Way back in the first decade of the new millennium, when Craigslist seemed like the biggest threat facing newspapers, founder Craig Newmark paid visits to lots of media companies and media conferences. Yes, his site was definitely taking classified advertising away from papers, he would say. But newspapers were still spectacularly profitable, he'd add, and might be just fine if they weren't so intent on preserving those profit margins.
These days, it's an open question whether newspaper companies can maintain any kind of a profit margin at all. The New York Times seems to have turned the corner toward a modestly profitable future in which circulation revenue pays most of the bills. But The Washington Post, which billionaire Jeff Bezos agreed to buy yesterday, had been losing money since 2008.
So Newmark was definitely right that newspapers need to learn to accept much lower profit margins. But switching from a high-margin business to a low-margin one is really hard. High margins sound like a good thing, and they can be. They're evidence of what Warren Buffett — himself a long-time newspaper investor and major shareholder in the Washington Post Co. — dubbed a moat, which keeps competitors out and customers in. But when disruptive innovation threatens to breach a moat, high-margin companies usually find themselves especially ill-prepared to fight back.
That's partly because, as Clayton Christensen, Stephen Kaufman, and Willy Shih wrote in the 2008 HBR article "Innovation Killers," standard financial metrics make new investments look much less attractive than existing business lines. It's partly because managers of well-moated companies tend to turn complacent — or just don't need much skill to run such a business in the first place. (Buffett, in his latest Berkshire Hathaway shareholder letter, tells of a newspaper publisher who confessed, "I owe my exalted position in life to two great American institutions — nepotism and monopoly.") And finally, the owners or shareholders of high-margin businesses tend to see those margins as their due, and are thus unwilling to countenance lower-margin strategies. One of the things that bothered the newspaper industry most about Newmark, in fact, was that he didn't seem interested in making much of a profit at all.
The result of all this was that, while the decline of American newspapers (especially the big regional papers) was probably inevitable in the age of the Internet, the reluctance and at times inability of newspaper companies to transition from high-margin business models to low-margin ones has made things much worse. Layoffs and other cutbacks meant to preserve profit margins have only sped the decline in revenue, while bold new investments have been few. And for the most part the margins have declined anyway. Profits of more than 20% of revenue used to be common at newspaper companies. In 2012, the Pew Charitable Trusts said in its latest State of the News Media report, "the operating margin for Gannett was 9.9%, New York Times 5.4%, McClatchy 15.1%, E.W. Scripps 6.9% and A.H. Belo 8.1%. The Washington Post operated at a 9.2% loss."
Those are (apart from the Washington Post's loss, of course) still pretty healthy margins by the standards of many industries. Amazon.com, which Bezos founded in 1995 and has run ever since, has an operating margin of just 1.5%. In a time of great change and disruption, Bezos has turned low margins — usually a sign of competitive weakness — into a competitive advantage. And while not much else is clear about what his ownership of the Washington Post will be like, a willingness to countenance low margins will surely be part of it.
That's happening across the industry as papers change hands. Some of the buyers are still financial investors like Buffett, who figures that if he gets in at a low enough price and concentrates on small-market papers with a monopoly of local news, he'll make money even in a declining industry. But that's rare. Private equity firms, which have long focused on buying into declining industries, have apparently deemed the decline of newspapers too precipitous for their tastes. Most of today's new owners appear to be looking for something out of the investment beyond profit. Sometimes that's political influence and hometown boosterism, as with the local developer and hotelier who bought San Diego's daily paper. Sometimes it's the opportunity to try out a new business model, as at the Orange County Register in California. And sometimes it's just too early to tell, as with Bezos at the Post and John Henry's acquisition a few days ago of the Boston Globe. One thing that unites all of these acquirers, though, is that don't seem to have bought in expecting a 20% annual return on their investment. And that's progress, of a sort.