(Fortune Magazine) -- Barry Svrluga, a 36-year-old baseball writer for The Washington Post, was on his way to the barber when an e-mail pinged his BlackBerry telling him that the Washington Nationals had sent two struggling pitchers to the minor leagues. Svrluga detoured to Starbucks, wrote a 572-word commentary on his laptop and posted it to his blog, Nationals Journal at washingtonpost.com. After his haircut he swung by the Post's newsroom to do a live question-and-answer session online with fans. That night, after filing a story for the newspaper, which he calls the "$0.35 edition" in his blog, Svrluga recorded a ten-minute podcast for the Web site, with sound bites from team officials and players.
Like most reporters at the Post, Svrluga has become platform-agnostic, which is a nice way of saying that his bosses are no longer big believers in print. Today a small army of bloggers, podcasters, chatroom hosts, radio voices and TV talking heads, as well as a few old-fashioned ink-stained wretches, populates the newsroom at the 131-year-old Post. They understand that Donald E. Graham, the chairman and CEO of the Washington Post Co., is hurrying the paper into the digital future. "If circulation is dropping," Svrluga explains, "and we're trying to figure out how people are going to get their news, who am I to say no to trying out new avenues?"
New avenues: That's the story of the newspaper business right now. Alarmed by declining circulation, advertising and profits, America's newspaper publishers - as hidebound a collection of businesspeople as you can find - are thrashing about to see whether they can separate the news from the paper and still make money. They're going way beyond the headlines.
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A Web site for college students called BigLickU from the Roanoke Times! Another for busy moms from the Dallas Morning News! Restaurant coupons from the Palm Springs Desert Sun's FoodPsycho.com! Innovation! Disruption! Transformation! These are the new buzzwords of an industry whose last big idea was the invention of USA Today. In 1982.
Can newspaper publishers turn the Internet from a threat into an opportunity - as Rupert Murdoch wants to do with his $5 billion bid to buy Dow Jones (Charts), owner of The Wall Street Journal? It's a long shot, but it's their only hope. Their plight is something not often seen in business: Newspapers remain important institutions, providing a valuable public service, but their business model is slowly, or maybe not so slowly, going away.
No less a sage than Warren Buffett, a lifelong newspaper aficionado, the owner of the Buffalo News, and a director of the Washington Post Co. (Charts) for most of the past 35 years, told Fortune, "The present model - meaning print - isn't going to work."
The Washington Post, a first-class newspaper that dominates its local market, has the best shot of any at reinventing journalism for the Internet. Since the mid-1990s, the Post has plowed many millions of dollars into its interactive unit, taking readers to unexpected places. They can join a lively global debate about religious faith, read hyperlocal coverage of a fast-growing Virginia county or watch daily video programs from the digital magazine Slate.
Graham has made the paper's digital business his uppermost priority. "If Internet advertising revenues don't continue to grow fast," he says, "I think the future of the newspaper business will be very challenging. The Web site simply has to come through."
The problem facing Graham is easy to understand but hard to solve. The pillars of the Post, revenues from display and classified advertising, are declining faster than its Internet business is growing. For the first five months of 2007, total ad sales, including print and online, are down by 12 percent. Other newspapers, too, are reporting sharper drops in ad revenue lately than anyone in the business had expected.
Profits are shrinking too. Operating income for the Post Co.'s newspaper division fell from $125.4 million in 2005 to $63.4 million in 2006. (Most of the decline was caused by a $47.1 million expense for early-retirement buyouts.) In the first quarter of 2007, operating income for the newspaper unit fell by another 53 percent.
What lies ahead for the Post seems to be a long and painful transition from print - so important to local advertisers that the newspaper could raise prices almost at will - to the Internet, where competition for readers and advertisers is brutal. The best evidence of the difference is the fact that advertisers paid about $573 million last year to reach readers of the company's newspapers, predominantly the 673,900 daily and 937,700 Sunday subscribers to the Post. Advertisers paid only about $103 million to reach the eight million unique visitors to the Post's Web sites each month.
To Graham, this is more than business; it's personal. His grandfather Eugene Meyer bought the Post for $825,000 at a bankruptcy sale in 1933. (Hard times are not new to the business.) His father, Philip Graham, diversified the firm by buying TV stations and Newsweek. His mother, Katharine Graham, reigned during its Watergate glory. That makes Don Graham both the trustee of a family fortune and the steward of a journalistic tradition - responsibilities that he takes to heart and that are not always easily reconciled. "The Post is a business, and it is something more," he says.
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Graham, 62, is a reticent and self-effacing man. He would not be photographed by Fortune, and only reluctantly did he sit for an interview. "I'm not the center of the story," he demurs, crediting others for the company's successes. But Graham is intelligent, analytical and disciplined, and he, more than anyone, has put the Post in a position to work through the industry's crisis.
Why is the Post Co. in better shape than its peers? Luck played a role. In 1984 the company bought a small test-preparation business from a Brooklyn entrepreneur named Stanley Kaplan, not really knowing what it was getting. Today the Kaplan education division is the company's largest and fastest-growing business, and it has shielded the Post Co. from the kind of shareholder pressure that forced the breakup of Knight Ridder and the Tribune Co (Charts, Fortune 500).
But Graham also had the foresight to steer the Post Co. away from print as other companies spent billions buying into it. An outstanding board of directors, whose members include Barry Diller, Melinda Gates and Graham's most important advisor, Buffett, has been a big help. So has Graham's reputation as a benevolent owner, which has attracted great writers and editors to the Post.
Finally, the Post is published in the most affluent and educated region in the country; in the nation's capital, much of the business that gets done depends upon the news. Here's the point: If Graham and his people can't build a business model for journalism in the digital world, nobody can.
A lasting legacy
On Sunday, Feb. 17, 2007, the Post published a 4,700-word story by Dana Priest and Anne Hull, the first of a series to document the neglect of wounded Iraq war veterans, particularly at the Army's top medical facility, Walter Reed Army Hospital. Their work set off congressional hearings and brought about the dismissal of the Army Secretary and two generals.
"This is what we are all about," says Priest, 49, who won a Pulitzer Prize in 2006 for stories that exposed secret CIA detention centers overseas. "You could not do it as a blog," she adds - though the Walter Reed story was certainly amplified by the Web.
About 25 people, including nine Pulitzer Prize winners, make up the Post's investigations unit. "Investigative reporting is our brand," says Jeff Leen, the editor who leads the group. In the past few years, the Post broke open the Jack Abramoff corruption scandal, examined Vice President Cheney's behavior in office, exposed mismanagement at the Smithsonian Institution and chronicled farm subsidies that go to the rich - all part of what the paper's executive editor, Leonard Downie, calls "accountability reporting." The engraving plate from the Aug. 9, 1974, front page, with its enormous headline - NIXON RESIGNS - hangs in the room where Post editors meet daily.
As a local newspaper with global ambitions, the Post is a holdover from earlier, inkier times. The paper maintains 20 to 25 overseas correspondents in 19 bureaus, and they are well trained. Before Fred Hiatt, who is now editorial-page editor, was dispatched to Moscow years ago, he took a yearlong paid sabbatical to study Russian and the Russians. It's no trivial matter to cover a foreign power for a newspaper that sits on the breakfast tables of cabinet secretaries and members of Congress.
Top journalists have flocked to the Post since the days when the swashbuckling editor Ben Bradlee ran the place and Woodward and Bernstein were lionized in the movie based on their book, "All the President's Men." Katharine Graham - the first female CEO of a Fortune 500 company - guided the paper through the 1971 publication of the Pentagon Papers and Watergate. She was an astute businesswoman too.
In 1971 the Post Co. went public at $6.50 per share (adjusted for a subsequent four-for-one split). Twenty years later, when Mrs. Graham turned the CEO job over to her son, the price was $222, a gain of 3,315 percent, ten times more than the Dow.
Like the New York Times Co. (Charts) and Dow Jones, the Post Co. has two classes of stock, with control resting in the family-owned shares. The biggest outside shareholder is a friendly one: Buffett's Berkshire Hathaway, with 18 percent of the publicly traded shares. Don Graham's direct stock holdings in the company are worth roughly $350 million.
Money, though, is not what drives the CEO. "He's a very duty-bound person," says Boisfeuillet "Bo" Jones Jr., a lifelong friend who is publisher of the Post. After college Graham joined the Army, serving in Vietnam as an information specialist, and then returned to Washington to join the D.C. police force. For about 18 months he patrolled a beat on the city's poor northeast side, a world away from his childhood homes in Georgetown and Virginia's hunt country. To his mother's relief, he joined the Post in 1971 as a metro reporter. He was named publisher in 1979.
By then - long before Yahoo or Google News - the newspaper business had begun what Jack Shafer, Slate's press critic, has termed its "slow, unstoppable, train ride to hell." (Yes, the Post Co. pays his salary.) In 1976 the Los Angeles Times published a page-one story about newspapers that began, "Are you holding an endangered species in your hands?"
Between 1940 and 1990 about 267 papers shut down, victimized by big forces: TV news (which killed afternoon papers), the movement of people from cities to suburbs (which made delivery more costly), geographic mobility (rootless people tend not to read the local daily) and a decline in civic engagement dating back, as it happens, to Watergate.
The Post's daily circulation peaked at 832,000 in 1993. It has dropped by nearly 20 percent since then, while the region's population has grown by about 20 percent. Says Buffett: "Per capita readership really is falling rapidly." Even so, the Post retains the highest penetration of any paper in a top-ten market.
In an effort to recapture young readers, the Post in 2003 started a free weekday tabloid called the Express, which now publishes 185,000 copies a day. It's profitable. A year later the company acquired El Tiempo Latino, a Spanish-language weekly. It also publishes five paid-circulation suburban newspapers, 34 free suburban weeklies, 12 military newspapers and real estate and auto guides. To squeeze a few more dollars out of its presses and trucks, the Post Co. distributes The Wall Street Journal in Washington, and it prints and circulates the local edition of the satirical newspaper the Onion. Bar mitzvah invitations may be next.
This year the Post will generate nearly 50 percent of its revenues from display ads, about 30 percent from classified ads, and about 20 percent from circulation sales. All three revenue streams are under pressure. Display advertising has been hurt by the consolidation of department stores, classifieds have been whacked by online competitors and the Post sells fewer papers.
The Rupert discount
Five years ago Graham reluctantly raised the newsstand price to 35 cents; he does not want to increase it again, because that could accelerate the decline in single-copy sales. "We strongly believe in the mass model," says editor Downie. By contrast, The New York Times has just raised its price to $1.25, and the Journal costs $1.50.
Graham's singular accomplishment as CEO has been to reduce the company's exposure to print. In 1990 the Post Co.'s newspaper division contributed 48 percent of revenues and 51 percent of operating income; last year newspapers accounted for 25 percent of revenues and 14 percent of operating income.
The company bought cable systems in the mid-1990s, when prices were low. But Graham's best move has been to invest in the sprawling array of education businesses - a test-prep firm, colleges, an online university and professional training businesses - that make up the Kaplan unit. It contributed 43 percent of the Post Co.'s $3.9 billion in revenues in 2006.
While the Post Co. diversified, the New York Times Co., the Tribune Co., Knight Ridder, Gannett (Charts, Fortune 500) and McClatchy (Charts) invested heavily in print during the 1990s. They have paid dearly for it. One example will suffice: In 1998, McClatchy bought the Minneapolis Star-Tribune for about $1.2 billion. The Post Co. then owned about 28 percent of the Minneapolis paper, and it chose to sell. Smart move. McClatchy sold it last year for $530 million.
This dependence on print is the big reason why, over the past five years, newspaper stocks as a group are down by nearly 30 percent. The Times Co. is off by 45 percent. During that same period, Post Co. shares are up by more than 40 percent.
"I can look our shareholders in the eye," Graham says, "and say we should have a steady, to some extent growing, stream of income from our businesses while we try to sort out, if we can, the problems of the newspaper."
Those problems are daunting, all agree. "The Post has enormous national and international importance," observes Buffett. "That does not make it a good business."
Growing into the Web
Joshua Bell, one of the world's great violinists, owns a Stradivarius worth millions. If he played it for spare change during morning rush hour at a subway stop in Washington, would anyone notice?
Gene Weingarten, a 55-year-old staff writer for the Post's Sunday magazine, decided to find out. When his 7,400-word story about the experiment, called "Pearls Before Breakfast," went up on the Post's Web site, accompanied by a three-minute video and a 45-minute recording of Bell's performance, it became an Internet sensation.
"I got more mail than I've had on anything, ever - from all over the world," Weingarten says. "One guy wrote to me from an Internet cafe in Beijing."
This is the kind of thing that gives Graham hope. A tour de force of storytelling, fashioned by a consummate stylist ("The violin is an instrument that is said to be much like the human voice, and in this musician's masterly hands, it sobbed and laughed and sang - ecstatic, sorrowful, importuning, adoring, flirtatious, castigating, playful, romancing, merry, triumphal, sumptuous ... So what do you think happened?") was married to the power of digital video and magnified by the viral nature of the Internet, to bring eyeballs and advertising dollars to the Post.
Graham showed the video at the Post Co.'s annual shareholder meeting to highlight the creative possibilities of online journalism. He likens newspaper Web sites to the early days of television, when the networks did 15-minute evening newscasts.
"I don't think any news organization has maximized the potential of the Internet," he says. "I know this one hasn't." Imagine if, when big news breaks, the Post's Web site routinely offered a print story, a video version, an audio point-counterpoint by op-ed columnists, maps, photos, links and reader reaction. Could washingtonpost.com become a leading online news destination?
To a degree, it has - ranking behind nytimes.com and usatoday.com but ahead of cbsnews.com and time.com. About 90 percent of the Post's online audience comes from outside Washington, thanks in part to Robert Redford and Dustin Hoffman. "Why are people coming?" asks Caroline Little, the president of Washington Post Newsweek Interactive. "It was Watergate."
The Post has two goals online. It wants to become a must-buy in Washington while increasing its share of national ad dollars. Right now ads aimed at local readers account for about 60 percent of revenues. The site offers a vast trove of local content - going-out guides, traffic, weather, sports. Says Graham: "We have a map of D.C. with every school listed, with test scores and other things parents would want to know. It's not all-inclusive, but it's a lot of information, and you couldn't do that in the paper."
No news is too trivial for a new hyperlocal site that was just launched to serve Virginia's fast-growing Loudon County. "This is about things like going to every place of worship in Loudon, writing a summary of what they do, and giving the priest or minister or rabbi a recorder so they can podcast their sermon," Little says. Whether the town pizza parlor and muffler shop will spend the ad dollars to support such small-scale stuff remains a big unknown.
Getting a bigger share of national spending will be even harder, because advertisers who want to reach news readers have so many other places to spend their money - other newspapers, TV news sites, Yahoo and MSN, news aggregators like the Drudge Report and Huffington Post, even blogs. "You're almost always going to be able to find inventory," says Jordan Bitterman, director of media for Digitas, which buys Internet advertising for American Express, AT&T and General Motors. "So the buyer has more leverage than in the print category."
Another problem is that readers feel a deeper affinity to the newspaper that lands on their doorstep than to a Web site that's one click away from everything else. Most of the eight million monthly users of washingtonpost.com come to the site "horizontally," following links from other Web sites. A minority are "vertical" readers, who start at the Post's home page and then dig deeper. Jim Brady, executive editor of washingtonpost.com, spends a lot of time thinking about how to turn incidental readers into loyalists. "We love visitors at washingtonpost.com, but we prefer residents," he says.
Advertisers seem to like video, so the Web site employs six videographers and sends them all over the world. More than 100 reporters in the Post newsroom have been trained to use simple videocameras. Says Downie: "Rather than think of ourselves as a shrinking newspaper, we think of ourselves as an expanding multimedia newsroom."
A few critics say Graham needs to move even faster to get the business online. While the CEO is beloved in the Post newsroom, he is also viewed as a "conservative with a small 'c'" leader. "Don has always been allergic to master plans," says Downie. Guided by Buffett, among others, he is loath to gamble.
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This may be a time when bold strokes are required. Murdoch has talked about hiring "all the best business journalists in the world" and making The Wall Street Journal free and online only. Could newspapers join to pressure Google, Yahoo and other aggregators to pay them for their content? Could they combine their Web sites?
Buffett muses out loud: "The ideal combination would be if The New York Times, The Wall Street Journal and the Post had a joint Web site, and you couldn't get any one individually. That, you could sell for a fair amount of money, and it would have one hell of a readership."
Might the Graham family find a way to give the Post to a private foundation, a model pioneered by the St. Petersburg Times? Not likely, Don Graham says. He'd prefer to keep the paper in the family. It's widely believed that his niece Katharine Weymouth, the Post's vice president of advertising, is being groomed to take over.
But to take over what? That's anyone's guess. "No one," Graham says soberly, "can sit here and tell you how people are going to be getting news stories ten or 20 years from now." But people will want to know the scoop from the White House, the prospects for peace in the Middle East, and who's pitching for the Nationals, and someone will be there to tell them. We just don't know who that someone will be.
