Circling the Drain?

The future (or lack thereof) of newspapers discussion is hitting a crescendo this week between Steve Ballmer declaring they’re all toast in ten years and a columnist for the Seattle Post-Intelligencer firing back that we’re more likely to see Microsoft’s obituary printed in his paper.

While the plight of the New York Times, Los Angeles Times and various other papers tend to take center stage, the Seattle market is a great place to watch the wrenching adjustments the newspaper business is undergoing.  Seattle is unique in that it is one of the few two newspaper towns left in the United States.  When I last checked, oh 15 years ago, there were only six major cities left with more than one paper.

I checked as part of the initial research in the early 1990s that led to MSN Sidewalk.  The analysis didn’t consist of much more than “Wow, you make 40% of your revenues and over 60% of your profits from classified ads?  Boy, that would be easy to do in software.”  Now Microsoft has long since sold off Sidewalk, because it turned out there was a political dimension to the news business as well, which the company was characteristically naive about.  In the middle of the DoJ hullabaloo Microsoft didn’t need any more bad press from newspapers who saw the company through a competitive lens.  The lesson is you don’t pick fights with people who buy ink by the barrel unless you’re prepared to finish them.  And the company wasn’t.

The Seattle Times is family-owned (complete with scion who bangs the drum for local ownership of media and more regulatory restraints on his competitors) and the Post-Intelligencer is owned by the Hearst Corporation.  The Times doesn’t have significant diversified holdings (unlike say the New York Times or Washington Post) to mask or subsidize the core newspaper business, so it is a pure-play tell on industry fortunes.  Hearst Corporation is more opaque as a privately held conglomerate but the fact the P-I is the weaker paper in town means they can’t ignore the underlying economics too much.

The papers have a Joint Operating Agreement, which is a government-sanctioned antitrust exemption allowing the Seattle Times, the larger of the two papers in circulation, to provide advertising sales, production, marketing, circulation and even web operations for both papers.  The Times gets paid its expenses and they split what is left over, with the P-I getting 40%.  The news and editorial operations are separate.  They even share a Sunday edition, to which the P-I contributes a few flimsy pages of mostly syndicated content.

Despite this cushy arrangement, the two have been at odds, spending five years battling over the terms of the JOA.  Both papers have gone to great lengths to keep the terms of the JOA secret (transparency is kind of like anytime, anywhere communications — it is great other people are always reachable, but we’re not so sure we want it ourselves…).  The area of greatest competition between the two papers in recent years has been around who claimed to be losing the most money, which was at least in part jockeying for negotiating leverage.  Amidst these negotiations, the Times, historically the afternoon paper while the P-I was the morning paper, moved to the morning in what could only be characterized as a go-for-the-jugular move.

So while the Times and the P-I have made their peace around the JOA after five years of bickering, with the Times making a $24 million payment to Hearst, both papers continue to face the reality of the Internet disaggregating and sucking the life out of the traditional newspaper business model.

If they understand the secular forces they are facing, it is not clear from recent statements by the publisher of the Seattle Times:

Publisher predicts ad-revenue drop

Combined advertising revenue for Seattle’s two daily newspapers is forecast to drop to $195 million this year, with an expected $41 million of that for the hard-hit classified-advertising category, Seattle Times Publisher Frank Blethen said in an e-mail to employees Tuesday.

The revenue figure would represent a 29 percent drop since 2000, a year that also saw classified ads total $125 million, nearly half the two papers’ total ad revenue.

…

In his e-mail, Blethen said the revenue problems plaguing the Seattle papers and the entire industry probably “will continue until the recession ends, which could be several more quarters.”

Blethen said The Times has lost a total of $49 million this decade. Earlier this month the newspaper reduced its staff by about 7 percent through layoffs and buyouts.

Does he really believe the sun will come out in “several more quarters” and double digit revenue declines and recurring layoffs will be a thing of the past?

We’ll continue to monitor the situation.