Newspapers are in the Newspaper Business

One of the people whose work has shaped my thinking on the role of disruptive innovation in declining industries is Clusterstock editor (and Techdirt alum) Joe Weisenthal. There’s a common argument that declining companies need to ask themselves “what business they’re in,” and answer the question in a way that allows the firm’s continued survival. James Surowieki notes that Theodore Levitt once argued that the problem with the railroad industry is that they didn’t realize they were in “the transportation industry,” a realization which would, supposedly, have inspired them to be early leaders in the trucking industry. Similarly, the argument goes, if the newspapers realized they were in “the information business,” they could have become early leaders in the move to the web. Joe’s response to this struck me as being spot-on:

I don’t buy this. What expertise did the rail companies have in trucking? It’s like the idea that the oil companies are actually “energy” companies, who should be investing heavily in solar and wind. Maybe. But what expertise or competencies do they have in this type of thing? None. If there were any examples of companies having had the ability to do something like this, that’d be one thing. But Surowiecki’s hindsight reasoning doesn’t strike me as good business advice.

Now here’s some actual business advice that might work for companies in dying industries: Recognize that the end is in sight and stop reinvesting in the core business. Trim costs and distribute the cash to shareholders until it runs out.

This isn’t sexy or anything worthy of Surowiecki, but companies actually do it. Like Earthlink, the ISP, which is making money hand over fist by not reinvesting in a dying business. Or the beeper companies, which actually still make a lot of money (doctors still use beepers) etc. etc.

I think a big part of the problem here is that people have trouble thinking clearly about what a CEO’s job is. There’s a widespread assumption, driven by the tendency to anthropomorphize corporations, that the CEO’s top priority is to ensure his firm’s survival, and his second priority is to promote growth. But this is wrong. The CEO’s job is to maximize shareholder returns. Sometimes that means aggressive growth. But in other circumstances it means not squandering shareholder resources trying to expand in a declining industry, or in a hail-mary attempt to enter new markets for which the firm has no particular expertise. If your firm is currently profitable, as the newspapers were in the late 1990s, it might be better to just pay out larger dividends and plan for the firm to shrink gradually over time.

If (God forbid) I ran a mid-sized metropolitan daily, I think I’d follow the opposite of the common advice: recognize that the core competence of a newspaper is printing and distributing newsprint, and figure out how to make that process as profitable as possible. In particular, I think the newspapers’ core competence is not the production of content. As more and more cheap content gets produced online, newspapers should be looking for ways to re-package that content and sell it to their existing consumers. TechCrunch’s partnership with the Washington Post is a good model. My guess is that syndicating TechCrunch content is much more cost-effective than producing it themselves. The long-term goal should be to have all the non-local content—book, movie, and music reviews, international news, science and technology, health and medicine, non-local sports and business—produced by third parties and syndicated cheaply. They should find the most talented bloggers in their metropolitan area and pay them a nominal amount to syndicate some of their posts as columns. They should get over the stigma associated with wire copy. The newspaper of the future should have a bare-bones editorial staff tracking down affordable (ideally free) content for syndication combined with a modest staff of reporters to cover local stories that aren’t being covered by third parties (and even that might shrink over time as online sites do a better job of covering local stories).

It’s only a slight exaggeration to say that in the long run, the goal should be to make the newspaper a dead-tree RSS reader. The majority of people born before 1965 want to get their news in the familiar newspaper format. Newspapers can serve as profitable intermediaries between them and the thriving world of online content. This is a (literally) dying market, but it’ll be around for another 20 years at least, and there’s every reason to think it can be profitable if newspapers understand that those are their core customers. These are relatively wealthy customers with relatively inelastic demand, so there’s probably a lot of room to raise subscription rates to compensate for falling circulation. In the long run, one of two things will happen. One possibility is that sometime in the 2030s, there will be so few newspaper readers left that subscription revenues don’t even cover printing costs and newspapers have to close up shop. The other is that the newspaper will become an expensive niche product, like The Economist or even National Journal today: supported by high subscription fees from a small minority of people who are willing to pay a premium for the physical format. Either way, there should be another couple of decades of profitability before newspapers run out of customers.

People are right to tell newspapers they should ask themselves what business they’re in. The problem is that the answers to these questions tend to be driven by wishful thinking. Newspapers would like to dominate Internet-based reporting the same way they dominated the 20th century news business. They’d like to get most people born after 1980 to read newspapers. But that’s not going to happen. And the sooner they realize that, the sooner they can re-focus on their core business, which has always been printing and distribution more than journalism