Delivering the news

When Warren Buffett wrote this year’s letter to Berkshire Hathaway Inc. shareholders, he waited until page 16 to announce his renewed interest in what many consider a dying industry. He gave the section a sheepish headline: We Buy Some Newspapers … Newspapers? Since late 2011, the investor’s Omaha, Neb.-based holding company has acquired 28 dailies, six in North Carolina. He knows his move is counterintuitive, considering the recent history of the newspaper business, but if he is right, it signals good news for the state. The case for optimism can be found by comparing Buffett’s history with that of daily newspapers in the United States.

Here is his North Carolina portfolio of dailies in order of circulation size (weekdays combined with Sunday to yield a seven-day average): News & Record, Greensboro, 58,940; Winston-Salem Journal, 57,220; Hickory Daily Record, 19,197; Statesville Record & Landmark, 10,319; The News Herald, Morganton, 7,134; and McDowell News, Marion, 4,189. All but Greensboro came with the purchase of most of Richmond, Va.-based Media General Inc.’s newspapers in May 2012. Berkshire acquired the News & Record this year from privately held, Norfolk, Va.-based Landmark Media Enterprises LLC. The circulation numbers used to be higher, of course. But the paradox of the newspaper business is that it always has adapted its business model to whatever competition new technology spawned.

Of late, the industry’s main adaptation has been to put out cheaper products. John Robinson, News & Record editor from 1999 to the end of 2011, recalls the pain of that strategy. “The staff got smaller about every year. It was very difficult to maintain the quality that we aspired to.” Ken Otterbourg quit as managing editor of the Winston-Salem Journal after Media General consolidated copy editing of its three largest papers. “I resigned in 2010 because I disagreed with the decision to move the paper’s copy desk out of state, away from our readers,” he wrote on his website. “I believe that sometimes the best thing that leaders can do is be true to their values and act accordingly.”

Buffett’s history suggests that he will seek a different way. Instead of propping up the bottom line by making papers worse, he likes to make them better. This is not as contrarian as it sounds. The decline of newspapers started slowly. One traditional measure of a paper’s value to advertisers is household penetration — paid circulation as a percentage of households. Nationally, it peaked in the 1920s at 130%. There were more copies sold than households to receive them. That was possible because many people took more than one newspaper. Even smaller cities had competing papers. Others had morning-evening combinations under one owner or joint operating agreements that let competing papers share production plants. Metropolitan papers often circulated well beyond their hometowns. Raleigh’s News & Observer once offered home delivery all the way to the coast. When my wife and I moved to Chapel Hill from Topeka, Kan., in 1956, we had our choice of six home-delivered dailies, including The Charlotte Observer.

Newspaper growth was slowed by the first disruptive new technology, AM radio. KDKA in Pittsburgh made the first broadcast of presidential election returns on Nov. 2, 1920, and soon radio stations were competing with newspapers for advertising. They also competed for readers’ time, and newspaper penetration began a decline that has never reversed. But it was a slow decline. Household penetration did not fall below 100% until the 1960s. By 2010, it was 39%.

Despite those losses, papers remained prosperous through most of the 20th century. Circulation, bolstered by the growing population, kept rising. It grew even while technologies entered the field: broadcast television, FM radio and cable television. The introduction of offset printing with its lower cost and higher quality drew advertisers to direct-mail and niche publications. Meanwhile, publishers used technology to cut their costs. Cold type allowed them to get rid of the sweaty shops where type was set with molten lead. Computerization moved composing-room functions from the back shop to the copy desk. Aided by those developments plus the Taft-Hartley law of 1947, publishers became aggressive at breaking the newspaper craft unions that kept labor costs high.

In 1961, Leo Bogart of the Newspaper Advertising Bureau invented a new metric that diverted attention from the fact that circulation was failing to grow as fast as the number of households: average daily readership. Based on sample surveys asking adults if they had read a newspaper “yesterday,” it captured pass-along readership. As first measured, average weekday readership among adults was 80%. The number of copies sold, ad salesmen argued, was less important than how many people actually read or looked through the paper. But that number, too, began to fall. By 2012, it was down to 43%. Seeking a more impressive number, the industry came up with a seven-day measure — the percentage who read or looked at a newspaper or its electronic edition or visited its website at least once in a seven-day period. In 2012, it was 68%.

The main factor keeping publishers prosperous in the 20th century was consolidation, shaking down to one paper in all but the largest markets in the 1980s. The Winston-Salem Journal was founded as an afternoon paper in 1897 by Charles Landon Knight, a young lawyer from Bluefield, W.Va. Eventually, he would become a successful publisher in Akron, Ohio, and his sons would found the company that became Miami-based Knight Ridder Inc., the second-largest newspaper group of its day. But his Winston-Salem venture didn’t work out, and the Journal passed through a series of owners. One was Owen Moon, who combined the paper with the Twin City Sentinel in 1925 to create a morning-evening operation. Its ownership remained local until 1969, when it was sold to Media General, which closed the evening paper in 1985.

The morning Greensboro Daily News, founded in 1909, and the afternoon Record, launched in 1880, became part of the same locally owned company in 1930. It published separate morning and evening papers until its sale in 1965 to Norfolk-Portsmouth Newspapers, which later became Landmark Communications Inc., and combined them into a morning paper in 1982.

This consolidation was typical of the industry. When newspaper publishers bragged about “pricing flexibility,” they were using code for monopoly. An ink-on-paper product requires a large capital investment in expensive machinery. Whenever profits were threatened, monopoly publishers could raise prices, mostly on the advertising side. They owned the toll road along which information moved from local retailers to customers, and there were no good alternative routes. In midcentury, 71% of newspaper revenue came from advertising, the rest from circulation. By 2000, it was 82%.

Through all of this pre-Internet technological change, the consistent result was increasing specialization of mass media, and the distribution of ads reflected that reality. National advertising boosted the image of products aimed at mass markets, and its share of newspaper ad revenue decreased 36% in the second half of the 20th century. Retail fell 23%. But classified advertising, the most targeted form, more than doubled.

No new medium ever drove an old one out of business. The old just found niches that kept them going in some form. For example, movie theaters split into multiplexes, using more screens to offer esoteric films to smaller audiences. Buffett’s early interest in smaller newspapers showed he appreciates this reality. He bought Sun Newspapers, a group of neighborhood weeklies in Omaha in 1968, and their consolidated staff won the 1973 Pulitzer Prize for local investigative reporting after it exposed the concealed multimillion-dollar assets of Boys’ Town, the Catholic charity on the outskirts of Omaha. The papers were sold in 1980 and closed three years later.

The present portfolio reflects this preference for smaller papers, including three nondailies in Rockingham County: The Reidsville Review, The Eden News and The Messenger in Madison. But a metropolitan paper can be specialized, too. That recognition drove Buffett to take a large position in The Washington Post in 1973. His move might have been partly sentimental — he had been a Post paperboy when he attended Woodrow Wilson High in northwest Washington in the 1940s. The company’s share price, he told publisher Katharine Graham in a letter she shared in her 1997 memoir, Personal History, was “dramatically undervalued.” He then added: “But the twin attraction to the undervaluation is an enterprise that has become synonymous for quality in communications. How much more satisfying it is going to be to watch an investment in the Post grow over the years than it would be to own some garden variety company which, though cheap, had no sense of purpose.”

Graham’s sense of purpose was inspiration for a major research project after I joined the journalism faculty at UNC Chapel Hill in 1981. It was a study of the role of publishers in setting ethical standards and was funded by the American Society of Newspaper Editors. (Reading the handwriting on the wall, the organization changed its name in 2009 to the American Society of News Editors.) ASNE’s interest was aroused by Graham’s resolute support of her newsroom during its Watergate investigation. To find out how typical she was, I designed a mail survey of editors, publishers and staff members and used it to develop a typology. It employed two dimensions: publishers’ benign participation in newsroom decisions and their malign participation.

Both were estimated through behavioral measures. One indicator of malign participation was how frequently the publisher asked for special handling of a story about an individual or organization with whom he had personal ties. On the benign side, I counted showing up in the newsroom from time to time as a favorable sign. Sorting on those two scales yielded four publisher types. I labeled a publisher who was busy in both ways a “politician.” One who was low in benign and high in malign participation was a “fixer.” Being low on both earned a label of “absentee.” The best kind of publisher, the one with low malign and high benign activity, was a “statesman.” Alas, there weren’t enough of them. The most common type was absentee, at 36%. Only 19% were statesmen. I published the results in my book Ethical Journalism in 1987.

I expect Buffett’s publishers to fit the statesman mold. The statesman recognizes quality and service to the community as essential to the business model. Such a publisher intuitively adopts what I now call “the influence model.” Hal Jurgensmeyer developed that concept while managing Knight Ridder’s business side in the 1970s. He argued that a paper’s basic product is neither news nor advertising but influence. It creates societal influence, which is not for sale, and commercial influence, which is monetized as advertising. The former enhances the latter. Buffett demonstrated his grasp of that in his acquisition of The Buffalo Evening News in 1977.

Like other afternoon papers in blue-collar markets, the Evening News was dominant weekdays, but its morning rival had the only Sunday paper. Nationally, Sunday papers, with their array of specialized content, were getting fatter. Buffett gave the Evening News resources to improve the news-editorial product and launch a Sunday edition. Just four years later, the morning Buffalo Courier-Express published its last edition. That gave the Evening News a monopoly. It followed a morning and evening schedule until 2006, when it dropped the evening edition and became The Buffalo News.

Buffett frequently cites as a model Walter Hussman, a Chapel Hill journalism graduate and third-generation newspaperman who became publisher of the Arkansas Democrat in Little Rock in 1974 when he was 27. It was an afternoon paper of 62,405 circulation. Its morning opposition, the Arkansas Gazette, had 118,702. To reverse the Democrat’s declining market share, Hussman started a morning edition and then did something that foreshadowed Craigslist Inc. founder Craig Newmark’s Internet strategy two decades later. He offered free private-party classifieds. That attracted ads from people with lost cats, rooms for rent or cars to sell. Those ads stimulated readership, and commercial classifieds quickly followed.

There was more. Hussman doubled the size of the news staff while increasing the news hole 38%. The Gazette sold itself to McLean, Va.-based Gannett Co. in 1986, its circulation still substantially ahead of the Democrat’s. But Gannett, with all the resources of the nation’s largest newspaper chain, didn’t have heart for the battle and shut the paper down in 1991. Al Neuharth had retired as CEO by then, but he still paid close attention. I asked him about it in 2002 while researching my 2004 book, The Vanishing Newspaper. “Walter Hussman beat our tail by putting news in the paper and having the leaders of the community, including the advertising community, believe in what he was doing,” recalled Neuharth, who died in April at age 89. “Dillard’s department store, headquartered in Little Rock, they believed in his credibility so much they pulled all their ads out of our Gannett newspaper. Big hit, big hit.”

But Hussman was an outlier. Coping with technological disruption by making newspapers better had become a radical idea by the end of the 20th century. Newspapers’ history of making easy money through their monopoly power did not help. Their business culture was careful and conservative.

The Internet’s threat to that monopoly was exposed by Craigslist, which began in San Francisco in 1996. With classified ads providing the largest share of their revenue, publishers were terrified by its impact on their bottom lines. They tried to protect profits by cutting quality to cut costs. Without necessarily intending it, they had adopted what Michael E. Porter, the Harvard business professor, called “harvesting market position.” If replacement by a new technology is inevitable, your last resort is a short-term strategy of squeezing as much cash as you can out of the business as it dies. You do it by raising prices, reducing quality and counting on customer habit to keep the revenue coming in as long as you can.

I was jarred into awareness of this strategy while on vacation in the summer of 2001. An email discussion told me that a job I had loved in the 1960s, Washington correspondent for Knight Ridder’s Akron Beacon Journal, was being abolished in a cost-cutting move. Within hours, I had an appointment at the Miami-based Knight Foundation to discuss a research grant to try to prove the value of the opposite strategy, spending money to build a newspaper’s influence. In making my argument, I compared a newspaper to a goose that lays a golden egg every day. That was a good metaphor when a newspaper was a natural monopoly. Now that the Internet has taken away the monopoly, newspapers can still make money, just not as much. Think of a magic goose whose capacity has been reduced to only one golden egg a week.

But it’s still magic and worth keeping and nurturing, though its value might be hard to see if you had the bad luck to acquire it at a price based on the egg-a-day production rate. You can sell it at a discount that accounts for the lower output, and the buyer will be happy. The person who sold it to you is still happy. The only loser is you. Buffett obviously sees himself as the third owner of the goose in this parable. He knows technology doesn’t destroy old media; it just forces them into new business models. And the price of a newspaper property finally got low enough to make the attempt to create such a model worthwhile. Newspapers still reign supreme in the delivery of local news, he told shareholders. “Whenever there is a pervasive sense of community, a paper that serves the special informational needs of that community will remain indispensable to a significant portion of its residents.”

A North Carolina newspaperman who agrees with him is David Woronoff, publisher of The Pilot in Southern Pines and a member of the family that owned The News & Observer for 100 years. He and the ownership group headed by his uncle Frank Daniels Jr. tried to buy the News & Record in 2008. “Thank goodness it didn’t happen,” he says. “It was like trying to catch a falling knife. We couldn’t get a handle on where it was going. But it’s a good market and a good newspaper.” And at the right price, it could be a great investment, he adds. “The key is to be relevant. Be engaged in your community. We think the news is a hell of a lot more important than the paper. Our strategy is to dominate the market with a portfolio of products that serve your community.”

Responding to adversity by making newspapers better could give them something that looks a lot like a monopoly. Political scientist Russell Neuman suggested such a strategy in his 1991 book, The Future of the Mass Audience. Readers and advertisers will gravitate to the most trusted source in their community, and there can only be one most-trusted. In this model, readers will pay more of the cost of that news rather than riding so cheaply on the backs of advertisers. Again, Buffett cites the example of Hussman, an early adopter of a pay wall for his newspaper’s online content. Berkshire’s papers were not as quick to do that but are working on it.

Former editor Robinson sees ways Buffett’s managers could better things at the Greensboro and Winston-Salem papers. Online versions should improve quickly. They might combine resources for statewide investigative projects, as the Charlotte and Raleigh papers, both owned by Sacramento, Calif.-based McClatchy Co., do. They could open a joint Raleigh bureau. “We’re really not talking about editorial combinations so far,” says Kevin Kampman, the Journal’s new publisher. But he indicates one subtle change that has been made. When one of the papers picks up material from the other, credit is given directly instead of through the Associated Press.

Buffett is not afraid to experiment. “Whatever works best — and the answer is not yet clear — will be copied widely,” he told shareholders. Imitation is a venerable newspaper tradition. I was present Oct. 21, 1976, as John S. Knight, who still held the title of editor emeritus at a fat and profitable Knight Ridder, spoke to the National Press Club. “I always operated,” he said, “on the philosophy that if I could borrow, adapt or steal a great idea, that was journalism at its peak.” Now that information moves with the speed of the Internet, the mobility of good ideas ought to increase. So watch for the Buffett effect. It might bring better journalism to the Old North State.

Philip Meyer lives in Chapel Hill. His memoir, Paper Route: Finding My Way to Precision Journalism, was published last year.