(December 08, 2005) -- Before the Tribune Co. discharges any more journalists, and before Wall Street kills any papers, let's look at the economics of newspapers. Must they be at the mercy of executives seeking bonuses and stock appreciation rather than nourishing a force for civic good?
Although the obit-writers are greatly exaggerating the death of American newspapers, we've seen enough advertising and circulation stagnation to realize that if we don't think imaginatively now about how to preserve them, we'll have to think very imaginatively later about how we'll get along without them, both as individuals and as a nation, and that's not pretty to contemplate.
In fact, in spite of Knight Ridder's abject surrender to a shareholder's demand to break up the company, newspaper publishers aren't hurting. Yes, print circulation is off, but the companies' online revenues are ballooning, and consultant John Morton computes an industry profit margin of 20%.
But while family owners, like the Paddocks of Arlington Heights, Ill., who elevated the Daily Herald from a country weekly into Illinois' third-largest daily with a still-growing circulation of 150,000 in 28 editions, consider newspapering a mission rather than an investment, Wall Street will always prod publicly-owned newspapers to improve their return on investment.
So if the aggressive investors and financiers don't get the high return they want, and if it can't be achieved by revenue breakthroughs, that means cutting costs -- i.e., reporters, editors, photographers, and newsprint, the sad story that inevitably undermines the quality and the societal value of newspapers.
But does "healthy" have to mean "profitable"?
Let's dream for a moment about newspapering freed from the profit motive. Purists may argue that newspapers, like any other enterprise, should have to earn their way in the marketplace, and if they fail the market test, so be it.
But in fact newspapers, as important to the civic health of our society as public transportation, have a claim on public allegiance that goes beyond financial measure. Does anyone believe that our society is better, our civic virtue enhanced, by the failure of the Washington Star and the New York Herald Tribune and the Chicago Daily News and all the other fine dailies that have perished for purely financial reasons?
To be sure, if advertisers continue to pare their commitment to newspapers, they may become less interesting to read and less useful. But if their professional staffs can be preserved, perhaps even augmented as their companies capitalize better on the Internet, newspapers' freedom and opportunity to report the news, especially the sensitive, prickly news, can only be enhanced, freed of any concern about offending advertisers.
Again, market devotees will resist, contending that lack of competition and the profit motive will give rise to journalistic sloth. But in fact competition for the news consumer will continue to be rife, especially for the younger folk who tend to look to broadcasting and the Internet rather than picking up a newspaper. To survive and prosper in the face of this vibrant competition, newspapers will have to be very good indeed.
HOW TO DO IT
The St. Petersburg Times, with its Poynter connection, is a rare example of a nonprofit. How could other newspapers be liberated from the for-profit world to concentrate on their mission?
There are two tax-favored models before us: public broadcasting and real estate investment trusts. Some rather simple tax legislation would be required, available solely to newspapers, not to broadcasters or to companies that own both -- which incidentally would free these papers to cover the federal government without fear of jeopardizing their corporations' interests at the Federal Communications Commission. Such special legislation wouldn't be novel, for Congress long ago recognized the importance of healthy newspapers when it authorized joint operating agreements as an exception to the antitrust laws.
A newspaper company, like a public broadcaster, could be organized as a not-for-profit, tax-exempt corporation. It could still sell papers and advertising, it could still develop new Internet revenues, it would still pay market wages and salaries (or maybe better), it could re-invest in improving its own staff and facilities and operations, it just couldn't make a profit. And it wouldn't pay taxes or dividends.
Of course, this is quite possible now, but the question is how to make the transition. If a newspaper is struggling and likely to be closed, it probably has little market value, so its owner, like the owner of an old car that costs too much to keep up, could simply donate it to a not-for-profit like an existing civic organization, or create one for the sole purpose of operating the paper. The owner could still run it and draw a reasonable salary. But no stock options.
If the newspaper is making money but not enough to satisfy Wall Street expectations, it might have enough residual value for the owner to shop it around. But if the owner is an otherwise-profitable company, a deductible gift might do more for the bottom line than a fire sale. Congress could encourage such donations by allowing the company to deduct the full value of the newspaper as a charitable contribution, creating a special exception to the current ceiling on corporate gift deductibility, which is 10% of taxable income.
Another possible transition from for-profit to not-for-profit might be a buyout and donation by civic-minded wealthy individuals or families, the same folks who give millions to build a new library or a new hospital wing. Especially if their local newspaper is declining, they might see buying it as a signal contribution to the vitality and quality of their community. Such a generous civic act just possibly could be more appealing to the super-wealthy than merely taking another position in a hedge fund. Facilitating this, too, would require an amendment to the tax law, to waive for this purpose the 50-percent-of-adjusted-income ceiling for personal tax deductions -- just as Congress did for 2005 contributions to Katrina relief, and all other 2005 charitable gifts.
Law enforcement might help in this. When Larry Ellison of Oracle was charged by the state of California with a securities-trading violation, he settled by agreeing to donate $100 million to charity. That would have been enough to buy a good-sized newspaper and donate it to a not-for-profit, maybe even endow it.
The other tax-favored model is that of real estate investment trusts. Alone among for-profit industries, REITs pay no federal income taxes. Congress bestowed this special privilege on real estate companies that distribute 95% of their profits to their shareholders. So REITs are for-profit, and to be attractive to investors, they must actually produce profits and pay them out as dividends.
To assist publicly held newspaper companies, Congress could extend this tax-free privilege to them -- again, not to broadcasters or to media conglomerates that own both. It would mean that if the newspaper makes a profit (after necessary expenditures to strengthen and improve the operation), it can avoid federal income tax by distributing virtually all of it.
Such a favored status would appeal to investors, though they might not be typical investors, perhaps those with a measure of civic pride and spirit that would find gratification in such an unorthodox position.
Proof that converting to such a tax-free trust form would be attractive to for-profit companies is seen in Canada, where a similar status is available to all public companies and many large ones have made the switch.
For a newspaper company whose expenses vary with the vagaries of news coverage, a tax-free form has obvious advantages. For instance, if responding to the expensive exigencies of covering a Katrina-like story means little or no profit, the company would have no obligation to pay a dividend, and of course no income tax.
If all of this sounds like a substantial re-thinking of the economics of American newspapers, that's what it is. And it's time.
Joe Mathewson (letters@editorandpublisher.com) Joe Mathewson, a former Wall Street Journal reporter, banker and corporate lawyer, teaches business journalism at the Medill School of Journalism in Chicago.
