Fall 2001 Human Rights Magazine

By Randall P. Bezanson

The press's freedom protects the public's right to an independent source of information on those matters that are essential to a self-governing and free people. We call this information news, and we expect the press to be independent in the judgments it makes about the news we need to receive. This is especially important with newspapers, which traditionally have served as a broad source of information to all segments of the public. We must be interested in the forces that pressure the newspaper business, as our political freedoms rest in important ways on the quality of news and, most importantly, in the independence of those who select and distribute it to us.

News is a business. It has always been so, particularly in America where, enlivened by public demand for news, the nineteenth century witnessed the emergence and growth of the highly profitable penny press and the great metropolitan newspapers. The search for profit yielded newspapers of increasingly broad, mass distribution, oriented to the public's interest in information, and freed of obligation to the patronizing demands of class or to duties imposed by government. Business has been good for news. Its private capitalist impulse created a broadly democratic, public, and fiercely independent newspaper.

Dramatic change is now afoot, however. Today, the business of news is business, not news. This trend is strikingly revealed in the publicly owned newspaper companies that account for over 40 percent of the daily newspaper circulation and over 50 percent of the Sunday circulation in the United States. The publicly traded segment of the newspaper business includes firms with varied commitments to quality journalism, and their papers range from the distinguished to the undistinguished. But the firms share a common feature: They are subject to the unceasing demands of the investment marketplace, populated by passive investors-individuals, corporations, and institutions-whose interest is profits, margins, yields, and share value; whose interest, in short, is business, not news

.Publicly traded companies are the instruments of fundamental change in the newspaper industry in the United States. But they are not the cause of change. They are instead manifestations of larger forces. My purpose in this article is to discuss a study recently conducted by Gil Cranberg, John Soloski, and me, with the support of the Open Society Institute. The study, recently published as Taking Stock: Journalism and the Publicly Traded Newspaper Company, sought to understand the changes taking place in the newspaper business by focusing specifically on the organization, behavior, and business practices of the publicly traded newspaper companies. I will focus on three aspects of our study: the influence of the investment markets; the organization and operation of the publicly traded newspaper firm; and the changing character of competition in the newspaper business.

The Investment Market

Investment markets and institutional investors were not until recently, large objects on the newspaper industry's radar screen. But over the last twenty-five years, a new environment has emerged. This new environment is characterized by great increases in the amount of investment capital; remarkable broadening of the portion of the population that participates in equity markets; and management of the expanding investment assets by widely held mutual funds, investment banking organizations, insurance companies, and pension plans. The forces of broad participation in the equity markets and institutional fund managers have created markets that are highly focused on short-term financial performance, yet are much less liquid for the large institutional investors whose holdings, if sold, would dramatically affect share prices.

The institutional investors hold, on average, 50-60 percent of the shares of the publicly traded newspaper companies, a block of ownership that is in many ways monolithic, even if it is held by ten or twenty or thirty different institutional investors. These institutional investors demand short-term performance. And they make their demands known to the companies in which they invest, pressuring management to adopt management policies and financial strategies that will satisfy their often short-term investment objectives.

The Organization of the Firm

Newspapers traditionally have been organized differently than typical business firms. The traditional newspaper company is divided into two parts, business and news, each operating semi-autonomously from the other, but both focusing on the sale of the same product-the newspaper.

The business part focuses on revenues, profits, selling advertisements, managing distribution, controlling the price of raw materials, developing and monitoring budgets, and the like. It is financially efficient, revenue driven, cost conscious, and oriented toward financial productivity in the way in which it performs its duties.

The news part is the editorial side, which focuses on gathering and processing information, determining what's important and what readers want in the newspaper, composing the news product, deciding what matters are of greatest importance, and rendering institutional views, or editorials on a regular basis. The editorial side is creative, necessarily decentralized and a bit chaotic, sometimes overstaffed, boisterous, usually consultative and deliberative, concerned about the quality and appeal of its news product-its public importance, value, usefulness to the customers, and truth-as much as its cost.

Atop these two sides of the corporate personality sits the publisher, whose job it is to reconcile the competing demands and conceits, blending the imperatives of profit motive, public obligation, and aspiration for public influence. These goals can be accommodated but they cannot be made congruent. They always conflict. In that conflict, it might be claimed, lies the very heart of the journalistic adventure and, in its classic form, the soul of the newspaper enterprise in America.

Today, the organization and operation of the publicly traded newspaper company is being radically changed. Profit maximization is the principal objective. The standards of efficiency implied by a profit-driven firm are being introduced into the news side of the company. Total circulation is less important than circulation "quality," which often means its socioeconomic and demographic composition. Target marketing, and in some cases, focusing of news content to specific markets are strategies employed to maximize advertising revenue, a richer potential source of income than subscriptions.

The wall separating news from business, which was never impenetrable but was of much more than symbolic importance, is crumbling. The purpose served by the increasing interaction between, and occasional merger of, news and business is more effectively to align news decisions-staffing, editorial policy, general content-with the strictly financial standards that pervade the rest of the organization. Some of this is being done from the top down. Boards of directors and central executive management of the publicly traded newspaper firms are strongly oriented to the financial markets and to increasing shareholder values. This focus places a premium on short-term operating results. Controls on the operating newspapers are highly centralized for financial matters and decentralized on editorial matters. But financial controls on budgets, personnel, and revenues place sharp constraints on the newspapers' capacity to exercise their nominal editorial freedoms.

Much of the realignment of news decisions along financial and profit-oriented lines is accomplished not with a stick, but with a carrot: large bonuses tied to revenues, expenses, and margins; stock-based awards tied to overall corporate performance and increased shareholder value that extend to editorial and news personnel. Standards of evaluation and compensation are almost exclusively objective, and largely, if not entirely, based on financial targets. Compensation to managers of the newspapers is based in substantial (often very substantial) part on bonuses geared to achieving or exceeding financial budget targets. Incentive compensation at the newspaper company level typically takes the form of stock awards or stock options, in combination with bonuses tied to financial targets for the operating newspaper. The newspapers are thus given strong incentives to accomplish the shareholder-value objectives of the overall firm. The operating management and key editorial and news personnel are made stockholders, and thus shareholder-wealth objectives may become their own personal objectives, as well. In subtle ways, these incentives may alter allegiances and sharpen the focus on financial consequences of news decisions. They can lead to financially driven editorial decisions and to efforts, sometimes quite openly acknowledged, to "tear down" or disassemble the "wall" that protects the independence of editorial decisions from business considerations.

The imperatives of managing complex and diversified (in news product) businesses account for many of the organizational changes. There is, however, another contributing factor: the firm's main business constituency. The newspaper company is different from most other companies, such asGeneral Motors, for example, because it has two inherently competing markets or constituencies: the readers, who want and need the news; and the advertisers, who want the news delivered in a package that will make their commercial messages most effective.

General Motors serves those who purchase their cars: their corporate organization, efficiency, even short-term orientation is ultimately determined by the actions of the customers. If a newspaper company were like GM, the newspaper company's behavior and profit orientation would be judged by whether the readers chose to buy, or to continue buying, the company's product-news.

But because advertisers today contribute about 80 percent of newspaper revenues, by far the strongest customers of newspapers are the advertisers and the readers the advertisers wish to reach, not the broader subscriber or circulation market. Efficiency in the newspaper firm, in other words, is being adapted to the demands of the dominant customer base for corporate and financial purposes, advertisers, and investors, and away from the public audience. The

Changing Face of Competition

Corporations are vehicles for profit-driven commercial activity. This has always been so. Why, then, have newspaper corporations experienced such dramatic changes in organization, form, and orientation over the past fifteen or so years? Surely newspapers at the turn of the nineteenth century or in the mid-twentieth century were equally profit-driven and governed by self-interest. One need think only of the Hearst and Pulitzer papers, which were known for debased content and large combinations into chains. But for most of the twentieth century, newspaper competition existed in most large- and medium-size markets. Subscription revenues then comprised well over 50 percent of revenues. The principal financial constituency of the newspaper was the reader, not the advertiser. Competition constrained newspaper content, forcing the firm to focus on news, its product, and on the usefulness, value, and quality of its news.

Today, competition in news product is rare. Because advertisers are the newspaper's dominant revenue source, the competitive market is the market for advertisers and their customers. This market is fiercely competitive, and for newspapers it is being driven by another market, the highly liquid, pure financial market of passive investors interested in short-term yield and performance.

Technology, also, has changed. New economies of scale permit publications to reduce their size and focus on narrower markets, and to do so profitably. Newspaper content, as a consequence, is becoming more adapted to specific audiences and demographic groups. This means that news, the substance of the business, is becoming varied, less fungible.

Newspaper companies found that the new economies of scale combined with new technologies for printing and distribution of news made newspapers highly profitable financial commodities. Operating margins for newspapers could be raised to ever-increasing heights, climbing from historic rates of 8 or 10 percent to 15 percent, then to 20, then to 25, then to 30 percent and even higher.

Newspapers, in short, were reconceived as engines of untapped potential advertising revenue-unkempt and sloppily run operations ripe for the cost-cutter's picking, enterprises whose product, hard news, could be stripped and made efficient because the product in its traditional form bore no relation to the news imperatives of focused audiences and premium advertising rates. Subscription revenues became a smaller, even incidental, piece of the revenue pie in their long-term strategies. Overall circulation became less important than yield on circulation. The newspapers shed unwanted circulation, discounted subscription prices, and target-marketed to get and keep the most desirable (socioeconomically) circulation. Sophisticated production and distribution technology enabled them to produce a better and more focused advertising vehicle and to adapt its content-news and advertisements-to different segments of its audience producing many newspapers where there had been only one, through zoning and packaging. Then they increased the amount of advertising and hiked the advertising rates. These new companies saw themselves and sold themselves as a uniquely efficient medium for advertising.

This was not like General Motors, with external market forces requiring it to make better cars more efficiently in order to increase revenues and profits. Instead, it was as if the markets told GM to forget about the kind of cars it makes, and use them only as instruments for accomplishing other ends. Newspapers were encouraged, in other words, to see news simply as the engine for, or instrument of, delivering eyeballs for advertising-after all, the advertisers pay most of the bills anyway.

A radically altered competitive environment helped to make this possible. Because competition in news, with other newspapers, was no longer a factor for most of the operating newspapers-they owned their communities or their market niches, and therefore could command high prices from their advertisers that supplied the revenues-there was no reason to worry about the terms of competition with other newspapers, because competition didn't exist. There was no reason, in other words, to worry about quality, scope of news coverage, indeed, even the professional experience of the news reporters.

Journalism and Press Freedom

The First Amendment, the Supreme Court says, rests on a free market in ideas and information. A free press is the "bulwark of liberty," essential, as Professor David Anderson of the University of Texas School of Law has put it, " 'to the security of freedom in a state' . . . provid[ing] a necessary restraint on what the patriots viewed as government's natural tendency toward tyranny and despotism." The press's role is to provide needed information and opinion about public and private matters. This role requires the press to be free and independent of government, but it also requires a measure of freedom from private markets, too, insofar as the private markets do not always place value, in the short run at least, on the oftentimes controversial, unsettling, and unwelcome gaze of the press's eye.

The operation of the free market justifies a rule prohibiting government intervention in the news, its quality, and its content. But the free market must, in fact, operate if this rule is to make sense. The competitive market in ideas and information assumes that the providers of ideas and information are competing for, and responding to, the preferences of the consumers of ideas and information. If newspapers don't provide what their readers want, they will change what they provide in order to retain the readers and, most important, the subscription revenues readers provide.

The market's preference for newspaper content is being reflected not in consumer (reader) preference, but in advertiser satisfaction. Advertisers are primarily interested in the consumers' buying practices, not their reading preferences. In a market where there aren't a lot of competing newspapers, buying preferences are a pretty obscure and imperfect approximation of consumer preferences for news content and quality. More basically, advertisers are interested only in the preferences of some consumers, those who buy their products. They are indifferent to the preferences of readers who are not consumers. Thus to the extent that advertisers will serve as surrogates for consumer preference, visiting their measure of those preferences on the newspapers with which they do business, the preferences thus manifested will not be those of a general reading public, but of specific segments of it.

It might be argued that in a world of increasing choices among the sources of information-television, radio, magazines, online bulletin boards, chat rooms, newspapers, and thousands of sites on the Internet-this should not be a matter for concern. Newspapers are simply becoming a specialized and focused medium like magazines or film.

But newspapers have historically served as the main, perhaps the only, broadly democratic and broadly representative source of information in our society. Indeed, the trends in newspaper news away from hard news and toward "featurized and people-oriented approach[es] . . . [and] lifestyle, celebrity, entertainment, and celebrity crime/scandal," as the Project for Excellence in Journalism put it, reflect not a shift in hard news to alternative media, but instead a movement by newspapers toward the shallower and more visceral news now dominant in the other media. The transformation of newspapers is, therefore, clearly a cause for concern, especially if no comparable (in breadth, quality, and durability) medium of information is taking the newspaper's place.

Some Recommendations

The American newspaper is undergoing fundamental change that is compromising its role as a fiercely independent source of information and opinion judged relevant and necessary for public understanding in a free, democratic, capitalist society. In light of this principal conclusion, which rests on a wide array of financial and organizational, economic, and technological considerations, we offer a number of possible avenues for change, recommendations that might relieve the relentless pressure of the investment market and its corroding influence on the quality of news in the papers owned by the publicly-traded newspaper companies. Our recommendations include:

• prohibition of incentive compensation in the form of stock options or grants, and prohibition of other forms of incentive compensation (including bonuses) based predominantly on financial performance, for the editors and news staff of the operating newspaper companies; restrictions on the proportion of executive management compensation based on financial performance, coupled with new incentives based on expanding circulation and on the quality of journalism practiced in the company's newspapers; dramatic changes in the composition and allegiance of boards of directors of public newspaper companies, such as a strict limit on the number of inside board members, a prohibition on the awarding of stock options and market-based incentives to board members, and express legal authorization for boards to consider news quality and the community's interest in its newspaper's mission when making all decisions, even when the maximization of short-term shareholder return is compromised; changes in tax and securities laws that would encourage long-term investment in newspaper companies; and

• a fundamental reorientation of federal policy (antitrust, tax, securities) from one that protects newspapers against competition and encourages larger and consolidated newspaper companies, to one that supports and fosters newspaper competition and diversity in newspaper enterprises.

  These recommendations are directed at blunting both day-to-day operating incentives and the larger, structural market forces that are reshaping the newspaper companies from those whose business is news into those whose business is business. The publicly traded newspaper company is here to stay, and in some ways it has proved to be a healthy force in the newspaper business. It need not, and probably cannot, be eliminated. But it can, and should, be reformed. Randall P. Bezanson is the Charles E. Floete Professor of Law at the University of Iowa.

  Author's Note: This article draws from Taking Stock: Journalism and the Publicly Traded Newspaper Company, a book published in 2001 by Iowa State University Press, coauthored by the author with Gilbert Cranberg, George H. Gallup Professor of Journalism, Emeritus, University of Iowa, and John Soloski, Daniel and Amy Starch Professor and Director, University of Iowa School of Journalism and Mass Communications (and now dean, University of Georgia).

As published in Human Rights, Fall 2001, Vol. 28, No. 4, p.20-23.