Introduction to a panel held at the Association for Education in Journalism
and Mass Communication convention on Thursday,
August 8 in Hall B of the Sheraton Centre Toronto Hotel
Spoiler alert – it’s very simple. Newspapers are still here because they still make money. Not as much as they used to make. They used to make an obscene amount of money. Now they are having to cut costs as fast as they can just to keep their heads above water. But newspapers are inherently profitable thanks to some economic features such as vertical integration, elasticity of demand, and economies of scale. So while they have slimmed down considerably, they are still publishing profitably despite what you may have heard elsewhere. This is a line of research I have been pursuing for almost a decade, first in this country, then in the U.S., and now in the UK, where I am working frantically to finish a book on the subject.
Meanwhile digital media, which have been widely touted to replace print media, have struggled to find a profitable business model. If they don’t, how can they replace print media, especially if the latter are actually making money? Caught in the middle, of course, is journalism, especially local news coverage, which is what gets cut back most, to the detriment of democracy. It’s a conundrum that policymakers are confronting differently in different countries. Here the apparent solution is to throw money at media, as subsidies worth almost $600 million (about $450 million U.S.) were announced in the last federal budget. This country’s news media are now fighting over how to divvy up the loot, and it looks like most of it will go to old media – newspapers – to prop them up. And in Canada that unfortunately means most of the money will be going to New Jersey hedge funds. It’s a long story.
Of course, 18 months passed and far from 80 percent of American newspapers were gone. None of the nation’s 50 largest daily newspapers had ceased publication. San Francisco, Miami, Minneapolis and Cleveland still had a daily newspaper. They still do. After Denver and Seattle, the contagion was confined to Tucson and Honolulu. The recession gradually eased, but more importantly newspapers proved incredibly resilient, able to cut their costs almost as fast as their revenues fell frighteningly by a third and then by half and now by even more. Unfortunately, they were only able to cut costs so quickly by throwing journalists overboard, so while the outlook may have brightened somewhat for newspapers, it only darkened for journalism. None of what I am saying should be taken to mean that newspaper journalism is thriving. Quite the opposite. I am only saying that newspapers as businesses are hanging in there and should for the foreseeable future.
In the UK, five years passed and only about 100 newspapers had closed instead of the 650 Claire Enders predicted. Most of those were free sheets which had proliferated in the 1980s to soak up all the ad revenue, what we would call “shoppers.” The only paid regional daily to close was the Liverpool Post, which was a second-place newspaper. In this country, only one daily folded during the recession of 2008-09, in Halifax. It was immediately resurrected, incidentally, as a free commuter tabloid, Halifax Metro.
This year also marks the fifth anniversary of my book Greatly Exaggerated: The Myth of the Death of Newspapers, which examined the finances of publicly-traded newspaper companies in the U.S. and Canada going back to 2006, before the recession began. It found that none had suffered an annual loss on an operating basis over an eight-year period and that most were posting double-digit profit margins, with some in the 20-percent range. Of course, they were doing so on greatly reduced revenues as classified advertising mostly disappeared and digital advertising came nowhere near making up the difference. Newspaper profits were a fraction of what they were before the print advertising bubble burst in 2004. At the height of the boom, operating profits were routinely above 20 percent, with some in the 30-percent range, as monopoly newspapers could even approach 40-50 percent return on revenue. That is, they could keep 40-50 cents in profit for every dollar that came in the door as revenue. The dailies that folded had all been second-place afternoon newspapers, which in a declining industry proved to be an endangered species indeed. Newspapers aren’t dying so much as newspaper competition is dying. The monopolies that remain are still mostly profitable.
Unfortunately, much confusion has been caused in the public mind by the multi-million-dollar losses often declared by newspaper chains, which tend to grab the headlines. These are “extraordinary” losses only on paper, as under the accounting rules companies are required to regularly revisit the value of their business. If it goes down, as it invariably did for newspapers due to their declining revenues and earnings, that loss has to come off the books somehow. It did so, under the accounting rules, through the annual profit and loss statement as an extraordinary loss. On an operating basis – money coming in the door minus money going out the door – newspapers still have their heads well above water. That should be true indefinitely, as they have proven to be quite scalable enterprises that can be made larger or smaller as necessary. It is important to remember that newspapers began as small businesses, often one-person operations. On their present trajectory they are at worst on track to return to that status.
Much confusion has also been caused in the public mind by declining circulation, which is often pointed to as a harbinger of newspaper doom. This ignores the counter-intuitive fact that most newspapers lose money on circulation sales. They of course make it back and more from advertising. Cutting back on circulation has thus been a way for newspapers to cut costs, as it is increasingly expensive to truck copies farther and wider to readers of diminishing interest to their advertisers. At the same time, they have asked their readers to pay closer to the actual cost of producing a hard copy of the newspaper, often doubling or even tripling subscription rates, as Iris has found. Given the well-proven elasticity of demand for newspapers, many more readers than not were willing to pay more. Much more. The truth is that newspapers now have more readers than ever thanks to the Internet. It’s just that most are reading it for free, and that has to stop if newspapers are to survive.
Even more confusion has been caused in the public mind by the dozen or so bankruptcies of newspaper companies, which also tended to grab headlines. These were invariably due to heavy debt loads taken on in making ill-advised acquisitions before the print advertising bubble burst. The newspapers themselves remained profitable throughout and thus continued to publish under new ownership.
Unfortunately, many of the new owners were hedge funds which had bought up their debt at pennies on the dollar when the companies were facing bankruptcy. These so-called “vulture capitalists” owe no fealty to journalism and are instead fixated on the bottom line. They well understand the inherent profitability of newspapers, however, and took over several major chains for bargain prices. The recent upsurge in their acquisitions speaks to the continued profits to be made in the newspaper business.
The problem of hedge fund ownership has been seen nowhere more than in this country. Despite a supposed 25-percent limit on foreign ownership of newspapers, U.S. hedge funds were able to acquire out of the 2009 bankruptcy of Canwest Global Communications our largest chain, the former family-owned Southam Inc., for which I worked for almost 20 years. In a nifty piece of financial engineering, the hedge funds kept most of the debt they had accumulated on the company’s books, ensuring they would get paid first every month whether or not it made money. Unfortunately this has meant throwing even more journalists overboard just to service the debt held by its hedge fund owners. Renamed Postmedia Network, it took over the country’s second-largest chain, Sun Media, five years later, giving it 15 of the country’s 22 largest dailies. Despite promising not to merge the duplicate dailies it thus owned in five of the country’s six largest cities, it merged their newsrooms in four cities shortly after receiving approval for its takeover from our oddly impotent Competition Bureau. The largest chains here, Postmedia and Torstar, make profits in the 10-percent range. Postmedia made $65 million in profit in its most recent fiscal year, while Torstar made $60 million, yet they will soon be getting financial assistance from taxpayers. Their annual reports are posted on their websites. Check them out if you don’t believe me.
In the UK, the picture is more varied. While in the U.S. I was able to access the finances of only about 40 percent of the industry, as that is the segment which is publicly traded on stock markets, and in Canada about 75 percent, in the UK I can get more than 100 percent. That’s because the regulator there, Companies House, requires annual financial statements from all companies, whether publicly traded or privately held, whether parent, holding, or subsidiary. While I was unable to unravel the finances of News Corp. dailies in the U.S. because they were lumped in with the company’s newspapers in Australia and the UK, not to mention several book publishing divisions, in the UK you can get separate financials for the Sun and the Times because they are published by separate subsidiaries.
The results are interesting. The Times was for years a money-loser for Murdoch as a vanity quality daily, and before him the Thomson family of this town, whose building is right next door. It has actually been making money for the past few years, however, since erecting a hard paywall around its content. This began to reverse what has been called the “original sin” of newspapers, which was giving their content away for free online. When you think about it, that really isn’t a very good business model. A similar paywall around the Sun’s content had to be dropped, however, for a lack of customers. The lesson was that people will pay for quality, but they won’t pay for crap, an abundance of which is of course available online for free. Most newspapers have now introduced a so-called “metered” paywall online as perfected by the New York Times, which at last count had more than 4 million online subscribers paying more than $800 million a year. Of course, not all newspapers are the New York Times, but most can generate revenue from online subscriptions, and today every little bit helps.
Other UK newspapers have found their way by heading in different directions. The Daily Mail has made money from online advertising, despite the digital dominance of Facebook and Google, by creating the world’s most popular English-language website. Unfortunately its content is more clickbait than solid journalism. The Guardian, which has kept its solid journalism free for all to read online, found the cost was eating into its rich Scott Trust too rapidly, so it began selling memberships. Its loyal readers responded by taking out more than a million of them, contributing tens of millions of pounds to Guardian journalism every year and putting it on track back to profitability. Most newspapers, however, have benefited from the metered paywall, which was actually pioneered by the Financial Times in the UK. It proved so successful there that it turned the business daily around from losing tens of millions of pounds annually into a cash machine for which Nikkei paid £844 million in 2015. That’s about a billion U.S. dollars.
It wasn’t supposed to be like this. The Internet was supposed to bring a great flowering of journalism online, but so far that hasn’t happened because nobody has yet come up with a viable business model for digital news media. The economics of the Internet are exactly the opposite of what they are for newspapers, which are profitable because they tend toward monopoly. The Internet tends toward infinite supply, and under the first law of economics – supply and demand -- that only drives prices down. Digital startups can scarcely compete for advertising with Google and Facebook, which have simply built a better mousetrap. Who would have predicted 20 years ago that a search engine and a social network would be the most profitable digital media? Yet many somehow blame newspapers for not foreseeing this and instead getting into those lines of business.
Newspapers will continue to publish in print because they have a robust business model. It is often said that their business model is “broken,” but if you still have your head well above water after your revenues have fallen by more than half, I’d say you’re hanging in there pretty well. Plus there’s just something about print on paper that people prefer, especially for longer reading. The advent of e-books, for example, has hardly meant the death of printed books. Most importantly, print is also still a preferred medium for some types of ads because of its higher engagement levels and favorable demographics.
We have of course recently had another newspaper casualty and thus seen renewed predictions of the coming extinction of a medium. The long-publishing Youngstown Vindicator sadly announced it is closing at the end of this month, but it had some unique problems in a depressed area and was apparently not very well run. More troubling to me are recent predictions by insiders Dean Baquet and Warren Buffet that newspapers will be going away. Baquet gives most local newspapers five years, while Buffett predicts only a few large dailies will survive, but I predict that these predictions will also prove at least premature. Newspapers may no longer be the big fish in the news media pond, but I predict they will remain one of many smaller fish swimming well for the foreseeable future, both in print and online.