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28th August, 2010 Leave a Comment

The placards proclaiming The End Is Nigh predict both the demise of newspapers and the replacement of professional journalists by legions of empowered amateurs. On the flip side they say it is too late to repent because serious journalism has gone to hell. Like reports of Mark Twain’s death, the predictions are premature. They may also be avoidable.

Rupert Murdoch’s website paywalls and his ebullient support for electronic devices like Apple’s iPad as platforms for subscription-based news services will become infectious. Over time we could see the weekday editions of newspapers, plus many weekly magazines, delivered only to digital eReaders. The weekend would be the preserve of print editions. The savings in printing and distribution costs would be enormous.

Murdoch has heaped praise on the iPad and committed his company to delivering journalism in new ways. While he is at the helm of News Corporation, he will invest in journalism and we should not lose sight of the fact that – leaving aside the darker elements of the Murdoch empire and Fox News – newspapers like the Australian, the Wall Street Journal and the Sunday Times do produce fine examples of serious journalism. Other groups do likewise.

However, although Murdoch may feel reasonably secure in his diversified media and entertainment empire, with its US$30 billion turnover, the doomsayers have not been entirely wasting their poster paint. There are serious faults in the news-media business model that threaten both journalism and the vehicles in which it is presented. Without some serious rethinking about the way the news business is structured, the messages on the placards may indeed be no more than premature.

The problem lies in the fact that the business model has been seriously flawed by industry traits that became embedded decades ago and not simply as a result of the current recession or even the internet. Although many of the characteristics are common in commercial broadcasting, they are most pronounced in companies that publish newspapers.

The four decades after World War II were golden years for newspapers. Daily circulations were on a seemingly endless upward trajectory in the UK, North America and Australia. In New Zealand, combined daily circulations jumped from 785,000 in 1957 to almost a million a decade later. Advertising revenue displayed a similar trend, with only minor recessionary blips. Between 1950 and 2000, print advertising revenue in the US rose more than 2200% and similar patterns in newspaper advertising growth were seen elsewhere.

The upward trajectories produced enviable cash flow and profits that attracted the attention of the sharemarket. Stock exchange listing became an attractive proposition for owners who wanted to unlock some of this new-found wealth. Equity raising also allowed newspaper companies to begin to expand by acquiring other publications. Investors were attracted by the combined promise of organic growth, growth through acquisition and very high profit margins as computer technology replaced manual production. Profit margins of more than 20% – and in one case as much as 40% – became common, fuelling high shareholder expectations and outstripping many larger listed companies.

Then sales began to slide. Combined US daily newspaper circulation in 1993 dipped below 60 million for the first time in 30 years, which marked the beginning of a year-on-year decline that began to accelerate in 2004. A similar trend occurred in the UK, Canada and Australia. In New Zealand, total daily circulation fell from a 1985 high of 1.06 million to 727,000 in 2005.

To offset these declines, and to meet the demands of shareholders, newspaper-owning companies capitalised on their monopoly position in print advertising. They increased their advertising charges even though they delivered fewer newspaper buyers, creating a service gap that would return to haunt them as alternative media became available.

Year-on-year growth was vital to satisfy market analysts and shareholders. News media groups were by now operating in mature markets and saw little choice but to acquire the existing revenue streams of other groups rather than investing in elusive organic market growth. The scale of acquisition grew. The groups trusted that size would bring with it a form of protection and were prepared to borrow huge amounts of money to finance acquisitions for which they paid inflated sums. The emphasis on growth and the bottom line was enhanced by the widespread practice of “incentivising” senior executives against profits. Bonuses were based on profit margins and year-on-year growth – both of which encouraged expansion and rigorous cost containment.

Debt burdens grew alarmingly. By the middle of the present decade, two of North America’s largest “acquirers”, McClatchy and CanWest, had total debts of more than US$3 billion and US$3.5 billion respectively. The Australian group Fairfax Media, publisher of the Dominion Post and Sunday Star-Times, had assumed debts of US$2 billion.

Up to this point, publishers thought they could escape gravity and assume that what went up would not come down. They practised a form of rocket science that was fuelled by year-on-year double-digit profit rises and a belief that acquisition was the same thing as revenue growth. And the industry was emboldened by the fact that business was getting better in spite of declining circulation. Alex Jones, in a 2009 book titled Losing the News, suggests many in the newspaper business were standing like the citizens of Pompeii in trancelike denial as Vesuvius belched smoke before erupting. Then came the worst inter­national financial recession since the Great Depression and the ash began to fall.

Newspaper revenue – already hit by the effect of the internet on classified advertising – dropped like a stone. US newspaper advertising revenue fell an estimated 43% between 2007 and 2009, and in the other markets, including New Zealand, declines of more than 20% were reported. American media company profit margins that had averaged around 20% in 2005 dropped to an estimated 5.6% this year – if they made a profit at all.

Six US newspaper publishers – including the publisher of the Chicago Tribune and the LA Times – filed for bankruptcy protection in 2009. So, too, did Canada’s largest media company, CanWest (former owner of New Zealand’s MediaWorks).

Eleven US metropolitan dailies and more than 50 British regional newspapers closed, and the share price of Australian media companies (which control the bulk of New Zealand’s newspapers) fell by an average 50% in 2008 alone.

Newsrooms found that company accountants, who had been making their presence felt for more than a decade, had become sabre-wielding hussars. Editorial staff and budgets were cut. The picture was the same wherever one looked. In the US, newspaper employment dropped to 1949 levels; in Britain one group alone shed 2500 staff.

In New Zealand, Fairfax, APN, TVNZ and MediaWorks cut staff, including journalists. The effect on journalism has become obvious.

There will be some recovery in advertising as the effects of the recession diminish. In some markets, newspapers with huge circulations will sustain themselves for some time to come. However, it is time for most media companies to accept that the model that sustained high profits and made the shares attractive has gone and will not return. Media groups that maintain attractive profitability will do so from their other activities, such as entertainment products, not from news. At best, news media will return very average profit margins that will not make them particularly attractive to investors. For companies whose operations are largely in mainstream news media there will be no return to the market capitalisation they experienced at their peak.

There are a number of options: listed companies could scale back news operations even further, irrespective of the effect on quality; they could try to sell their news outlets or simply close them in favour of more lucrative activities; they could, like Murdoch, continue to subsidise loss-making news operations (to preserve content generation in the hope that digital initiatives will pay off) but risk shareholder wrath; or they could pay down debt and scale back their overall business activities to a more manageable size – and again risk the anger of shareholders.

None of this augurs well for journalism in general, or serious journalism in particular. It is time, therefore, to examine other structures that may be better suited to the preservation of journalistic quality, structures in which the damaging effects of investor pressure and corporate aggrandisement do not play a part.

There are alternatives, but we cannot rely on amateurs – even gifted amateurs – or solo professional journalists to carry the torch for serious journalism. They lack the critical mass to influence sufficiently the people over whom they assume a watchdog role. There are no guarantees of salvation but the most likely solution lies in formal structures that have modest profit expectation and high journalistic aims.

Modest profit is, of course, a clue that the solution may not lie in public-service broadcasting. Broadcasters like the BBC, ABC and Radio NZ are, of course, vital parts of the future of journalism. However, there are dangers in placing total reliance on organisations whose financial well-being is in the hands of politicians whose power they are supposed to scrutinise and, if necessary, condemn. In a healthy democracy these public service broadcasters are matched by equally robust organisations in the private sector.

In future, these organisations may need to be sustained not by dividend-seeking investors but by trustees whose function is to preserve and promote journalism in the public interest. There are already well-established examples of this. The Scott Trust has administered Britain’s Guardian since 1936. In Ireland, the Irish Times has been in trust ownership since 1974. There are several examples in the US, the largest of which is Florida’s Pulitzer-prize-winning St Petersburg Times, which has been controlled by the Poynter Institute since 1978. In Canada, Ontario law prevents the Toronto Star from being owned by a trust, but its controlling shareholders have elected to ring-fence the newspaper and have operated it under a set of trust-like principles for 50 years.

In each case there is an overriding imperative to produce good journalism in the interests of the community. The Irish Times Trust Company’s memorandum of association provides a good example. It requires the Irish Times to follow an editorial policy that promotes constitutional democracy expressed through freely elected government; social justice and non-discrimination; arts, education, culture and recreation; Christian values, free from all religious bias and discrimination; peace and opposition to all forms of violence and hatred; and international understanding.

The memorandum also requires editorial content to be accurate and comprehensive, informed and responsible comment to be identifiable from facts; and special consideration to be given to the representation of minorities.

The Toronto Star operates under a set of six like-minded principles that include “the rights of working people”. In contrast, the Scott Trust is expected simply to maintain the liberal Guardian “in the future on the same lines and in the same spirit as heretofore”. It is exquisitely vague but successive editors have been guided by the writings of their most illustrious predecessor, CP Scott, who penned such sayings as “comment is free, but facts are sacred”, “it is well to be frank; it is even better to be fair” and “nor must the unclouded face of truth suffer wrong”.

These trusts need to be distinguished from newspaper family trusts – such as those operated by the Sulzberger family, who control the New York Times; the Graham family, who control the Washington Post; and the Harmsworth family, who control Britain’s Daily Mail. In each of these cases the family have dedicated themselves to preserving a journalistic legacy but their trusts exist essentially to administer family shareholdings. And the family’s interests must come first: one day those interests may not be served by a commitment to serious journalism.

The dedicated media trust has the advantage of a clear commitment to the sustained operation of an organ dedicated to the public interest. It is not a charity – newspapers fall outside the legal definition of “charitable purpose” – and must operate on commercially efficient lines. Its profits, however, are ploughed back into the enterprise.

There are no guarantees of profitability; for many years the Guardian was sustained by profits from the Manchester Evening News, which was operated on the same profit-making lines as its contemporaries. The recession saw the MEN group sold, but the Guardian can turn to other parts of the normally profitable Guardian Media Group for support if it cannot cover costs. The Irish Times and the St Petersburg Times have also struggled during the recession, but so have most other newspapers whose owners must not only cover costs but also return dividends to shareholders.

Nonetheless, trust-owned newspapers have been forced to make cuts. This has included cuts to news staff but the charter-like nature of their editorial operations has preserved key elements of coverage. Guardian editor Alan Rusbridger has refused to make compulsory redundancies in the editorial department.

There are other constraints that have served trust-owned papers. They are debt- and risk-averse. They do not have the same capacity as ordinary boards of directors to raise large amounts of debt and their responsibility to maintain the legacy means they will not make high-risk decisions.

The latest examples of trustee-type governance are start-ups dedicated to investigative journalism. The Center for Investigative Reporting began in California in 1977, but the most prominent example is ProPublica, a Manhattan-based non-profit (philanthropically funded) newsroom with a staff of 32 journalists. It was started in 2008 by former Wall Street Journal managing editor Paul Steiger, and often works in collaboration with newspapers. In 2010, it won a Pulitzer Prize for investigative journalism. Other investigative units in the US and, latterly, in the UK, are linked to university journalism schools.

On the horizon is the use of a special type of company structure recognised in a number of US states and which may get federal support. Called Low Profit Limited Liability Companies, or L3Cs, they sit between non-profit and commercial enterprises and receive tax concessions for putting social purposes ahead of profit. The L3C is being suggested as an alternative for news media but may require legislative change to make “the news” a social purpose.

Could we see media trusts here? In the short term, it is unlikely that corporate owners will hand our metropolitan newspapers to trusts. With the right tax incentives, however, conglomerates may be persuaded to ring-fence their news organs in trust-run subsidiaries to retain the kudos of a masthead without trashing the annual accounts. They may also see trust-ownership as a way of divesting themselves of smaller poor-profit regional and community newspapers or magazines.

A more likely genesis is through smaller start-up trusts established to provide civic-minded professional journalism. They could grow to fill the space left by a shrinking commitment by profit-driven companies. They would forego printing presses but deliver print-quality journalism in a digital form to audiences large enough to attract political attention.

The community needs to start considering the options. Without appropriate watchdogs, the back of “The End is Nigh” placards might read “Democracy has gone to hell”.

28th August, 2010 Leave a Comment

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