Dallas Publisher Reflects on Business at 125 Years

This is a long, but very thought-provoking, letter to employees by the publisher of the Dallas (TX) Morning News. Lots to think about here:

'Newspaper companies that will survive will not consider themselves newspaper companies'

Dallas Morning News publisher's letter to staff on the paper's 125th anniversary

Colleagues,

As we celebrate our 125th anniversary, I wanted to congratulate and thank each and every one of you for being a part of this organization and helping to fulfill its purpose. No one knows better than you the challenges we've encountered over the years. I'm proud to stand shoulder to shoulder with you as we've faced and overcame each of them. Through it all, the words etched on the front of our building still hold true. Our commitment to providing important, irreplaceable, integrity-driven journalism has never wavered.

I would like to share with you some remarks I made at a luncheon at SMU this week. They encapsulate my views of where we are as a business, where we need to go and what we need to do to get there. As importantly, they speak to why it is so critical that for-profit newspaper companies continue to operate and do so robustly.

Let's clear up one thing right off the top. For those of you who are over 50 and can't imagine your morning ritual without The Dallas Morning News, I have good tidings. Most of you will be dead before we quit publishing a printed edition of The Dallas Morning News. The only caveat to this declaration is this: if technology enables a reading experience that you, the die-hard print edition devotee enjoys more than the ink-on-paper experience, then the last rites for the newspaper -- emphasis on "paper" -- will come sooner than your last days above ground.

Short of that happening, research project after research project has identified a significant and plentiful cohort of consumers whose bumper sticker could read "you'll have to pry this newspaper out of my cold dead hand." By the way, this is a good thing for those of us in the newspaper business. We tend to think highly of such people.

Actually, The Dallas Morning News is really not in the newspaper business anymore. We use to be. We had one product. A newspaper. We had one publishing cycle. 24 hours. We had one size. And it fit all. We were like Henry Ford's admonition that the consumer could have a car in any color they wanted, just as long as it was black. We were willing to give you any newspaper you wanted, as long as it was the one we threw on your driveway.

How things have changed. We now publish multiple products like Briefing, Al Dia and Quick. We publish websites that have an always-on publishing cycle, so we can bring you important breaking news and information. We customize printed products by geographic zones. We enable you to customize your engagement with the content we distribute digitally. And we make the content we publish available in a newspaper, on your desktops, your mobile phones, and on the emerging category of mobile tablets.

We're no longer a newspaper company. We're a news media company. The newspaper is just one way we package and distribute the content we publish.

But what happened? How did the response to the statement "newspapers are dead" become "tell me something I don't already know?" Frankly, I don't know how the death of newspapers could have been any more exaggerated, especially in stories we in the newspaper business wrote about our own industry.

I'll say this: we gave it all we got. And we did a great job. Everyone bought into the imminent death of newspapers. We managed to convince consumers, sell the notion to advertisers and scare away investors. It's enough to make you wonder why we were writing that newspapers were no longer an effective way to communicate.

Yet, here's the story that got lost in the "death of newspapers" narrative: For the most part, newspaper company operations have remained profitable-though certainly less so than prior to 2001. It was debt inflated capital structures that were put in place just prior to breath taking declines in advertising revenues that diminished cash flows from operations so severely, no bank would refinance these newspaper companies’ newly acquired debt. This predicament meant Chapter 11 protection for the companies that owned newspapers like The Los Angeles Times and The Chicago Tribune, The Denver Post, The Philadelphia Inquirer, The Minneapolis Star Tribune and The Orange County Register.

Yet it is critical to distinguish these unsupportable corporate capital structures from the newspapers' operations that were still providing positive cash flow -- just not sufficient to support the level of debt taken on. These newspapers continue to be profitable with operating margins in the high single digits or low teens. Still pretty healthy margins by most industry standards.

Nevertheless, the past three years have been particularly punishing. Industry advertising revenues, which historically made up 80% of a newspaper's total revenue, declined by 8% in 2007, 17% in 2008 and 24% in 2009. Mid-way through this year, ad revenues were down another 9% or so. And yet, in spite of these precipitous declines, as I said previously, most newspapers are still profitable. They have cut their expenses by 30-40% or more to align their cost structure with their revenues.

The questions are: Why should you care whether newspaper companies continue to operate? And in order for them to continue to operate, what is the way forward?

Let me address each question in turn.

Why should you care?

You should care because for at least another decade, the profitability of newspaper companies will depend on the printed edition. And it is the newsrooms of the for-profit metropolitan newspaper companies that are doing the bulk of local, regional and state government watchdog reporting in our country, reporting that is so critical to a durable democracy.

Why is this watchdog reporting so critical? It's because throughout history, the power inherent in government has led to corruption. Always has. Always will. Dick Nixon to Don Hill. It's the way it is. Yet in a democracy, corrupt government will not long endure as a legitimate government. Those colonials who wrote our constitution understood this. They recognized that the press, if free from government restraint and interference, could be a powerful tool for holding elected officials and public institutions accountable for their actions.

This relationship between government accountability and the free press is critical to the durability of our democracy. Since those early years, the scale and complexity of our local government has reached proportions Thomas Jefferson could never have imagined. Yet, it is only the for-profit newspaper press that has invested in large scale local newsrooms. In other words, it is only the newspaper companies that have the scale of resources to match up to the scale of our local governments.

As a case in point: The Dallas Morning News employs more reporters than WFAA, KDFW, KXAS and KTVT combined. Other local media organizations, lacking the scale of newspaper newsrooms, cannot adequately do the watchdog work that is so vital to our democracy.

Let's review these other media players briefly:

Public television and public radio? They support quality journalism on a limited scale at mostly the national and international level. What they do locally is mostly excellent. Yet, they don't have the funding to engage in the breadth of local reporting that matches up to the scale of local government.

Local television news? It still shows flashes of brilliant and important local reporting. Yet over time, and while there are notable exceptions, most local newscasts are a diet of high story counts, breaking news reporting and stories that often blur the line between news and entertainment. They aren't doing much government watchdog reporting.

How about Google, AOL and Yahoo? Don't confuse aggregation and dissemination with original reporting. The same can be said of The Huffington Post and similar organizations -- only on a smaller scale. They are certainly not doing original local reporting.

And the newly fashionable not-for-profit news organizations? I'm all for them. They are doing some important journalism. Yet none of them employs more than twenty professionals who are engaged in original reporting. They utterly lack scale.

It is no coincidence that in every country anywhere in the world that has a functioning democracy in which its citizens enjoy meaningful personal liberties, three things are always present:

* A rule of law
* A genuinely free and open election
* A free press

And while our constitution guarantees the press the right to do its work free from undue government interference, it doesn't guarantee the press the inalienable right to do it for a profit. Yet that's what our democracy needs -- for these newspaper companies and the newsrooms they support to be profitable. No one will adequately replace the watchdog work they do if they go away.

So here is my prescription for how newspaper companies can sustain their profitability:

* The newspaper companies that will survive will not consider themselves to be newspaper companies. They recognize that they are local media companies. They will distribute content on paper, through the internet, via the mobile web, through applications and any other way technology lets consumers access news and information. They will make themselves an indispensable resource of local news and information for citizens of the communities they serve.

* To be indispensable, these local media companies must provide relevant local content that is differentiated by the consumer's inability to get it from any other source.

* This means that who, what, when and where are table stakes. They don't provide a winning hand. Everyone has them. They are commodities. The differentiation will come from using the scale of the newspaper's newsroom to give the consumer perspective, interpretation, context and analysis. It's the columnists, the beat reporters, the subject matter experts that will drive value. It's enterprise and investigative journalism that will be distinguishing.

• And what is newspapers' sustainable competitive advantage? Fortunately for our democracy, it's the scale of their newsrooms. It is important to recognize that digital technology has already leveled the technological playing field for local media. In the internet environment, the means of transmission and the devices used to access news and information are identical for all media. The sustainable competitive advantage newspaper companies have is the scale of their newsrooms and the quality and quantity of important and relevant local news and information it permits them to originate as compared to all other local media. If newspaper companies continue to reduce the scale of the reporting resources in their newsrooms, they will level the reporting playing field with local TV stations and give up their competitive advantage.

* In addition, the newspaper companies that make the transition will have a customer base that covers a greater proportion of its costs. The traditional newspaper business model in which advertising was responsible for 80% of the revenue and the consumer - by way of subscriptions or single copy sales - accounted for only 20% of revenues is a that model that is not sustainable. Direct payments from consumers will need to account for 50% or more of newspaper companies' total revenue. This means higher subscription and single copy prices for the printed newspaper. It means smartly calibrated pricing for its locally originated news when accessed via the desktop, smart phones and tablet devices. It means paid niche apps. It means enforcing copyright protection. And it means not making the most of content we originate available unless you pay for it.

* It means finding innovative ways to monetize the very large audiences that newspaper companies still attract and being as dependent on impression based advertising as we are today. Why? Because there is going to be a perpetual imbalance in the digital media environment between the supply of available digital ad impressions and the demand for them. This condition has already driven down digital advertising prices and it will keep them down. Local media do not have the scale of audiences to support their businesses at digital CPM rates.

* Finally, it means getting mobile right. Digital consumption of news and information is going mobile at an astounding pace. And it will continue. The growth in access of news and information has shifted permanently from the desktop to mobile devices. We didn't get it right with our wired internet based business model. We must get the mobile business model right.

It's not the newspaper I am fighting to save. It's the scale of the newsrooms of newspaper companies I want to preserve so that in turn we can preserve our democracy. And these newsrooms will be preserved only if newspaper companies find a sustainably profitable business model in the digital media environment in which they now compete.

There's plenty of hope and still sufficient time. But the sense of urgency is real.

Jim