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.)