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An opinion column, with comments, from Editor & Publisher Online

Newspaper Saved! Newspaper Saved! Read All About It!

Medill's Joe Mathewson, a former Wall Street Journal reporter, banker, and
corporate lawyer, argues for a radical re-thinking of the economics of
American newspapers, and outlines several scenarios for going the
non-profit route.

By Joe Mathewson
at the Medill School of Journalism

(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.

***

READER COMMENTS

If you want to have your reactions to this article included below, e-mail
us at letters@editorandpublisher.com.

***

Saving Newspapers

Thinkers make a country great. Thanks to Joe Mathewson for thinking this
one through. Now, if moderate thinking citizens could just get their
radical representatives in government to agree to change the rules to help
citizen founded non-profit newspapers to start up and thrive. Sadly, the
way our country is headed, I think our governors would prefer to support
propaganda, rather than information.

Mary Hooper
Bakersville, N.C.

***

Non-profit Possible in San Diego

The LA Times reported that David Copley, who recently had a heart
transplant, has looked at the idea of turning the San Diego Union-Tribune
into a non-profit when the day comes that he passes away.

Gary Warner
Travel Editor
The Orange County Register

Ed's Note: In his Sept. 29 profile of the Copley legacy in The Los Angeles
Times, James Rainey writes: "Several former Copley executives said they
thought that the publisher would leave his empire to a foundation, with
the proceeds going to benefit charity or perhaps a journalism school."

***

REIT Clarification of Joe Mathewson's Story

Just to clarify the REIT rules, which were somewhat mischaracterized by
Joe Mathewson (Newspaper Saved! Newspaper Saved! Read All About It!, Dec.
8), REITs are required to distribute at least 90% of their taxable income
to shareholders each year in the form of dividends. In exchange for doing
so, a REIT is granted a dollar-dollar deduction from corporate taxation.
So, if the XYZ REIT chooses to distribute 96% of its taxable income to
shareholders, it is subject to taxation only on the 4% it retains. It is
not a blanket exemption from taxation, however, and the tradeoff is that
REITs are left with less cash on hand than non-REITs.

Jay Hyde
Vice President, Communications
National Association of Real Estate Investment Trusts (NAREIT)

***

Regarding Joe Mathewson's Article

Why can't more people with Joe Mathewson's outlook on newspapers be among
the ranks of our government and among those with the financial resources
(i.e. ownership of newspapers) needed to make the important and valuable
changes he suggests for newspapers.

The pundits say newspapers are dinosaurs, but they don't have to be. Many
newspapers that have managed to keep running have lost much of their
influence because they are subject to corporate, late-capitalist greed in
the form of the desire to maximize profits at the expense of quality
journalism that serves readers and the greater public good. Economics in
this country have progressed to the level at which big business is no
longer serving customers, but bending at the will of stockholders.
Newspapers should not be subjected to this marketplace.

Non-profit papers like the St. Petersburg Times and the Christian Science
Monitor have managed to retain extensive quality coverage because they are
not held to the behest of stockholders who worry that their portfolios
might lose value. While for-profit papers cut their newsroom staffs and
eliminate foreign bureaus, non-profit papers refuse to give into the
tendency to rely extensively on wire services for coverage that is best
produced by staffers at individual newspapers who preserve diversity in
news coverage.

The difference in quality is clear. While important issues go uncovered in
for-profit papers, non-profit papers haven't abandoned quality journalism
and are performing their civic duties. They are giving voice to those who
otherwise wouldn't be represented and are bringing attention to the issues
that otherwise would go unnoticed.

Mathewson's proposal is realistic and needs implementation now more than
ever. Members of Congress and corporate owners need to be pressured to
allow for this revolution.

Matthew Stone
St. Paul, Minn.

***

Journalism for Profit or Not?

I've read several articles and editorials lately about newspapers and
their falling circulation figures. Blaming the Internet seems to be the
popular thing to do. Your idea of a non-profit model is unique, at least
to me. That way, you say, you can publish what you want without fear of
reprisal or outside control being exerted. That solution alludes to the
real problem, and it is what you write. It's the product itself, just as
it usually is when a company has revenue issues.

Do editors ever pay attention to the letters that are written complaining
about biased or inaccurate coverage of the news? I see such letters
regularly. Editor's replies are predictable. 'We' are right or 'we' have
justification for what we printed. That letter writers frequently predict
coverage, and do so accurately, because of the biases in journalism
doesn't seem to ever hit home. Sometimes an event is mischaracterized.
Sometimes coverage is unbalanced. Readers keep score, and for many
readers, the two go together.

The times are changing and despite readers telling editors what they want,
the papers are not going along. They persist in following an old model
that worked when they were the only game in town, just as GM and Ford and
Chrysler did when the Japanese started marketing products here. There are
other sources of news now, but the papers have not responded by changing
the way they do business. The semiconductor makers changed when Japan
showed up and they prospered. Detroit didn't change anything except paint
schemes and is having trouble except when they give away their product.

If you think customer service consists of getting the paper delivered on
time, continue to ignore letters from readers, but do some market research
and see what comes out of it. There are a lot of people who have canceled
subscriptions because they are tired of the bias in the news. Lately, that
subject has been spoken of more and more openly, and critically. Who wants
news that can't be trusted? Verify stories when you find them. Who wants
news that can't be trusted?

There's a message here.

Joe Dantone
Austin, Texas

***

Question for Joe Mathewson

About foundations owning newspapers: Is there not some issue about their
doing this, that led the Jesse Jones foundation (Houston Endowment) to
have to sell off the Houston Chronicle?

David Sullivan

Ed's Note: If there is, we're not aware of it. Those in the know can
e-mail us at letters@editorandpublisher.com.

--------------------------------------------------------------------------------
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.

Links referenced within this article

letters@editorandpublisher.com
http://www.editorandpublisher.com/eandp/columns/mailto:letters@editorandpublisher.com
profile
http://www.latimes.com/news/printedition/front/la-na-copley29sep29,1,3156488,full.story
letters@editorandpublisher.com
http://www.editorandpublisher.com/eandp/columns/mailto:letters@editorandpublisher.com
letters@editorandpublisher.com
http://www.editorandpublisher.com/eandp/columns/mailto:letters@editorandpublisher.com

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