Mainstream Newspapers, R.I.P.: Why Dailies Will Become Extinct
A Prediction: Within the next 10 years, most local daily newspapers across the nation will be out of existence. Or they will be losing so much money, they will wish they were out of business.Why will local paid-subscription daily papers end their 250-year run as the arbiter of America's public life? The newspaper giants will topple because -- like the steel mills before them -- the industry's profits require certain economic conditions that simply will not exist in the future. By 2006, big dailies will have lost a huge percent of their readers; forfeited their sky-high profit margins, especially in the extremely profitable classified sections; and lost much of their display advertising revenue, as companies continue the switch to target their marketing based on niche demographics.This is not to say that companies like Gannett, Times Mirror, McClatchy and the New York Times will suddenly be out of business. I do not believe that for a moment. But it is clear that newspaper chains will move their resources into other areas as dailies become less profitable.There are those who argue that the "new media" or online "electronic newspapers" will entirely replace the ink and paper dailies in our communities. But that is not my argument here. Instead, I hope to articulate, on an economic level, why large newspaper companies will no longer produce a daily local newspaper that is distributed to the home.WHY BELIEVE ME?Before reading my argument about why daily newspapers are headed for extinction, there are a few things you should know about me.I am the majority owner and publisher of the News & Review, which owns alternative weeklies in California and Nevada. Over the last 16 years of publishing our paper, I have competed with three of the largest and most successful daily newspaper chains in the country -- McClatchy in Sacramento, Donrey in Chico, and Gannett in Reno.Obviously, I have a major conflict of interest in writing about the future of daily newspapers.So why am I doing it? The answer is simple: It is a story that will a have major impact across the country, and it's not being told. Though the future of daily newspapers is constantly being discussed by analysts and number crunchers (and is the topic of much deliberation at newspaper industry conventions), nobody has really taken this prognostication to daily newspaper readers.That being said, I'll admit that the idea of having no more dailies scares me. Though I have often disagreed with how mainstream papers paint the world (and have worked for the last 23 years to create alternative voices to the mainstream dailies), it is hard to visualize how our democracy can function as news and information becomes more and more splintered; as fewer people share common information and perceptions as disseminated by the media. With the breakup of the television market and decline of the major networks, we seem to be headed for a country without a shared mass media. When I listen to a Christian radio station or hear Rush Limbaugh's show or read the ethnic press or read a Wall St. Journal editorial, I am usually stunned at how differently we all see the world. (And, of course, I know that many of you who read the News & Review are equally stunned by the world we present.) I believe the growth of an independent and diverse media is a positive thing for our country, but can't help thinking that having no shared media may tend to underscore our differences rather than reveal our commonalities.I do not know if this future is going to be good or bad, but I do know that it is going to very different. And for the mainstream newspaper industry, the future is coming awfully fast.AN END TO HIGH PROFITSDaily newspapers are currently one of the most profitable industries in the country. Not long ago, before readership started to decline, a monopoly newspaper in a medium-size market could command a profit margin of 20 to 40 percent! And last year, the profit margin for the industry still averaged at about 12.5 percent, almost twice the profit margin of a typical Fortune 500 company.Ironically, the very factors that increased profits and prevented direct competition among newspapers -- the huge infrastructure of a daily newspaper with its printing plant, its distribution network and expensive reporting staff -- will lead to their demise by turning them into the monsters that cannot find enough to eat. In fact, an article published last year in the American Journalism Review actually advised newspaper publishers to "learn to love" lower profits -- or else.The situation is very similar to what happened with the steel industry in the 1970s. At one time a huge steel mill's size gave it a strong competitive advantage, but eventually micro-mills could produce steel more efficiently than the large mills. Just as the large mills' size made them unable to compete, the daily newspaper's huge infrastructure will soon be an albatross around the industry's neck. That's why the cost of starting or revitalizing a daily newspaper is great, and the future returns are so small.That's why no one today is starting up daily newspapers.READERSHIP LOSTAround 15 years ago, it became apparent that baby boomers' children were not picking up the daily newspaper-reading habit like their parents and grandparents. In fact, a recent study conducted for the American Society of Newspaper Editors study found that so-called "Gen-Xers" are about a third less likely than baby boomers to read newspapers daily and far more likely to agree that "reading is old-fashioned."Meanwhile, even the boomers are reading daily newspapers less, with adult readership falling from 78 percent in 1970 to 64 percent in 1995.The readership decline has caused many dailies to go out of business. Some of the remaining papers picked up the circulation from the others during this "shake-out" period continued to grow in circulation. But overall, newspaper readership continued to decline. What will happen to the surviving dailies when there are no other weaker dailies to cannibalize as the readership falls?Some industry researchers, like those who published findings in the 1996 Veronis, Suhler & Associates Communications Industry Forecast, say the downward readership trend will turn around; that young people will develop a daily newspaper habit as they grow older. And it is true that, today, many daily newspaper gurus are in a mad search to figure out ways to change the content of daily newspapers in order to appeal to young people. They've tried shorter stories, longer stories. They've tried more entertainment and lifestyle coverage. They've added more TV stories.But these attempts to fix the problem will not work. Replacing out-of-touch editors with hip, young editors or adding better, "younger" graphics will not fix the problem. Some daily newspaper executives are likewise concerned about the loss of young readers. Here's a quote from a speech given by the Sacramento Bee's Frank Whitaker to the American Newspaper Publisher's Association way back in May of 1991: "For years we've been coasting on a healthy profit margins despite all the warning signs: declining household penetration; at best--flat circulation; the proliferations of a variety of alternate media; and a growing skepticism on the part of our young readers regarding our credibility and our essentialness."We can't continue to put something for everyone into bigger and bigger packages and expect readers to love us and want us--they won't."YOU HEARD IT SOMEWHERE ELSE FIRSTAnother reason why they won't love newspapers is because dailies cannot solve their slowness in breaking news compared to radio, TV and the Web. At the beginning of the century, newspapers only had to compete for breaking news with other newspapers. And compete they did. Most small towns had multiple competing dailies. Many larger towns had dozens of dailies.Today, while newspapers can still give the most in-depth look at any issue, they can rarely break a major story. Election results are known before the paper hits the porch. A plane crash interrupts regularly scheduled programming. The O.J. trial was seen live. ESPN Sport Center has already shown videos of every ballgame three times before you can read the box scores in the newspaper. The World Wide Web will bring us even more up-to-the-minute news in the near future.So now that TV and the Web can give you the breaking news in an instant--the who, what, where and when--all that's left is the "why." Unlike the "who, what, where and when," the "why" of a story comes with a cultural context. Even though a college student, a retired state employee, an African-American shop owner, and a gay truck driver will all want to understand the "why" of a story, they will turn to quite different sources to discover it. One may turn to MTV, another to Hard Copy, another to an alternative newspaper, another to Pat Robertson.Just like many other sources of the "why" about a story, my largest paper, the Sacramento News & Review, produces newspapers that 25 percent of local residents regularly read and the other 75 percent ignore. This is quite different than the almost total penetration of a community that daily newspapers used to reach. Without the ability to break major new stories, daily newspapers will not be able to bring all segments of a community together to read the same paper. Their audience share will continue to drop.And, as if losing one out of five readers wasn't drastic enough, the real bad news is the age composition of the 2006 daily newspaper readers. The percentage of weekday readers will mainly happen among younger readers, who also happen to be in their prime consuming years, when individuals establish shopping patterns. This trend will have a huge effect on the daily's ability to sell retail advertising based on certain age groups. If a television show suddenly attracts 20 percent more viewers, the ads on the new show will create 20 percent more response for the advertisers. Because they are providing 20 percent more return, the television station can charge 20 percent more for the ads. What is so remarkable about the rate hike is that it is almost all profit. The film costs the same, the actors are paid about the same, the rent is the same -- but the profits are up 20 percent.There are similar economics in the newspaper industry. What is different for newspapers is that when circulation increases, the industry has to print and distribute additional papers. That costs money and cuts into the profit margin. Still, while these costs are high, circulation and insert revenues have more than covered these expenses.The major financial impact of losing readers will be on how much newspapers can charge for their advertising pages. In rough terms, a 20 percent drop in readers will mean a 20 percent drop in advertising rates. Even after cutting off that chunk off the dailies' bottom line, the company would still clear enough to continue publishing for years.Except for the Web.CLASSIFIEDS' INEVITABLE MOVE TO THE WEBThere are all kinds of predictions about what the online medium will mean for the future, but one thing is certain: It's a medium made for classified listings -- i.e., for helping people effectively buy and sell things. Web search engines will enable a user to quickly search for the job listings, homes for sale and available automobiles. Because classifieds represents 38 percent of most dailies' advertising revenue, the coming era of Web classifieds is being met with major concern from mainstream newspapers.The Web already offers free or nearly free classified listings for employment, housing and real estate. The U.S. Department of Labor has more than 300,000 free job listings. Some real estate companies have already put their homes online with more planning to come online.These were categories in which the dailies once had little competition, and therefore were able to charge top dollar. These same high prices will help drive classifieds to the free or low-cost Web. As the Web becomes more popular, a daily newspaper's classified section--with its minimal information on a small number of listings--will not be able to compete with a Web page with its lower ad rates, far larger database of information and many more listings. When people ask me, "How will individuals without access to a computer get these classifieds?" my response is simple: The audience will follow the database. If the best classified database is on the Web, somebody will find a way to make money providing that information to people, maybe even by printing out classified listings at Kinko's. That is why, during the next 10 years, the Web will effectively eliminate classified advertising as the most significant revenue source the dailies have.Classified research recently conducted by the Newspaper Association of America seems to concur: "Advances in technology encouraged competitors. ... Now these new players have created a natural wedge between newspapers and advertisers. They're offering lower prices, better service and more information than newspapers. They're eating away at newspaper franchises. Creating a new market for classifieds we no longer control."As an ex-paperboy, a longtime newspaper reader and a current newspaper publisher, I love newspapers. I love the feel, the portability, the familiarity. But when looking to buy a new house, I would much rather see 100 percent of the houses in the neighborhood--with a picture and a detailed description of the homes that only the Web will be able to provide--than look in a newspaper where traditionally, only a small percent of the homes are listed and you get very little information.Or if you're looking for a low-cost automobile, you will go online because there you soon will be able to find the same information that's in a newspaper classified, plus you could quickly check other related information--say, the car's bluebook value or its Consumer Reports rating.I find that the train analogy is helpful in understanding why classifieds will switch over to the Web. If you compare trains and airplanes, then you find that trains have many advantages over planes. The seating is roomier, your luggage stays with you, you can walk around, and you arrive in the center of town. In many ways, trains are nicer than planes. The advantage that planes have is one: It takes only a few hours to fly across the country on a plane.So, which do you choose?Although a newspaper has many features that make it more desirable than the Web -- including the "you can't take it into the bathroom" argument -- newspapers will never be able to compete with the Web for processing a classified database.So, over the years, classified advertising will move to the Web.How would loss of classifieds effect the revenue stream at an average daily? Well, an average medium-size daily runs about 225 classified pages a week and earns around $4,000 per page -- $900,000 per week--after printing and production expenses have been taken out. If 80 percent of their classified pages are lost to the Web, or if they have to reduce those prices to "Super Sellers" prices (see sidebar), then the daily would lose around $720,000 per week or nearly $37 million during the year.These events will increase the sense of overall crisis for dailies. The loss of classified net revenue combined with the expected decline in advertising revenue based on readership loss will not only wipe out the profit, it will leave the company with a large revenue hole -- a hole that can't be filled.WAR OR NATURE?For me, competing with three aggressive daily newspapers companies -- each about 100 times bigger than us -- has changed the way that I view capitalism. Before these experiences, I thought that a "war model" was the best way to understand business competition. In war, the country that brings the most firepower and has the most resources usually wins. So in a battle with Donrey, Gannett or McClatchy, I should have been dead meat.But I've come to realize that the war model is not an accurate way to understand business competition. I think a "nature" model is a much more insightful way to gain an understanding of how things are going to play out in the media future, especially as use of the Web continues to grow.In a nature model, newspapers and, in fact, all other businesses, are trying to make sure that they can get enough to eat, can reproduce, and are not eaten by somebody else. Currently, the Sacramento News & Review, is a $3 million-dollar business, and my daily competitor, the Sacramento Bee, is an $188 million-dollar business. In the nature model, you don't think about which company has the most resources, but rather, that my paper needs to find 3,000 calories a day to survive, and the Bee needs to find 188,000 calories a day.Which one is most likely to get their needed calories?In essence, I believe the environment is changing in a way that ensures that the daily will not be able to find enough food to survive. The large size that made them so successful in one environment will work against them in the next.How do alternative papers fit into this new environment?I am not sure. Though I am sure that we have a much better chance of survival than the dailies, I do not believe that it is totally clear sailing for our papers, either. Just as the alternative newspaper industry was facilitated by the advent of desktop publishing in the late 1980s, I believe that the Web will create new media creatures that will be able to live on 500 calories a day. And a few hundred 500-calorie businesses may turn out to be a lot more threatening to my newspaper than a giant company--like a big daily newspaper--that needs 188,000 calories.Who knows what the future holds?One thing seems certain: The days of wide circulation and great profits for the dailies is coming to a historic end, though not in the short-term time frame of Wall Street, which rarely seems to see past next quarter's earning report.But like nature, capitalism has no reverence for what should be, only what is. When a species' death rate is higher than its reproductive rate, that species goes extinct. When a company or an industry's expenses are higher than its income, it goes out of business.But life does not go out. Instead, new, more efficient species evolve.SIDEBAR ONENewspaper Economics 101: Say Goodbye To Those Classified AdsIn order to understand the impact of the dailies' future loss of classified revenue to the Web, we first need to examine how newspapers are currently put together.Regular display advertising runs in the front part of the paper, mixed up with news stories. Classified ads run in the back part of the paper in sections that are nearly all advertising. This makes the classified pages twice as profitable as the pages at the front.A newspaper income statement can be difficult to grasp because of the complex relationship among advertising rates, circulation revenue and printing costs. Nevertheless, like other businesses, a newspaper has marginal costs and marginal revenue.A shoe-store owner will buy shoes from a wholesaler for $50, and then sell shoes for $99. The $49 made on each shoe sale goes to pay the rent, the employees, the advertising and the taxes. Hopefully, the store owner has a couple of dollars left over for profit.So, when an average-sized daily, for example, sells an advertising page for $6,000, what are its costs? If it's printing and production costs are $2,000 per page, it costs the paper $3,000 to print the page for the ad plus a half-page of editorial copy that accompanies the ad. Let's say the daily then pays reporters -- usually through salaries -- the equivalent of another $1,000 for the half-page story. This leaves the company $2,000 to pay for the building, the managers and all the other expenses of running their newspaper.But the classified pages are even more profitable. First of all, most dailies charge more for a classified page than for an ad in the front of the paper. Newspapers adjust their rates depending upon their competitive situation, not their costs. So, in advertising categories where a daily has competition, their rates are competitive. But in advertising categories where there is no competition, their rates can be much higher.Unlike display ads, classifieds are in advertising sections that rarely add extra pages of editorial copy. There is no need to write or print editorial copy to accompany the ads. So, if it costs the daily around $2,000 to print a page of the lucrative Sunday "Help Wanted" ads, this classified page brings in nearly $19,000 to pay for overhead. And though classified represent about a third of most dailies' advertising revenue, the represent a majority of a dailies profits.So, you can see why the loss of classifieds will be hugely significant for daily papers.SIDEBAR TWOOne Size Doesn't Fit All: The Daily's Gradual Loss Of Display AdsDaily newspapers have yet another problem in store -- the loss of their existing lock on display advertising for large chain-store retailers. How and when this loss will hit is harder to calculate than the readership decline or classified losses. But let me explain the concept to you anyway.Most dailies' display advertising comes primarily from large chain stores like Macy's, Sears, Circuit City and Good Guys. In fact, it is shocking how little of a daily newspaper's advertising comes from local independent advertisers. That's because these advertisers are not interested in buying ads in an individual daily newspaper so much as they are interested in purchasing national presence for their entire chain. So chain-store retailers produce a single ad and use it in daily newspapers in nearly all of their markets. This is currently the daily's greatest advertising advantage over other print products.At my alternative newspapers, we campaigned vigorously to get these multi-city retailers in the paper. We went calling on the corporate media buyers in Chicago, Los Angeles and wherever and brought along a copy of the Enterprise-Record, since most of these media buyers had never seen it. Usually, they would look at our paper and say something pretty nice, and look at the daily and smirk, "I guess it's not one of our stronger dailies."But at this point I would inevitably hear the line: "Well, you are making a point for your town, but we cannot change our whole marketing plan for one community."The take-home lesson from this experience?In the end, despite our best efforts, most national media buyers still kept their advertising dollars with the daily.A partial explanation for this insanity is that media buyers are often responsible for evaluating media in huge regions, like "all markets west of the Mississippi." Given that assignment, media buyers understandably develop a One Size Fits All marketing plan that revolves around daily newspapers instead of diversifying between more specifically targeted mediums, like parenting publications, ethnic papers, the gay press, special-interest magazines and alternative papers.But in these days of target marketing, One Size Fits All may no longer be the best option. For example, while I was working on this story, Macy's was running a bold "high-fashion" four-color ad campaign in many dailies. The ad used a model who looked like she was starving and could easily have posed for a Send Money To Bosnia campaign. She was wearing clothes that no one over the age of 22 would think of wearing.This campaign was geared at sending a strong message about clothes and attitude to 18-to-24-year-old women. But in fact, Macy's (or more likely the clothes manufacturer) had spent hundreds of thousands of dollars to deliver an in-your-face message with a vehicle that, according to newspaper demographics, reaches hardly any 18-to-24-year-old women.More and more multi-city retailers are discovering that implementing a nationwide marketing plan is often like trying to force a square peg in a round hole. When they discover that there are viable options, the dailies, which presently get most of their display revenues from such advertisers, will be in a vulnerable position.But what will eventually force an advertising re-evaluation among retailers is the fall of a few dailies. When the retailers are not able to serve all their markets with one easy plan, they will be forced to try something new.