News media chasing the wrong story

There's a certain irony that, as the spectacular Newseum opens on Pennsylvania Avenue in Washington to celebrate the accomplishments of American journalism, within the media there is growing concern that our best days may have come and gone.

That was an overwhelming theme discussed among the newspaper editors and publishers holding their annual meeting in Washington last week amid a backdrop of accelerating declines in circulation and advertising revenue. These declines have contributed to a noticeable erosion in the quantity and quality of journalism in most of the country's newspapers, which in turn may be contributing to further declines in circulation. Many wonder whether the industry is caught in a downward cycle from which it may never emerge.

The basic story is that an industry that was based, largely, on highly profitable local monopolies suddenly has discovered that it has competitors using new technologies to deliver news and advertising at significantly lower cost. This competition has not only eroded operating profit margins that routinely exceeded 20 percent but called into question a business model in which the cost of gathering the news was financed by advertisers who had no choice but to pay the price and pass it on to their customers.

The lack of vigorous competition slowed the pace of innovation and allowed publishers and editors to make decisions about what readers wanted and needed without listening carefully to the readers themselves. Readership and "penetration rates" began to fall in many markets even before the emergence of the Internet, particularly in newer and fast-growing exurban communities and among younger readers.

That process has accelerated with the emergence of credible and convenient online alternatives.

I don't have a crystal ball to see how all this will turn out. But there are lessons to be learned from other industries that have faced similar challenges.

The first and most important is that there is no way to save the industry as long as the people who own it insist on returning to the days of 20 percent profit margins. In the long run, there is no reason to believe that the news business will become any more profitable than other competitive industries. Those aiming to survive the coming shakeout can almost expect to have little or no profit over the next five to 10 years.

A second lesson is that industry consolidation is not only necessary but desirable. Today, there are 1,437 daily newspapers in the United States, of which all but 400 have circulations of under 25,000.

At that size, it is unlikely they can ever be very efficient or, for that matter, very good.

To survive and prosper in a newly competitive media environment, newspapers need the scale necessary to achieve efficiencies in areas such as printing, advertising sales and marketing. They need to have a large enough reader base to support a core of experienced and well-paid editors and reporters. And they need to be large enough to support not only a printed newspaper but also a Web site and a range of news products the company can offer to advertisers.

Some of these scale efficiencies can be achieved when newspapers in different parts of the country are purchased by a national chain such as Gannett or McClatchy. But going forward, the real advantage will come from combining newspapers and other media outlets in a single region -- "clustering," as it is called in the industry. That doesn't mean readers won't be able to get news and advertising targeted to them -- technology makes that possible.

No doubt there will be plenty of resistance to this kind of consolidation. There will be complaints about the loss of local ownership and control, divergent viewpoints, community focus and local character -- the same complaints we've heard over the years about restaurants, booksellers, banks, hotels, hardware stores and the like.

I'd be kidding you if I didn't acknowledge that consolidation won't involve some of those trade-offs.

But it will happen because the alternative probably would be worse -- a steady and ultimately unacceptable decline in quality and profitability.

The third lesson, which follows quickly on the second, is that consolidation by itself is not a magic bullet and won't succeed in the long run if the efficiency gains are not invested back into new technology, top talent and product improvement.

Right now, many newspapers are trying to cut their way to success by not only reducing the number of employees but also reducing the size, scope and quality of their product. Space for national and international news is shrinking; news services and columnists are being dropped; coverage of business or religion or the arts is reduced or nearly eliminated. This strategy is silly on two levels.

To begin with, people are becoming better educated, more sophisticated and more global in their orientation, not less. The days are long gone when daily newspapers could satisfy readers -- particularly the younger and more affluent readers that advertisers crave -- by hiring inexperienced young reporters to write desultory stories about city council and planning board meetings or by filling much of the news hole with bowling scores, school lunch menus and bad photographs of high school sporting events.

News execs will often try to justify dumbing down their product, or making it more parochial, by explaining that local coverage is their unique competitive advantage and that readers who want more can always get it somewhere else these days, often for free online.

I'm aware of no evidence that time-stressed readers would not value having a single, convenient and trusted source for most of their news.

It hardly seems like a winning strategy to drive customers to other news sources when, with a little imagination and a modest investment, newspapers and their Web sites can acquire most of what readers want in the way of national and international news and features from quality news organizations eager to expand their reach.

If you ask me, the challenge facing our industry is not that readers have lost faith in their newspapers, but that newspapers have lost faith in their readers.

Steven Pearlstein, winner of this year's Pulitzer Prize for editorial writing, is a columnist for the Washington Post.