and best wishes that we are watching the launch of Global Post, one of the most ambitious endeavors to date in the service of seeking to properly compensate journalists in the future.

Global Post has developed a holistic, thoroughly modern business model that includes selling banner advertising, syndicating its content to other news organizations and offering a $199 premium membership that will entitle subscribers to suggest stories, hear special briefings from correspondents, listen to exclusive podcasts from world leaders, receive a host of email newsletters and get expedited mobile text alerts on breaking stories.

Global Post says it has assembled more than 70 correspondents in more than 40 countries to replace the international coverage that is being increasingly neglected by the avidly downsizing traditional press. The questions are whether the public’s appetite for foreign news will be large enough – and the quality of the execution will be good enough – to make the project a success.

Global Post’s correspondents are not staff reporters but individual contributors being paid “modest” stipends “comparable to freelancer rates paid by traditional American media,” according to the company’s website. While the correspondents don’t have the sort of salaries, benefits and retirement programs enjoyed by staffers at mainstream organizations, they are being granted “considerable shares of common stock in the company.”

This is the sort of bargain that made Google’s original in-house masseuse a millionaire. Can it do the same for foreign correspondents?

About that newspaper ‘doomsday' list

Don’t lose too much sleep over the list of 10 supposedly doomed newspapers that made the rounds in the last couple of days.

Although some of the papers one day may succumb to anemic readership and revenues, there is not enough information or analysis underlying the scary list to support the proposition that the publications are more or less doomed than any of 10, 20 or 30 other papers that might have been named, instead.

For the record, the papers on the list are the Philadelphia Daily News, Minneapolis Star Tribune, Miami Herald, Detroit News, Boston Globe, San Francisco Chronicle, Chicago Sun-Times, New York Daily News, Fort Worth Star-Telegram and Cleveland Plain Dealer.

The hit list, which was produced by Douglas A. McIntyre at 24/7 Wall St., was rapidly and uncritically republished everywhere from Time Magazine to the Drudge Report. Although Doug is a friend whose ordinarily thoughtful work I have cited on occasion, there is no hard data or deep analysis to support his findings.

Doug gives no evidence why the Plain Dealer is any more endangered than any of the other newspapers published by its parent, Advance Publications. Or why the Miami and Fort Worth papers are more at risk than some of the other McClatchy titles.

Even though weak economies are hardest on the No. 2 papers in two-newspaper towns, Doug predicts the demise of the print edition of the Boston Globe while saying nothing of the apparently fragile financial status of the far smaller Boston Herald.

Two more No. 2 papers, the Sun-Times and Philadelphia Daily News, indeed are facing steep challenges, as discussed respectively here and here.

Doug joins the many commentators who have been quick to predict the demise of the San Francisco Chronicle, but, as explained here, it is unlikely the Chron will be shut down. Rather, it almost certainly will be folded in due course into the cluster of MediaNews Group papers that encircle it in northern California.

Given that MediaNews, the parent of the Detroit News, is locked into a complex series of financial relationships with Gannett, the senior partner in the Motown joint-operating agreement, it seems unlikely the parties can let the News fail.

While the Strib and N.Y. News face fierce cross-town competition in their respective markets, each has the potential to partner with a rival paper to drastically reduce operating expenses and, thus, enhance profitability. The potential partner in the Twin Cities is the St. Paul Pioneer Press. The N.Y. News could team with Newsday, the New York Post or even the Newark Star-Ledger.

Doug’s doomsday list omits the names of some papers that arguably could be more endangered than the ones he mentioned. One of them is the Seattle Times, whose publisher says he is "holding on by our fingertips" even as the competing Post-Intelligencer seems poised to go out of business.

Memo to the new P-I: Don’t look back

Any day now, a handful of survivors from the Seattle Post- Intelligencer evidently will have a chance to invent the first digital-only newspaper in a major city. Assuming they get the chance, here’s how they might go about it:

Don’t look back.

You can’t replicate your old newspaper – or any other one, either. Don’t try. Put your resources into the stories you want to do, not the ones you think you are obligated to do.

Be different.

Make the new site look different, sound different and act different. Because it is different.

Cop an attitude.

Think of the site as a more of a blog than a newspaper. Pick your targets. Put a forward spin on the coverage. Write in an impassioned voice. Let every writer’s personality shine through.

Crib liberally.

Let the Seattle Times, local broadcasters and the wires cover the beats and write the ordinary stories. Leverage local bloggers, featuring the best stuff from them as though you had written it yourself. (Most of them will love you for it. Leave out the few who don’t.)

Go hyper for local.

Everyone on the staff should be trying to recruit new writers, new voices and new sources of content that you can aggregate to make your site the hands-down, go-to community forum. Staffers should be formally tasked to gin up hyper-local contributions from pastors, police chiefs and PTA presidents. Prominently feature the best of their work as though it were your own.

Make them pay, Part 1.

Create exclusive premium content and make subscribers pay for it from the very first day. If you start out giving away everything for free, it will be difficult to ever go back. (See also “Original Sin.”)

Make them pay, Part 2.

Limit the number of ad positions and stick to the highest possible rates. Don’t use cheap filler ads, because they degrade the value of your inventory. Sell 13-, 26- and 52-week sponsorships. Instead of fixating on page views, sell brand visibility, civic responsibility and the opportunity to be front and center before the shakers and movers of Seattle.

Take risks.

The work you do will play a major role in helping to define the future – and the future economics – of local news coverage. Take risks, try everything and have fun. Whatever you do, don’t look back.

Want to save your local paper? Read this first.

If you think life would be sweet if the profit-oriented corporations running newspapers were replaced by wealthy, civic-minded people operating them in the public interest, consider the case of the Berkeley Daily Planet. Then, think again.

Three weeks ago, the Daily Planet, which distributes some 23,000 free papers each week in Berkeley, CA, ran an arresting front page to kick off a PBS-style pledge drive to help offset the $3 million in losses suffered by the local couple who bought the paper six years ago to save a major source of news about their community.

I’ll tell you how the pledge drive worked out in a moment. First, the front page (click to enlarge image):

Here’s how the Daily Planet got to the point that its multimillion owners are in the position today of having to pass the hat to try to save the newspaper:

Becky and Michael O’Malley, long-time Berkeley residents who made a tidy $15 million when they sold their software company in 1996, purchased the Daily Planet at a bargain price when it was sold during the break-up of the venture-funded firm that founded it.

“We bought the paper because we were retired and thought it would be kind of fun,” said Becky in an interview last week. “I was a journalist before we started the software business and am a great believer that newspapers are essential to democracy. After all, people can’t go to every city council meeting for themselves.”

The O’Malleys, who Michael says have an “average age of 70,” never intended to make the Daily Planet into a big business.

“The $15 million we made when we sold the software company isn’t much money by today’s standards,” said Michael. “But we have a Berkeley lifestyle,” added Becky. “It doesn’t cost us that much to live.”

Although they say they would have been content to operate the paper on a break-even basis, the business lately has proven to be to be far more challenging than they had imagined.

“We rely on small retail advertisers,” said Becky. “The trouble with small retailers is that when there is a credit crunch, like there is right now, they have to factor [borrow money to buy] their inventory. They have to buy shoes before they can put them on the shelves to sell them. We are at the mercy of that dynamic. How long that is going to last, nobody knows.”

With interest rates dear and sales weak, merchants have little extra money to spend on advertising. In fact, one of the paper’s biggest and steadiest advertisers, a holistic pharmacy (remember, folks, this is Berkeley), abruptly went out of business a few weeks ago.

Another major problem, said Michael, is that newspapers “have talked themselves into a hole.” He believes newspaper advertising has fallen out of favor among merchants as the result of incessant media coverage of the problems of the newspaper business.

“People need jobs,” he continued. “Well, we’re running ads right now looking for people to sell advertising. But we don’t get much of a response, because no one wants to sell newspaper advertising. Last year, everyone wanted to work for a hedge fund. Maybe this year they will go back to wanting to work for newspapers.”

With the economy souring and losses mounting, the O’Malleys have begun wondering how much longer they can support the Daily Planet. The couple is well enough fixed that Michael says they probably would have paid as much in taxes on other investments as they have lost to date on the Daily Planet.

“We have enjoyed it, we have had a very good time and gotten a lot of respect and pleasure from our relationship to community,” said Becky. “But I don’t know how much longer we will keep doing this. The biggest issue we personally have is that it is a lot of work. But there also comes a point where prudence and our own offspring and the general state of economy make us wonder if we should continue the investment.”

Before walking away from the newspaper, they decided to see how much public support they could muster to help offset its losses.

“I certainly think it would be very dishonorable to fold without giving the public chance to buy in,” said Becky. “If the public doesn’t want, or can’t afford, to support the paper, then we may have to. We wanted to give everyone a chance first.”

In the last three weeks, the couple said, the Daily Planet has raised $12,000, including some individual donations as high as $500. “The response is a lot better than I would have predicted,” said Michael. Still, it is only 0.4% of the couple’s loss.

“We made only a little effort and had quite a show of enthusiasm,” added Becky. “My friends who know about PBS say you have to ask seven times to get a donation. But I don’t know what the future of giving will be in a bad economy – or if we will get repeat donations.”

One alternative before walking away from the paper would be charging something between $1 and $2.50 for a paper that until now has been free.

“Two bucks is nothing,” said Michael. “It won’t even get you a cup of coffee in most places. If 5,000 people wanted to pay $2, that would be great.”

What if they won’t?

“We are sort of cruising along,” said Becky, “and hoping the answer will present itself to us.”

(Disclosure: I served on the board of directors of the company that founded the Daily Planet before it was sold to the O’Malleys. The original company fizzled when the various investors could not agree on a going-forward strategy. Nutty as this sounds, it is more common than you would think.)

SF Chron loss closer to $70M per year

The San Francisco Chronicle evidently is losing some $70 million a year, far beyond the “more than $50 million” it claimed when demanding sweeping concessions from its unions under the threat of closing the paper.

Based on statements from company negotiators reported by the California Media Workers Guild, the newspaper’s losses in 2008 were approximately 45% greater than previously reported.

After plunging more than $1 billion into the newspaper without seeing a dime of profit since 2000, the Hearst Corp. last week threatened to sell or close the Chronicle if sufficient savings were not identified.

Updating its members this week on a series of grim bargaining sessions since the ultimatum was issued, the Guild reported that the company threatened to eliminate up to 225 jobs unless its unions agreed to a variety of concessions, including the loss of 150 jobs under Guild jurisdiction.

Further savings would come from far-reaching cuts in the pay and benefits of remaining Guild employees, as well as so-far unspecified layoffs and concessions from the production and circulation positions covered by the Teamsters.

“Even under the company’s plan,” the Guild reported, “management expects at least $50 million will be lost this year by the Chronicle due to recession and the collapse of the ad market in print media.”

Assuming average annual pay and benefits of $90,000 per each severed employee, the company would save some $20 million by unilaterally eliminating 225 positions. If the company would still be losing $50 million after cutting expenses by $20 million, then its actual losses can be no less than $70 million.

(Careful readers will note that I previously estimated an average annual cost of $80,000 per employee at the Chronicle. However, knowledgeable sources have told me that number was too low.)

Assuming aggressive cost cutting succeeded in trimming the annual deficit to $50 million, a question remains as to how long Hearst will continue to suffer such losses.

The alternatives are closing the paper – as is evidently about to happen at the company’s Seattle Post Intelligencer – or merging the Chronicle into the surrounding cluster of newspapers owned by MediaNews Group.

Stick-figuring out the new news

Just back from a stimulating two-day conference deconstructing journalism in the hopes of saving it by making the news more relevant to modern, time-constrained consumers.

The conference, which was attended by an ecumenical group of folks from the newspaper, magazine, television and academic worlds, was held at the Reynolds School of Journalism at the University of Nevada in Reno.

Organized by my friend Larry Dailey, the media-technology guru at the university, the event was facilitated by IDEO, the international design firm that has reconceived everything from kidney-transport systems to how elementary students are educated.

The big eye-opener at the conference, especially for us print types, is the need to use fewer words, provide more graphics, cultivate the social aspects of the web and leverage mobile technology more assiduously than we do today. For an example of streamlined presentation already in production, see Short Form Blog.

No one at the meeting, including me, regards the adoption of new ways of telling stories as a repudiation of traditional in-depth, investigative and long-form journalism. But we have to do something more than harrumph a lot to lure a generation of lite-readers back to the news.

In keeping with those observations, here is a summary of the proceedings, with the figures in stick and the words kept to the haiku minimum of 17 syllables per verse. The approach may be light-hearted but the message is dead serious.

Be interactive.
Use fewer words, more graphics.
Make it graze-able.

Leverage the crowd.
Be lively, viral and fun.
Pay back the user.

Be iPhone-worthy.
Embrace small screens, build many apps.
GPS them all.

How to charge for online content

Second of two parts. The first part is here.

I am going to tell you how to sell content in a moment. First, let me say that I know most publishers will not be able to charge for all the content published on their websites. Efforts to try this almost certainly would be suicidal.

There is no way anyone can hope to charge online visitors for such generic fare as sports scores, stock prices, government press releases and breaking news like the recent air crashes reported so dramatically on Twitter.

Given the open and unfettered nature of the web, it is unreasonable to believe generic news can be effectively sequestered behind a pay firewall. A publisher attempting to do this simply would divert readers from his site to some else’s, throttling the traffic that is the lifeblood of any media business.

There. I said it. OK?

Now, on to the business of trying to save the media business.

If we are going to save the tradition of professional journalism, it is vital for publishers to begin producing content that is sufficiently unique, authoritative and valuable to motivate consumers to pay for it.

The need for the traditional media companies to produce more and better content could not come at a worse time. Newsroom budgets are being gutted by historic declines in ad sales, aggravated by the need for many companies to generate unreasonably large profits to service the heavy debt they incurred to fund ill-considered and ill-timed acquisitions.

As a direct consequence of the breakdown in the traditional media business model, publishers today are cutting the quality and quantity of the content they produce at the very moment they should be investing more aggressively than ever in the sole distinguishing capability that powerfully differentiates them from the millions of websites that are siphoning away their readers and advertisers.

As the most challenged of all the distressed media companies, newspapers are so strapped today that they are producing ever less original reporting. In but one example of the decimation, the number of reporters covering the nation’s capital for American newspapers has dropped by half since 1995 to 300 correspondents.

This is not merely a step in the wrong direction. It is a leap into the abyss.

Fortunately for publishers, for-pay content doesn’t have to be the Watergate investigation of the future. People will pay for all manner of content on the web, it if it is thoughtfully conceived and marketed.

U.S. News and World Report sells access to school rankings and other detailed college data. Consumer Reports gets paid for rating refrigerators. Congressional Quarterly sells high-priced, inside-the-Beltway dope. The New Yorker makes money off reprints of its cartoons. Millions are spent on Kindle books, iPhone applications and even ring tones.

The Wall Street Journal, which claims more than 1 million paid subscribers to its website, is the most notable among newspapers in charging for access to some of its content. How does it get away with charging, when so much business information is available for free from places like Yahoo Finance and 24/7 Wall St.?

The answer is: Original, authoritative reporting and the power of its brand.

Notwithstanding the recent layoff of a small percentage of its staff, the Journal continues reporting at essentially full force to get ahead of and behind complex stories involving business, investing and the economy.

The Journal’s generally reliable and insightful reporting – which is flashed immediately across a variety of interactive and mobile platforms – provides critical and actionable information to executives, investors and policy makers. To steal an old tag line from Forbes, it is an indispensable capitalist tool.

By aggregating an audience of business people willing and able to pay to view its contnent, the Journal also has created a premium audience for advertisers, who pay top dollar to reach it. Thus, selling content reaps the additional benefit of boosting ad revenees.

The Journal isn’t the only newspaper charging for content. You also hit pay walls at places like the Arkansas Democrat-Gazette and the Santa Barbara News-Press. But the story is different in each place.

Walter E. Hussman, the publisher of the Little Rock paper, admitted in a recent email to being on the “wrong side” of the paid-content debate for more than decade. And he couldn’t be happier.

“I think the most compelling argument [for charging for content] is our paid circulation,” he said, noting that his average daily sale of 176,275 was 1.7% higher in 2008 than it was 10 years earlier. This contrasts starkly with the sharp circulation plunge suffered by the rest of the industry in the last decade.

Like the publishers of many small and medium papers, Hussman is fortunate to have scant competition in his market. With by far the largest force of reporters covering Arkansas, his paper is a must-read for anyone who wants to know what is happening in the state.

As long as the Gazette continues to publish exclusive and authoritative local news, Hussman can continue charging for access to his site. His ability to charge, it should be emphasized, is what helps support the production of the valuable content that gives his brand an unfair advantage over any would-be competitor.

By contrast, the Santa Barbara News-Press is living proof that geography and a long-standing franchise won’t let a publisher successfully charge for content that isn’t perceived by readers as being unique and valuable:

While the News-Press could scarcely be more isolated from California’s several large media markets, its for-pay website has been overtaken by a free site operated by the upstart Santa Barbara Independent.

The 53,817 unique visitors to the Independent site in January were more than double the traffic at the News-Press site, according to Compete.Com. In the last year, significantly, the Independent’s traffic rocketed by 48% while the News-Press audience fell 10% in the same period.

The weakness of the News-Press web strategy was revealed during the devastating fire in November that destroyed more than 100 homes. Scant information on the fast-moving blaze was available for non-subscribers at the News-Press site. At the same time, however, the Independent.Com brimmed with up-to-the-minute bulletins, first-person reports and even fire photos emailed from a Santa Barbara resident to his brother in Ohio, who posted them on the site because the California brother had lost his Internet connection.

The lesson here is not that free content trumps pay (though, all things being equal, it will) but that there has to be much more to a pay strategy than a publisher’s desire to want to be paid. This goes double when the publisher has been giving his valuable content away for free for the better part of two decades, as most newspapers have done.

The trick to charging for content, therefore, is coming up with unique and valuable information that people will pay for. The converse is to let information be free that ought to be free. Things, for example, like the life-threatening commnity emergency in Santa Barbara.

What are some good ideas for paid content? Here are a few for free:

The Financial Times this month is launching “China Confidential,” a fortnightly digital newsletter and website promising “premium, exclusive analysis and predictions on investment themes.” Its slogan, which could be the mantra for many pay-content initiatives, is “Premium Investment Intelligence.”

The New York Times could have done the same thing as the FT if it added a bit of original reporting and some exclusive features the new environment section it launched last week. At the moment, the section merely repackages stories previously printed in the paper. But there is a world of po$$ibility in the Green Inc. blog aiming to deliver insights on “energy, the environment and the bottom line.”

Paid content doesn’t have to be business-oriented. It simply has to scratch the itch of a large enough niche of readers to make it worthwhile to produce the content.

Although the Milwaukee Journal Sentinel provides plenty of free coverage of the Green Bay Packers, the paper for years also has published a premium “Packer Insider” newsletter. Judging from the enormous number of people you see at Packer games wearing $17.95 plastic cheese wedges on their heads (not to mention the $34.95 cheese bra), the team should have at least 25,000 die-hard fans willing to shell out $44.95 annually for the newsletter. Assuming there are, the newsletter would be grossing more than $1 million a year.

The biggest mistake a newspaper can make is to cheap out on premium content. A few years ago, the Sacramento Bee tried selling an expensive newsletter that promised a wealth of exclusive insider news from the state’s capital. It should have been a hit.

Instead of profound insights, exclusive tips and actionable information, however, it was padded with things like the governor’s schedule for the next day. So, the newsletter flopped. Not because people won’t pay for content but because it failed to deliver enough unique, authoritative and actionable information to merit a premium price.

If you happen to be a publisher wrestling with how to move from free to paid content, don’t let anyone tell you that you can’t charge for it. If it’s good enough, readers will pay. If you attract the right audience, advertisers will pay, too.

This concludes my free advice on the subject of paid content. If you want more, hire me as your consultant.