The self-destruction of newspapers

Disruption only happens when you let it. A former insider on what executives were telling themselves during the heyday of print.

It’s nearly 2 o’clock on a Friday afternoon. As you pull into your spot in the parking lot, it occurs to you that your workload is a lot lighter than what the other guys at the club are carrying. You’ve just turned sixty. The years are going by quickly now but there’s still a spring in your step. You practice a couple of half-swings as you walk down the corridor, you’ll play well tomorrow if you can get your short game going. 1996 has been a great year, and based on the budgets you’ve been looking at, 1997 will be even better. The newspaper business is one hell of a business, that’s for sure.

You can hear them all assembling in your meeting room next door. You marvel at how well it’s gone this week. Too easy, really. Hold the line on headcount expense and capital spending, and hike the advertising rate. Even the last remaining union bullies down in the delivery department of the big paper in the chain have been handled, and you have a non-union company at last. You’ll drop in for a chat with the chairman later, give him a sense of where they’re coming in, it’s always important to reinforce your position. “You’re doing one hell of a job,” he’ll say. Your face will be inscrutable. “Thanks, it’s really got nothing to do with me, we’ve got great people.”

Success and wealth imbue your life with a well-disguised self-satisfaction. You’ve come a very long way from your little home town in the Mid-West. This year you and Patty spent two weeks in Paris. She loved that. Next month you’ll join the group of top media people invited to Beijing for three days of government briefings followed by a week of sightseeing. You’re already on the board of the Newspaper Association and it’s only a matter of time before your politicking pays off and you get nominated to join the board of the Associated Press. You’ve climbed about as high as anyone can in the newspaper industry.

Just another couple of years and you’re out. Off to the house down in West Palm for good.

You joined the business straight out of journalism school in Missouri. A cub on the crime beat, an ambulance chaser. But you made the front page by 25. Then you vaulted right over older guys to managing editor, it wasn’t a question of being lucky, you just did a better job of cultivating and managing the person ahead. As he went up, you went up. You helped yourself out too of course, like the time they moved you in as publisher at the big paper and the first thing you did was fire 40 people. That got you the reputation you needed. Now here you are running the whole company and all ten newspapers. You’ve got your old pals in key positions, they’ve worked for you for years. They depend on you, they owe it all to you, so you have them right where you want them. Each of them plateaued out long ago but they sure know how to run the formula and they’d never think of rocking the boat. It’s interesting how fear keeps them off-balance. And how they always try to anticipate your position.

You’ve even got the CFO in your back pocket now. If you have a management challenge at all, it’s down the hall in the chairman’s suite. Too many years of privilege have turned him into a capricious ass. Yet he still gets all the damn credit and everyone in the company seems to admire him. Money has a way of attracting undeserved respect. They don’t see him up close like you do. I mean, he earned none of it, he inherited it all. Most of them even assume that he’s the one piloting the ship. That’s fine, the trick is to make him think he’s the senior partner in a two-person team, the one really pulling the levers. Most of the time he buys it. Damn good thing he’s away so much.

“I’ll be right there,” you tell your secretary. Locked in the room for a week but now there’s just one more budget to go. And it’s an easy one. The corporate development group.

As you worked your way through the budgets and plans for each of the properties not one of your publishers asked for money to experiment with any kind of online business, but now your irritating business development vice president is pushing hard for the company to experiment with, of all things, the internet. Damnit, she always finds a way to get under your skin. We need to move her out to one of the papers, she badly needs operating experience, a dose of the real world would really do her good. She shows you this chart:

This is not exactly earth-shattering. Internet revenues this year are an estimated $264 million. Total. Really? That’s it? For an entire “industry?” It’s less than your company’s net income last year. Look at the ad revenue of the daily newspaper industry. About $40 billion, and that’s not even counting subscriptions. More than television or radio or anybody. You’re finding it hard not to explode.

But then she tries to baffle you with, well, science. Last year, she says, in 1995, more personal computers were sold in the United States than televisions, maybe the magical price/performance matrix has been achieved. And modems are flying off the shelves. A platform for the internet is taking shape she says, and it will be a brand new channel into the consumer market.

She’s worked up quite a story. She tells you that more than 10% of U.S. households are now online, doubling in just a year. There were 95 billion emails sent last year, more than the 85 billion pieces of mail handled by the Post Office. For the first time, regional telephone companies had more data traffic than voice traffic.

And here’s the thing, she says. Internet advertising is starting to take off. The newly public Yahoo! did $5.5 million in the third quarter, she says, up 68% quarter-to-quarter. They now have 340 advertisers. Traffic is up 56%. And America Online is moving to the internet — they did $5.2 million in advertising in Q3, that’s 79% up, quarter-to-quarter. From 50 advertisers. Their traffic grew 15%.

Look at the chart, she says. Jupiter Communications estimates that $13 million in ad revenue was generated in the fourth quarter of ’95, $24 million in 1Q96, $43 million in 2Q96 and $66 million in 3Q96. That’s a sequential growth rate of 72%. She quotes an investment research report from Mary Meeker at Morgan Stanley that 46 of the top 100 domestic ad spenders have bought Internet advertising so far in 1996. That includes AT&T, MasterCard, Toyota and American Airlines.

She can see you’re not convinced. She doubles down. Something is happening here she suggests, don’t focus on the annual number, focus on the velocity. The internet is already superseding online services, its growing dramatically and advertisers, as always, are following the eyeballs. Sure, many of them are technology companies , but it’s only a matter of time before advertiser interest broadens and the trend begins to affect us down here in our local markets. We need to understand it, and quickly. Imagine if our retail advertisers are seduced away, that’s 40% of our revenues. Or our classified advertisers, that’s 50% of our profit.

The best way to understand it, she says, with a straight face, is to dip our toe in the water and set up an internet site based at one of our papers. Just eight or nine people at first, a couple of geeks but mainly people from the newsroom, we’ll put the newspaper up and advertising will be sold as an add-on by the paper’s sales people. It will be an extra gimmick in their briefcase, a value-add. She has a budget and a plan and an initial product spec for you to look at…and naturally, she wants to run the thing. Jeez, she’s looking for three million next year, five million in Year 3. After that, she says, who knows? The lessons we have learned about the internet may set us off in a completely different direction.

Now then. You happen to know some guys from Cox Newspapers and Times-Mirror who lost their shirt a couple of years ago experimenting with that online service called Prodigy, owned by IBM and Sears. You teased them a lot about that at the newspaper convention. If IBM and Sears can’t make it work, nobody can. Before them, back in 1986, Knight Ridder Newspapers put $50 million down an early online rat hole — they gave AT&T computer terminals away for free in upmarket Coral Gables down in Florida and charged 12 bucks a month for the Miami Herald online. But it turned out nobody wanted to read the paper on a computer. Recently the Tribune in Chicago put just $5 million into America Online and made an unbelievable return that now funds their Chicago Online joint venture. So, one company got lucky from a financial play? Doesn’t make any of this a business…

Now here she is, talking about the internet, and it sounds even more complicated than AOL. You had no idea there was a nerd underneath that Wharton M.B.A. And she doesn’t seem to have a clue about how to make money with it. Giving it away for free sure says a lot about how much she thinks it’s worth.

Meanwhile, here in the real world, one of your newspapers wants a new color press — that’s a $90 million capital investment right there. Another publisher wants a new production software system and still another a new inserter for Sunday circulars. If all that wasn’t enough, newsprint prices, one of the few big operating variables you can’t control, are going to go up by 7% next year. You’ll have to pass that on to your advertisers as a rate increase. Let’s hope they don’t expect anything extra for it…and screw it if they do, where else are they gonna go? The bankers and the markets won’t tolerate margin decline. And the last thing they will want to see is a management team distracted by the internet. If you can keep the margins of this cash cow humming at 20%, the stock will do just fine. And so will you.

So you tell your eager-beaver BizDev lady that her day job is to develop the business of your daily newspapers, not argue for exotic technology adventures. Nobody’s ever going to read the news on a screen, they like the feel of the paper in their hands too much for that. And does she actually believe that people will spend their hard-earned cash in cyberspace, that they will look for a car on the internet, or a house or a job? Print classified advertising is the largest marketplace in America for chrissake. No, she needs to forget this bullshit. She needs to come back in with a budget for a set of readership surveys because we really do need to figure out how to reach young readers, once and for all. Maybe a new section, with lots of color and celebrity news? How many times have you suggested that?

And you make a note to remind yourself to send her that great speech by Punch Sulzberger, the chairman of the New York Times, the one where he says newspapers will never go out of business and that the so-called information superhighway now under construction looks a lot like a roadway in India: “chaotic, crowded, and swarming with cows…” He is so right.

People will always need newspapers to explain their world to them. Local retailers will always need them, too.

And anyway, you need to get down to the beach house for the weekend.

All Rights Reserved for  Peter Winter

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