The U.S. Newspaper Industry in Transition

The U.S. Newspaper Industry in Transition Suzanne M. Kirchhoff Analyst in Industrial Organization and Business July 8, 2009 Congressional Research Service7-5700 www.crs.gov R40700 CRS Report for CongressP repared for Members and Committees of Congress The U.S. Newspaper Industry in Transition Summary The U.S. newspaper industry is suffering through what could be its worst financial crisis since the Great Depression. Advertising revenues are plummeting due to the severe economic downturn, while readership habits are changing as consumers turn to the Internet for free news and information. Some major newspaper chains are burdened by heavy debt loads. In the past year, seven major newspaper chains have declared bankruptcy, several big city papers have shut down, and many have laid off reporters and editors, imposed pay reductions, cut the size of the physical newspaper, or turned to Web-only publication. As the problems intensify, there are growing concerns that the rapid decline of the newspaper industry will impact civic and social life. Already there are fewer newspaper reporters covering state capitols and city halls, while the number of states with newspapers covering Congress full-time has dwindled to 23 from the most recent peak of 35 in 1985. As old-style, print newspapers decline, new journalism startups are developing around the country, aided by low entry costs on the Internet. The emerging ventures hold promise but do not have the experience, resources, and reach of shrinking mainstream newspapers. Congress has begun debating whether the financial problems in the newspaper industry pose a public policy issue that warrants federal action. Whether a congressional response to the current turmoil is justified may depend on the current causes of the crisis. If the causes are related to significant technological shifts (the Internet, smart phones and electronic readers) or societal changes that are disruptive to established business models and means of news dissemination, the policy options may be quite limited, especially if new models of reporting (and, equally important, advertising) are beginning to emerge. Governmental policy actions to bolster existing businesses could stall or retard such a shift. In this case, policymakers might stand back and allow the market to realign news gathering and delivery, as it has many times in the past. If, on the other hand, the current crisis is related to the struggle of some major newspapers to survive the current recession, possible policy options to ensure the continuing availability of in-depth local and national news coverage by newspapers might include providing tax breaks, relaxing antitrust policy, tightening copyright law, providing general support for the practice of journalism by increasing funding for the Corporation for Public Broadcasting (CPB) or similar public programs, or helping newspapers reorganize as nonprofit organizations. Policymakers may also determine that some set of measures could ease the combination of social and technological transition and the recession-related financial distress of the industry. Congressional Research Service The U.S. Newspaper Industry in Transition Contents Introduction ................................................................................................................................ 1 Industry History .......................................................................................................................... 2 Industry Conditions..................................................................................................................... 4 Industry Cost Cutting: Key to Survival? ................................................................................ 4 Declining Advertising Revenues, Recession, and the Internet ................................................ 5 Other Factors ........................................................................................................................ 7 Alternative News Sources ..................................................................................................... 9 Rise of the Web........................................................................................................................... 9 Interdependence ........................................................................................................................ 13 Searching for New Business Models ................................................................................... 16 Nonprofits........................................................................................................................... 18 Public Policy Issues .................................................................................................................. 20 Congressional Action ................................................................................................................ 21 Industry Proposals............................................................................................................... 21 Supporting the General Practice of Journalism .................................................................... 22 Figures Figure 1. Change in National Advertising Spending, 2007-2008 .................................................. 6 Figure 2. Newspaper Advertising Revenues from 2003- 2008.................................................... 14 Tables Table 1. Daily Print Newspaper Readership................................................................................. 3 Table 2. Top 20 U.S. Newspapers: Print Circulation .................................................................. 10 Table 3. Newspaper Website Readership.................................................................................... 12 Contacts Author Contact Information ...................................................................................................... 23 Congressional Research Service The U.S. Newspaper Industry in Transition Introduction The U.S. newspaper industry is in the midst of a historic restructuring, buffeted by a deep recession that is battering crucial advertising revenues, long-term structural challenges as readers turn to free news and entertainment on the Internet, and heavy debt burdens weighing down some major media companies. As the distress mounts—seven U.S. newspaper companies have filed for bankruptcy in the past year—lawmakers are debating possible legislation to assist the industry. Additionally, the Federal Trade Commission (FTC) will hold a series of workshops beginning in September 2009 to look at challenges facing newspapers, television, and radio in the Internet age.1 Publishers are experimenting with new business approaches, but there is no widely agreed-upon model to restore the link between newspaper content and earnings, which has been partially severed on the Internet. Newspapers depend on advertising for about 80% of revenues. Even after investing major sums in technology, and attracting millions of online readers, less than 10% of overall newspaper ad dollars are Internet-driven.2 At the same time, print readership is falling, further cutting into subscription and advertising revenues (see Table 1). Vin Crosbie, a noted Syracuse University professor and consultant, has predicted that more than half the approximately 1,400 daily newspapers in the country could be out of business by the end of the next decade.3 Concerns extend beyond the tens of thousands of reporters and editors losing their jobs. A robust, free press has been viewed by many as an essential check on government and business since the early days of the Republic. “The only security of all is in a free press,” Thomas Jefferson wrote in 1823.4 House Speaker Nancy Pelosi, in a March letter to the Justice Department, argued that current problems in the newspaper sector pose a significant challenge to democracy.5 Despite First Amendment sensitivities, Congress has intervened in the past to assist newspapers and other media, building a broad record of regulation and support. Federal actions include the 1970 Newspaper Preservation Act, providing limited exemption from antitrust law; laws allocating the public airwaves;6 copyright and fair content regulation;7 postal subsidies;8 and financial aid through the Corporation for Public Broadcasting (CPB) and indirectly through the National Endowment for the Humanities (NEH).9 Congress has ratified treaties governing fair use 1 Federal Trade Commission, “Extra! Extra! FTC Announces Workshop: ‘Can News Media Survive the Internet Age? Competition, Consumer Protection, and First Amendment Perspectives,’” May 19, 2009. 2 Pew Research Center’s Project for Excellence in Journalism, The State of the News Media 2009: An Annual Report on American Journalism. http://www.stateofthemedia.org/2009/index.htm. 3 Crosbie, Vin, “Transforming American Newspapers,” Corante, Aug. 20, 2008. http://rebuildingmedia.corante.com/archives/2008/08/20/transforming_american_newspapers_part_1.php. 4 Thomas Jefferson to Lafayette, 1823. The Writings of Thomas Jefferson, Memorial Edition (Lipscomb and Bergh, editors) 20 Vols., Washington, D.C., 1903-04, Vol. 15, p. 491. See University of Virginia Library, Thomas Jefferson Digital Archive, Freedom of the Press. http://etext.virginia.edu/jefferson/quotations/jeff1600.htm#Top. 5 Letter from Nancy Pelosi, Speaker of the House, to the Honorable Eric Holder, Attorney General, March 16, 2009. 6 CRS Report R40009, Fairness Doctrine: History and Constitutional Issues, by Kathleen Ann Ruane. 7 CRS Report R40194, The Google Library Project: Is Digitization for Purposes of Online Indexing Fair Use Under Copyright Law?, by Kate M. Manuel. 8 CRS Report R40162, Postage Subsidies for Periodicals: History and Recent Developments, by Kevin R. Kosar. 9 CRS Report RS22168, The Corporation for Public Broadcasting: Federal Funding Facts and Status, by Mark Gurevitz and Glenn J. McLoughlin. Congressional Research Service 1 The U.S. Newspaper Industry in Transition of intellectual property on the Internet,10 and, in the 111th Congress, the House has considered and passed the Free Flow of Information Act of 2009 (H.R. 985) to give journalists a right to withhold information in grand jury proceedings.11 The bill was referred to the Senate Judiciary Committee. Congress is now debating whether current financial problems, which have been most acute at large, general-interest daily papers, pose a public policy issue that requires federal action. If the answer is “yes,” options might include aiding existing newspapers as they grapple with the transition to a digital news world; supporting the practice of journalism writ large; or taking a hands-off approach to allow what might arguably be a major social, political, and technological realignment in the way Americans choose to inform themselves about local, state, and national news. Lawmakers have so far expressed little interest in a broad bailout of the industry, similar to aid for the automobile or financial sectors. Senator Benjamin Cardin, who has introduced S. 673 to make it easier for newspapers to reorganize as nonprofit organizations, has said he does not support a financial rescue for newspapers.12 The bill was referred to the Senate Finance Committee. There are critics of government action. Ken McIntyre, of the Heritage Foundation, has argued that nonprofit status could “de-fang” the press, by preventing newspapers from endorsing candidates or taking positions against whatever political party was in power.13 McIntyre endorses the concept of a technology shift of Gutenberg proportions, citing media expert Clay Shirky: “... We’re collectively living through 1500, when it’s easier to see what’s broken than what will replace it ... Society doesn’t need newspapers. What we need is journalism.”14 Industry History The newspaper industry has gone through prior periods of boom and bust. The popular press took off in the 1830s with the creation of the so-called penny press: inexpensive papers that were sold by street vendors, instead of the previous up-front subscription model.15 The industry grew in importance, profitability, and influence, including the rise of sensationalistic “yellow journalism” in the late 1800s. During the Great Depression, plunging revenues and competition from the emerging technology of radio hurt newspapers. Newspaper advertising revenue fell 45% from 1929 to 1933, and was still down 20% in 1941. Hundreds of newspapers went out of business or suspended operations, while a third of newspaper salaried workers lost their jobs. Radio increased in importance and was the only media segment that realized gains in advertising during the Depression.16 10 CRS Report RL34292, Intellectual Property Rights and International Trade, by Shayerah Ilias and Ian F. Fergusson. 11 CRS Report RL34193, Journalists’ Privilege: Overview of the Law and Legislation in the 110th and 111th Congresses, by Henry Cohen and Kathleen Ann Ruane. 12 Cardin, Benjamin, “A Plan to Save Our Free Press,” Washington Post, April 3, 2009, p. A19. 13 McIntyre, Ken, “Death of Newspapers Does Not Mean the End of Journalism,” U.S. News and World Report, May 8, 2009. 14 Ibid. 15 Emery, Edwin and Michael Emery, The Press and America: An Interpretive History of the Mass Media, Fourth Edition. Englewood Cliffs, NJ: Prentice-Hall, 1978. pp, 119-123. 16 Ibid., pp. 399-400, p. 428, p. 436. Congressional Research Service 2 The U.S. Newspaper Industry in Transition With the rise of television, the newspaper business faced another major transformation. In the 1960s, television surpassed newspapers as a source of information, and TV networks became more adept at capturing national advertising.17 Thereafter, the newspaper sector consolidated as family-owned papers were bought by growing chains. Between 1960 and 1980, 57 newspaper owners sold their properties to Gannett Co. By 1977, 170 newspaper groups owned two-thirds of the country’s 1,700 daily papers. From 1969 to 1973, 10 newspaper companies went public, including the Washington Post Co., New York Times Co., and Times Mirror Co.18 Table 1. Daily Print Newspaper Readership Percentage of Total Adults Who Read a Print Newspaper on a Weekday Year Percentage of Total Adults Percentage of Men Percentage of Women 1998 58.6 62.2 55.2 1999 56.9 60.6 53.4 2000 55.1 58.8 51.7 2001 54.3 57.5 51.3 2002 55.4 58.2 52.8 2003 54.1 56.8 51.5 2004 52.8 55.5 50.2 2005 51.6 54.1 49.2 2006 49.9 52.3 47.6 2007 48.4 51.0 45.9 Source: Scarborough Research Top 50 Market Report 1998-2007, prepared by Newspaper Association of America. As chain ownership grew an increasing number of cities became one-paper towns, leading to concerns about lack of competition and a diminished watchdog role for the media—similar to worries voiced today. In 1910, nearly 60% of cities had competing daily papers. By 1930, that figure had fallen to 21%, and by 1971 to 2%.19 Some local papers around the country tried to combat the economic stresses by pooling advertising and circulation operations. The U.S. Supreme Court in the 1969 decision United States v. Citizen Publishing Co. ruled against such arrangements. In response, Congress passed the Newspaper Preservation Act of 1970 (P.L. 91-353; 15 U.S.C. 43).20 The law provided a limited antitrust exemption for certain newspapers that combined financial functions but maintained separate newsrooms. While there were 25 to 30 such agreements in force at any one time in recent decades, just a handful remain today, and they have not been sufficient to save 17 Matthei, Harry, “Inventing the Commercial: the imperium of modern television advertising was born in desperate improvisation,” American Heritage, May/June 1997, Volume 48, Issue 3. 18 Neiva, Elizabeth M., “Chain Building: The Consolidation of the American Newspaper Industry, 1955-1980,” Business and Economic History, Volume 24, No. 1, Fall 1995. 19 Report of the Assistant Attorney General in Charge of the Antitrust Division, In the Matter of: Application by the E.W. Scripps Co. and MediaNews Group Inc. For Approval of a Joint Operating Agreement Pursuant to the Newspaper Preservation Act, File No. 44-03-24-15 (September 8, 2000), p. 16-17. 20 Ibid. Congressional Research Service 3 The U.S. Newspaper Industry in Transition some weakening newspapers.21 The Seattle Post-Intelligencer, Minneapolis Star Tribune, Rocky Mountain News, and Tucson Citizen—papers that were part of joint operating agreements—recently closed, declared bankruptcy, or moved to Web-only production. The increasing importance of cable television in the 1980s had a far-reaching impact on newspapers, as consumers turned to 24-hour cable news stations for information. Still, many newspapers continued to enjoy extremely profitable, quasi-monopoly status in their communities. Major newspaper companies posted double-digit returns on equity (profit compared to average shareholder equity) through most of the current decade. Profits peaked at 22.7% in 2000 and declined to just over 10% in 2008, as newspaper companies instituted severe budget cuts and layoffs.22 Cash flow margins for big, public newspaper companies reached their high in the late 1990s at 29%, an average that declined to 13% in 2008 with large differences from paper to paper.23 Industry Conditions There are now about 1,400 daily newspapers in the United States and thousands of community papers, which generally publish weekly or biweekly. A handful of papers, including the Wall Street Journal, USA TODAY, and the New York Times, have a national print readership topping a million or more.24 The top 50 papers account for about a third of circulation, among them the big city papers that had some of the largest circulation declines last year.25 Overall, the newspaper industry, including printers, reporters, advertising salespeople and other personnel, was a roughly $50 billion business in 2002, according to Census Bureau data, employing about 400,000 people.26 Industry Cost Cutting: Key to Survival? For the traditional, general-interest print newspapers analyzed in this report, labor makes up about 50% of costs, with production and distribution accounting for 30% and other expenses for the rest.27 Newspapers have taken dramatic steps to cut costs as their financial picture has worsened, including trimming the size of the print newspaper, eliminating staff, or reducing the number of days the print newspaper is delivered to subscribers. 21 Jones, Fredrick, “The Newspaper Preservation Act: Is it a Necessary Loophole in Antitrust Laws?,” paper presented at the Annual Meeting of the Association for Education in Journalism, August 8-11, 1981. Farhi, Paul, “The Death of the JOA,” American Journalism Review, September 1999. 22 Morton, John, “Not Dead Yet,” American Journalism Review, June/July 2009 issue. 23 Fine, Lauren Rich, “Bad Public Relations or Is This a Real Crisis?: YES,” Duke Conference on Nonprofit Media, May 4-5, 2009. http://www.pubpol.duke.edu/nonprofitmedia/documents/dwcrichfinefinal.pdf. 24 Audit Bureau of Circulations, “Circulation Averages for the Six Months Ended March 31, 2009.” http://abcas3.accessabc.com/ecirc/newstitlesearchus.asp. 25 Pew Research Center’s Project for Excellence in Journalism, The State of the News Media 2009: An Annual Report on American Journalism. http://www.stateofthemedia.org/2009/index.htm. 26 U.S. Census Bureau, Industry Statistics Sampler, NAICS 511110, Newspaper Publishers. 27 Fine, Lauren Rich, “Bad Public Relations or Is This a Real Crisis?: YES,” Duke Conference on Nonprofit Media, May 4-5, 2009. Congressional Research Service 4 The U.S. Newspaper Industry in Transition Daily papers cut their newsrooms by 11% in 2008, the biggest one-year drop since 1978. Daily newsroom staffing is off 17% from the recent, 2001 peak of 56,400.28 According to Erica Smith, a reporter with the St. Louis Post-Dispatch, nearly 10,000 journalists were laid-off or took buyouts in the first five months of 2009 alone.29 The number of reporters covering state legislatures in 2009 is down more than 30% from 2003.30 The number of papers seeking press credentials for Washington-based reporters is two-thirds below the levels of the 1980s. (However, the total number of daily reporters seeking credentials remained basically steady due to an increase in foreign press and specialty publications targeted at specific industries or niche markets.31) Newspapers from 23 states had Washington-based reporters in 2008, compared to 35 in 1985.32 Declining Advertising Revenues, Recession, and the Internet On the other side of the ledger, retail, classified, and national ads account for 80% of newspaper revenues. Subscriptions and newsstand sales make up most of the rest. Sunday newspapers, with their bulky ad inserts and extra sections, along with papers published later in the week, can account for more than half of newspaper print dollars.33 Underscoring the importance of the Sunday paper, the Atlanta Journal Constitution has launched an advertising campaign called “Unplug. It’s Sunday,” asking readers to buy the Sunday print edition, rather than read the paper online.34 The traditional advertising model for years generated healthy profits, subsidized expensive foreign, investigative, and other reporting and helped keep subscription and newsstand prices low. But the model is breaking down. Newspapers have seen a dramatic drop in advertising during the recession. While other media have also been hurt, newspapers have had some of the sharpest declines (see Figure 1). The situation appears to be getting worse. TNS Media Intelligence says newspaper ad revenue fell by 25.5% in the first quarter of 2009, compared to a year earlier. The Pew Research Center’s Project for Excellence in Journalism estimates that about half the recent drop in advertising is due to the poor economy, as auto dealers go out of business and other retailers cut back.35 But it is not clear that most of those ad dollars will come back when business activity revives. Newspapers are also in the throes of long-term, structural changes as readers and advertisers move to the Internet. While newspapers’ online presence is surging, Internet revenues 28 “U.S. newsroom employment declines,” American Society of News Editors, April 16, 2009. http://www.asne.org/index.cfm?id=1138. 29 Johnston, David Cay, “Welcome to the Jungle: Journalists, meet the all-or-nothing job market,” Columbia Journalism Review, May 22, 2009; Smith, Erica, “Layoffs and buyouts at U.S. newspapers in 2009,” Paper Cuts. http://graphicdesignr.net/papercuts. 30 Dorroh, Jennifer, “Statehouse Exodus,” American Journalism Review, April/May 2009. http://www.ajr.org/Article.asp?id=4721. 31 Pew Research Center’s Project for Excellence in Journalism, The New Washington Press Corps: As Mainstream Media Decline, Niche and Foreign Outlets Grow, February 11, 2009, p. 2. http://www.journalism.org/analysis_report/new_washington_press_corps. 32 Ibid. 33 Pew Research Center’s Project for Excellence in Journalism, The State of the News Media 2009: An Annual Report on American Journalism. http://www.stateofthemedia.org/2009/index.htm. 34 See the Atlanta Journal Constitution website: http://media.ajc.com/unplugsunday/?cxnsid=ajcse51992. 35 Pew Research Center’s Project for Excellence in Journalism, The State of the News Media 2009: An Annual Report on American Journalism. http://www.stateofthemedia.org/2009/index.htm. Congressional Research Service 5 The U.S. Newspaper Industry in Transition lag far behind Internet readership. Currently, less than 10% of newspaper company ad revenues are earned online. Figure 1. Change in National Advertising Spending, 2007-2008 1050TelevisionMagazineNewspaperInternetRadioOutdoor-5-10-15-20 Source: TNS Media Intelligence. Notes: Indicates average percentage decline/increase in Q4 2008 compared to Q4 2007. In one example, classified advertising, which accounted for about 50% of ad revenues for many papers at its peak in 2008,36 has gravitated from print to specialized websites like Craigslist and auto, real estate, and help wanted sites.37 Media companies have tried various strategies to hold on to the classified market, with big chains like McClatchy, the Tribune Co., the Washington Post Co., A.H. Belo, and Gannett Co. jointly owning Classified Ventures, which runs sites like cars.com and homegain.com.38 A coalition of media firms created CareerBuilder.com, a job placement site.39 The sour economy has, at least temporarily, undercut those efforts, with the 36 Fine, Lauren Rich, “Bad Public Relations or Is This a Real Crisis?: YES,” Duke Conference on Nonprofit Media, May 4-5, 2009, p. 11. 37 Vogel, Harold L., Entertainment Industry Economics: A Guide for Financial Analysis, Sixth Edition, Cambridge: University Press, 2004, p. 318. 38 Learmonth, Michael, “Newspapers Build Digital Portfolios,” Advertising Age, May 5, 2009. 39 Gannett, the Tribune Co., McClatchy, and Microsoft own Careerbuilder.com. http://www.careerbuilder.com/share/aboutus/profile_main.aspx. Congressional Research Service 6 The U.S. Newspaper Industry in Transition volume of classified ads plunging online and in print. Nationally, classified help-wanted ads fell 67.4% in the first quarter of 2009.40 Other Factors Another reason the newspaper industry is in trouble: red ink. Some large newspaper companies took on significant debt shortly before the economic downturn hit. Real estate developer Sam Zell, for instance, took the Tribune Co.—one of the nation’s most prominent newspaper chains—private in 2007 in a leveraged $8.2 billion deal he later called a mistake.41 The Tribune Co., now in bankruptcy, has imposed large staff reductions, consolidated operations, and taken other steps to reorganize. In 2006, McClatchy Co. bought newspaper chain Knight Ridder for more than $4 billion. In May 2009, the company offered to buy back more than $1 billion of its debt at a discount.42 Lee Enterprises, a newspaper publishing company based in Davenport, Iowa, in its first quarter 2009 report, noted that to secure new lines of credit, it had agreed, among other things, to limit capital spending.43 Legacy costs are a complicating factor. Many newspapers have traditional, defined-benefit pension plans, which now appear underfunded due to large losses in market investments. McClatchy, in its 2009 first quarter earnings report, noted it will have to make bigger cash contributions to its pension plans in coming years than previously expected, due to poor market returns and changes in pension law. The company cautioned investors that “the contributions will place additional strain on the company’s liquidity needs.”44 Investors have soured on newspapers. Some large newspaper companies saw their stock prices drop by more than 80% last year—far beyond the overall decline in the publishing industry and various stock indices. Newspaper stock prices rebounded a bit in 2009, but are still near historic lows.45 With revenues declining and their ability to raise new capital impaired, some newspaper companies are in danger of breaching financing agreements with their lenders. If that happens, lenders could terminate lines of credit and call in existing loans. Overall, seven newspaper companies have declared bankruptcy in the past year: • The Tribune Co., which publishes the Chicago Tribune, Los Angeles Times, Baltimore Sun, and five other large metro daily papers; • Philadelphia Newspapers LLC, which publishes the Philadelphia Inquirer and the Philadelphia Daily News; 40 Reflections of a Newsosaur, “Worst Quarter for Newspapers: Sales dive $2.6B,” http://newsosaur.blogspot.com/2009/06/worst-quarter-for-newspapers-sales-dive.html. 41 Miles, Greg and Brian Louis, “Billionaire Zell Says ‘I Made a Mistake’ in Purchasing Tribune,” Bloomberg.com, April 15, 2009. 42 McClatchy Co., “McClatchy announces private debt exchange offer for $1.150 billion of debt securities,” Press Release, May 21, 2009. 43 Securities and Exchange Commission. Form 10-Q filed by Lee Enterprises for the period ended Mar 29, 2009. 44 Securities and Exchange Commission Form 10-Q, filed by McClatchy Co. for the period ended Mar 29, 2009. 45 Pew Research Center’s Project for Excellence in Journalism, The State of the News Media 2009: An Annual Report on American Journalism. http://www.stateofthemedia.org/2009/index.htm. Congressional Research Service 7