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ORIGINAL URL:
http://www.latimes.com/business/la-fi-chronicle11dec11,1,4148375.story
POSTED: December 11, 2005 latimes.com

San Francisco Chronicle Struggles as Internet Siphons Readers, Ads
The newspaper's problems are being watched closely in the battle between
one and new media.

By Joseph Menn
Los Angeles Times Staff Writer

SAN FRANCISCO -- When Jeffrey Zalles needed a new cashier for his coin
laundry in the South of Market district, his help-wanted ad in the San
Francisco Chronicle brought just four responses.

So Zalles posted a notice on Craigslist, a San Francisco-based network of
websites that specialize in classified advertising. His cyber-ad drew 400
applicants.

Zalles found his cashier and hasn't relied on the Chronicle since,
advertising instead on the Internet and the city's array of free papers.

The venerable Chronicle is struggling, and defections by Zalles and other
advertisers are a big reason. Classified ads are a big source of income
for the Chronicle and the newspaper business as a whole, making up 27% of
the industry's revenue, with 53% from other ads and 20% from people buying
the paper.

What's more, the Chronicle's circulation is plunging. The paper reported
last month that sales fell 16% during the six-month period ended in
September . by far the biggest drop among the nation's 20 largest
newspapers. Chronicle executives said much of the decline was caused by
their decision to stop offering steep subscription discounts.

The Chronicle's woes are being closely watched around the country as the
newspaper finds itself on the front lines of the battle between old and
new media. As more consumers get their news from electronic sources and
advertising follows them, analysts warn that newspapers elsewhere .
already losing an average of more than 2% of their subscribers yearly .
might join the Chronicle in a steepening fall.

"It's a disturbing harbinger of what may happen with other newspapers as
attention turns to the Net," said industry analyst John Morton of Morton
Research Inc. in Silver Spring, Md.

The Chronicle's challenges are particularly formidable because San
Francisco and nearby Silicon Valley have the most tech-savvy audience in
the nation. More than half of the city's homes have had broadband Internet
access for more than two years, the highest such concentration in the
country.

About 57% of area residents use the Internet for news, compared with 50%
nationwide, according to a study by Scarborough Research. Locals seeking
jobs or companions are more likely than people elsewhere to use Craigslist
and other free ad sites.

During the last 10 years, consumers have flocked to websites created by
San Francisco journalists and entrepreneurs . as varied as the
tech-industry news site CNet and the online magazine Salon. The region is
at the forefront of a rapidly increasing number of experiments with
organized blogging and "citizen journalism."

John Battelle, the former publisher of the tech-centric Industry Standard
magazine, is selling ads and providing other services as a self-described
"band manager" for popular blogs including BoingBoing and Metafilter.

Craigslist founder and local geek hero Craig Newmark is funding a project
by blogger Jeff Jarvis to develop technology for identifying versions of
key news stories that readers agree are trustworthy.

"This is a very sophisticated audience," said Chronicle Editor Phil
Bronstein. "They are obviously as wired electronically and as into the Web
as any region in the country."

During a recent visit to Zalles' laundry, only one of 10 customers was
reading the Chronicle, and he wasn't a subscriber. Four were reading from
laptops, and all said the Internet was their preferred source for news.

Brian Shire, a 24-year-old computer programmer, said the Internet made
more sense for him because he didn't have time for a paper every day and
because the sites he visited posted stories that other readers
recommended. "I don't go to the Chronicle's website unless something
floats to the surface," Shire said. "Maybe if I had more time."

Katy Kavanaugh, a 42-year-old filmmaker, said she checked the Chronicle's
website, along with those of the New York Times and the Washington Post,
but didn't subscribe.

The Chronicle's decline can't be blamed solely on the Internet. Other
factors include tough competition from other Bay Area papers and a
cosmopolitan audience that reads national publications such as the New
York Times.

But even in an industry plagued by sliding circulation and stagnant ad
sales, the Chronicle's $62.5-million loss last year raised eyebrows, given
that papers as a whole are three times as profitable as the average
company in the Standard & Poor's 500. The Chronicle is owned by closely
held Hearst Corp., which won't detail its finances. The loss figure
emerged when the company negotiated with the union to reduce staffing
levels. An auditor for the union found no grounds to challenge the claim.

Outsiders attribute a large part of the loss to the decline in classified
advertising. "Newspaper finances are a three-legged stool: classifieds,
display advertising and circulation," said Scott Rosenberg, a former
writer at San Francisco's Examiner, who left a decade ago to co-found
Salon. "The classified leg has been kicked out, so the stool falls."

A study last year said Craigslist alone had by then cost Bay Area papers
as much as $65 million in help-wanted ads.

As for the drop in circulation, Chronicle Publisher Frank Vega said that
nearly all of it was deliberate, as the company curtailed deeply
discounted copies and other money-losing efforts.

Like other papers, the Chronicle is cutting circulation gimmicks such as
"sponsored copies," in which a supermarket or other big advertiser
underwrites freebies in a given neighborhood so that every home receives
its ads. Such tricks gave the paper more readers, allowing it to charge
other advertisers more, but prompted readers and advertisers to question
the value of what they were getting.

"If you keep offering something at half-price, that's what people will
think it's worth," Vega said.

But full-price sales of weekday papers also fell 5% or more, according to
Vega's figures. The overall weekday circulation of 392,000 is a far cry
from the 1990 peak of 566,020, and that cumulative 31% drop is more than
double the roughly 15% decline industrywide.

For the first hundred years after its 1865 founding by brothers Charles
and M.H. de Young, the Chronicle was a scrappy civic institution. Back
then, the paper used the city's telegraph office to get the local scoop on
Lincoln's assassination, and it ran stories by Bret Harte and Mark Twain,
who contributed theater reviews. Neither got a byline.

When it took on City Hall, it really took on City Hall. After an expose on
a mayoral candidate prompted the official to question the virtue of the De
Youngs' mother, Charles shot and wounded him. After the candidate won, his
son avenged the new mayor, killing Charles de Young in 1880.

The paper survived the 1906 earthquake without missing a day of
publication. It battled for circulation with larger papers, including the
Examiner, which a young William Randolph Hearst was using as the flagship
of a burgeoning media empire.

In the 1950s and early '60s, an influx of talent that included Dear Abby
columnist Abigail Van Buren and the return from the Examiner of colorful
columnist Herb Caen helped the Chronicle overtake Hearst's paper.

But the paper also earned a reputation for quirkiness. The most-cited
example was 1963's multi-part series documenting the poor state of the
city's coffee.

The Chronicle was the butt of a joke in the movie "All the President's
Men" about its supposed willingness to print forecasts of the previous
day's weather for those who missed it.

"People like to pick on the Chronicle. It's their familiar pal . you can
kick it around, but you still turn to it for your news," said 13-year
reporter Kevin Fagan, who covers the homeless.

There have been some notable journalistic achievements. The Chronicle
assigned the country's first full-time AIDS reporter in 1983 and won a
Pulitzer Prize for architectural criticism in 1990, a special Pulitzer for
Herb Caen in 1996 and a Pulitzer for photography this year.

The Chronicle and the Examiner were yoked together for 35 years in a joint
operating agreement that split profit. The Examiner moved to afternoon
publication, and it suffered from the same shifts in subscriber habits
that undermined afternoon papers nationally. The Chronicle had little
incentive to invest or improve because the smaller Examiner would take
half of any new profit.

Amid squabbling among the De Young heirs, Hearst Corp. bought the
Chronicle for $660 million in 2000 and sold the Examiner (now owned by
Denver billionaire Phil Anschutz and distributed as a free tabloid).

By then, readers already were moving to the Internet, and the Chronicle
had missed its best shot at dominating the suburbs and Silicon Valley,
where dailies such as the San Jose Mercury News had already won over many
readers.

"Instead of covering the heck out of the outlying areas, it allowed the
competitors to do that," said John McManus, director of the GradeTheNews
project at San Jose State University.

The 1997 death of Caen, whose staccato observations graced the paper as
often as six days a week, was also a blow.

"No one could miss that column and still be in the know," said former city
Supervisor Angela Alioto, the daughter of a San Francisco mayor.

Now comes the assault from the still-evolving news alternatives on the
Web.

The Chronicle and its peers elsewhere are fighting back by beefing up
their own websites.

Bronstein, who ran the Examiner for Hearst before becoming Chronicle
editor five years ago, plans online experiments such as running commentary
or other reports from private citizens on his paper's SFGate.com website.

"It's the cutting edge," said Bronstein, recently divorced from actress
Sharon Stone. "If it goes over a cliff or it takes off, the opportunity is
here."

SFGate drew 3.9 million users in October, according to Nielsen/NetRatings,
about even with the site of the twice-as-large Los Angeles Times and
trailing only the New York Times, USA Today and Washington Post among
newspaper websites.

Monthly readership at newspaper sites overall is up 11% in the last year
to 39 million.

As a result, newspapers are seeing a rapid rise in online advertising
revenue, to a projected $2 billion this year from $655 million in 2002,
according to media consulting firm Borrell Associates Inc. That's a
respectable chunk of all Internet advertising, which is climbing 28%
annually and will surpass $12 billion this year, according to Citigroup
Investment Research.

But print advertising is stuck at the same $48-billion level as it was in
2000, and the bump in online ads can't fix that, said Borrell's Gordon
Borrell: "It's like a helium balloon trying to lift an aircraft carrier
out of the water."

Chronicle Publisher Vega, installed this year after leading the combined
operations of two Detroit papers, said he wanted to increase SFGate's
revenue by charging readers for whatever they value most. "What's our
franchise? I've got to figure what that is," Vega said.

Many papers have tried similar experiments but retreated after readers
defected. The Los Angeles Times tried charging nonsubscribers for
entertainment features from August 2003 to May 2005. The New York Times
recently began charging nonsubscribers for access to its archives and
columnists, and a better-than-expected 135,000 of them have signed up.

Vega still sees the website as a way to induce more people to buy the
paper, even as he cuts the newsroom staff to a projected 400 from 570 five
years ago.

Newspaper executives are rooting for him, but Vega is battling against a
generational shift that not even he thinks will stop.

"I hate to read the obits because half of those people are our
subscribers," Vega said. "But I think newspapers, if they're run properly,
still have a lot of legs."

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# posted by newshare @ 12:23 PM