Monday, March 27, 2006

"Wisdom of Crowds" author says newspapers should focus on local news

James Suroweicki, a writer for The New Yorker magazine who usually focuses on business topics, gained fame in 2004 with his book, "The Wisdom of Crowds," which argued that the collected intelligence of the masses, now
easily and quickly compiled and analyzed with Internet technology, generally reaches better decisions than small groups of experts. Now he's giving some advice to the newspaper industry, in a short "Talk of the Town" column in the current New Yorker. He argues newspapers, still fabulously profitable despite gradual readership loss, can extend their life by reinvesting in quality local-news reporting and dispensing with things like stock tables and wire-service reports.


In case that doesn't work, here is the text:

by James Surowiecki
Issue of 2006-04-03
Posted 2006-03-27

Two weeks ago, when the newspaper publisher McClatchy announced that it
was buying the venerable Knight Ridder chain, for the lowball price of
$6.5 billion, McClatchy.s C.E.O., Gary Pruitt, called the deal .a vote of
confidence in the newspaper industry.. But few people bought Pruitt.s
pitch (or his stock.McClatchy.s shares have dropped nine per cent since
the deal was announced). And why would they? At this point, everyone knows
that newspapers are doomed. Lumbering apatosauruses reliant on old
technology and a creaking business model, papers are losing readers.the
Washington Post saw its circulation drop four per cent, to less than seven
hundred thousand, last year.and losing ad dollars. The Internet has
demolished the economics of the industry, allowing people to read, free,
news from many sources, and providing a cheaper platform for classified
ads. Habit may keep readers around a while longer, but spending billions
on a collection of newspapers now looks like the proverbial shuffling of
deck chairs on the Titanic.

But McClatchy.s gamble depends on a simple, if often overlooked, fact:
newspapers remain a surprisingly robust business and generate tremendous
amounts of cash every year. Most of them have profit margins that dwarf
those of the average company; McClatchy.s operating margin last year was
twenty-eight per cent, while ExxonMobil.s was around sixteen per cent, and
the typical supermarket.s is around four per cent. The reach of newspapers
remains huge. Daily circulation is around fifty-five million (not
including online readers), giving the industry more customers than any
other traditional media outlet. And those customers have the kind of
demographics that advertisers like; even as circulation has dropped,
revenue from print ads has stayed healthy, to the tune of more than
forty-seven billion dollars last year. Newspapers are classic cash cows:
solidly profitable businesses in a stagnant industry.

So why are newspapers everyone.s least favorite enterprise? One reason is
that Wall Street tends to love growth stocks, and to underplay the value
of steady cash generation. And no one likes to be in a business that.s
losing customers. Still, there.s a big difference between an industry
whose customers are fleeing en masse (camera film, say) and one in which
the decline is steady but slow; despite the current sense of panic, the
popularity of papers is decreasing only gradually. Readership fell faster
between 1970 and fifteen per cent.than it has since, and even this
audience drop-off is considerably less than what network news has endured
in recent decades. Furthermore, a good deal of the decline can be chalked
up to the life-style changes that killed the evening paper: since 1980,
the circulation of morning papers has actually risen by almost sixty per

Meanwhile, newspapers have minimized the damage by getting better at
making money off the readers kept. Some papers, such as the San
Francisco Chronicle and the Des Moines Register, have deliberately reduced
their circulation.usually by eliminating promotions and order
to trim costs and improve their demographics. Consolidation has reduced
competition to the point where there are now few multiple-newspaper
cities. And newspaper chains have become relentless in their pursuit of
cost-cutting. Although much of this has been bad for the art of
journalism, it has been very good for the bottom line.

In some sense, the newspaper industry has succumbed to a speculative rush
to judgment. People have looked at emerging trends.declining numbers of
young newspaper readers, the boom in news and advertising on the Net.and
decided that the future is already here. Yet, even in the age of
Craigslist, newspapers benefit from the so-called .network effect.. Since
lots of potential buyers read the classifieds, potential sellers are more
likely to list there, which, in turn, makes potential buyers more likely
to keep reading. That.s why seventeen billion dollars was spent on
newspaper classifieds last year. And, while the Net has eroded newspapers.
advantage in disseminating news, it has expanded their reach and
influence. The Washinton Post, despite its drop in circulation, attracted
more than eight million readers to its Web site in February, an increase
of nearly three million over the same time last year. Papers may not have
figured out how to maximize the monetary potential of this shift, but
online advertising already earns them two billion dollars a year.

The real danger is that the popular conviction that papers are doomed may
cause owners and shareholders to prefer the cash-cow approach, accepting
eventual oblivion while continuing to harvest billions of dollars in
profits, largely through cost-cutting. Settling for a tolerable short-term
future, newspapers could end up writing themselves out of the long-term
one. Yet it.s also clear that this moment of supposed doom represents a
sizable opportunity for newspapers, a chance to reinvigorate their product
and, eventually, improve the economics of their business. Seizing that
opportunity is going to require new investment, not penny-pinching.
Established, the movies, television.haven.t vanished when new
forms have come along. adapted by playing to their distinctive
strengths. (For most newspapers, this will mean abandoning things that are
ubiquitous on the Internet, like stock tables and wire stories, and
investing in content they can own, like serious local coverage and
in-depth reporting.) Newspapers, thanks to the efficiency with which managed themselves in recent years, still have the time and money
to save themselves. Instead of slowly sinking, why not steer around the

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