The economies of scale that once helped place the journalism business among the economy’s most profitable now threaten to help sink the industry. America’s newspaper chains missed their moment of opportunity to use their scale to dominate the information business online. Now, it’s time for those chains to break up, in a last-ditch effort to save many of their newspaper titles.
The principle of “economies of scale” says that, in certain cases, businesses can work more efficiently by getting bigger. For newspapers, big chains can spread of the cost of creating and obtaining out-of-market content across dozens of papers. It can run single, shared bureaus in state, national and international capitals. It can employ a single national sales force to sell ads across the entire chain. It can centralize IT, HR, and purchasing operations. It can standardize design and obtain better deals on syndicated content than individual papers could do on their own.
The chain also needs to employ additional layers of management, at the national and sometimes regional level, to oversee that centralized work. But the cost savings of eliminating all that duplicative work at the local level more than covers the cost of that additional management – and provides bigger profits for the chain’s investors.
At least, they used to.
When the Internet destroyed local newspapers’ control of the flow of out-of-market news information in their communities, it eliminated many of the economies of scale that justified local newspapers being bought up into large, national chains. What good is a deal on wire service content when your readers can get that same information for free elsewhere on the Web? (And you can just link to it from your website.) When journalists can use consumer-grade technology to produce their publications, what’s the advantage of maintaing a large, slow-moving, change-resistant, central IT department? What’s the sense in paying for a large national sales force when the unique, defining characteristic of your audiences is that they are local?
It didn’t have to be this way. Newspapers had a moment when they could have created (and thus, controlled) the social media and publishing tools that the public eventually used to destroy local newspapers’ information-access monopolies. What if Gannett had used its 1990s-era profit to create or buy something like Blogger, instead of leaving that to Google? Or Scripps had built YouTube? What if the late Knight-Ridder had used its Silicon Valley contacts to build something like Facebook?
What if the newspaper industry had used its smarts to build a better search engine before Google did?
If the newspaper industry had recognized in the 1990s that it was in the information access business – instead of the news reporting and ad sales business – it could have invested in new tools that would have allowed it to maintain its dominant market position in information access, instead of settling for the cheapest possible ways to shovel print stories onto static websites while not dipping into the industry’s double-digit profit margins.
Blame for this failure must fall on the leaders of the newspaper chains in the 1990s, because plenty of individuals within their companies were screaming at them then to make these types of moves. (Here’s a shout out to my over-40 readers who are glumly nodding their heads in solidarity right now.) Instead, when the threat of the Internet became obvious, news managers chose to throw money at creating classified vertical products that Craigslist already had rendered irrelevant – again demonstrating industry leaders’ belief that they were in the ad sales business instead of the far more lucrative information-access business.
Now, those opportunities are past. Google, Blogger, YouTube and Facebook exist – and the newspaper industry doesn’t own them, nor does it demonstrate the technical and social aptitude to displace them. So now news companies are left in the smaller, less lucrative information production business – the business that they mistakenly thought they were in all along. And in that business, local newspapers simply can’t afford to support their corporate parents any longer.
What’s the business case – today – for aggregating local news publications into national chains? The investors who keep shooting down pitches from content-driven Web start-ups are right: Local content doesn’t scale. It doesn’t scale for start-ups and it doesn’t for legacy chains, either.
Content production tools scale. Social media tools scale. Topical communities can scale (depending on the topic). Local news does not scale.
So the expense of paying for regional and national management is an expense that legacy newspapers carry that their local-owned and operated independent start-ups do not. That places those chain-owned newspaper companies are a permanent cost disadvantage to their start-ups – even if those newspapers could reinvent their operations to match the start-ups cost efficiencies in every other area. (And good luck with that, with all those national managers and corporate departments wanting to be “kept in the loop” on every decision.)
If local newspapers are going to have a chance to succeed in today’s information market, they’ve got to shed excess cost. And corporate overhead must be included on the list of those costs. Locally-focused news publications must become truly local, with local information, produced by local reporters with local ties, sold to local advertisers by a local sales staff who work for a local owner.
Break up the chains. It’s the news industry’s best hope. And I’m not writing this purely as an exercise in idealism. If newspaper chain investors are to retain any of their investment over the long-term, national managers ought to be devoting all of their time to recruiting and selling potential local buyers of each of their remaining publications. The value of local newspapers, saddled with corporate overhead costs, is only going to decline over the long term, given the continuing development of efficient online competition. The time to get out, for corporate stockholders, is now. So the best way to maximize the short-term value of those chain shares is to find and develop local buyers for individual publications who are willing to pay the highest obtainable price for them.
As any smart salesperson knows, you don’t get the highest price in a fire sale. You get it by developing relationships with potential buyers, qualifying those candidates and making a case for the high value (or at least potential value) of what you’re selling. If news chain managers really want to serve their investors, they’ll spend their remaining time pursing those buyers, before their chains lose whatever value they have left.
About Robert Niles
