Death By Innovation: How Newspapers Ruined Their Own Industry

Credit: Pixabay Creative Commons license

The death of the newspaper industry is a legend-in-the-making story about managers who oppose change. It’s also a lesson in how to undermine innovation.

Business schools and business books often cite the collapse of Eastman Kodak as a leading example of what happens to companies when their managers refuse to innovate. Kodak dominated print photography for decades and fought against the transition to digital until too late.

“More than 130 years after a ‘not especially gifted’ high school dropout, George Eastman, founded the camera company that dominated photography for most of the 20th century, Eastman Kodak filed for bankruptcy protection in the U.S. on Thursday,” The Guardian newspaper said on Jan. 19, 2012.

Part of the company eventually came out of bankruptcy and focuses today on a much smaller market: business imaging.

The Kodak failure is minor compared to the state of the newspaper industry. Print newspapers are quickly shrinking staffs, budgets and product sizes even during a growing economy.

Although some seem to have a future online — the New York Times is a notable example — the print versions will cease to exist at some point in the near future. Their costly newsprint, printing plants and manual circulation systems are too expensive to compete with digital publishing that has none of these costs.

Like Kodak, newspapers waited until too late to innovate aggressively and prepare for the massive changes resulting from the digital distribution of information. Newspapers closed or suffered layoffs at an alarming rate during the 2008 Great Recession and will do so again during the next recession.

The (Denver) Post has cut its staff about 70 percent since Alden and its founder Randall Smith took control in 2011, according to data from the Denver Newspaper Guild. — CNBC, June 16, 2018

How did an industry with near monopoly status in local markets get to this point? They did it in 10 ways involving slow innovation, no innovation or resistance to it.

1 — They saw digital as a threat.

Digital wasn’t just a threat to the print business. It was a personal threat to the compensation of executives, senior managers and middle managers.

Credit: Pew Research Center

Newspapers often use management by objectives in their compensations models. Pay raises, bonuses and commissions depend on achieving targets for advertising sales and circulation subscriptions.

Editors saw the threat as an attack on their readership. Newspaper websites pulled readers and advertisers away from the print product. Even worse, managers received little or no compensation tied to digital performance.

Innovation requires a willingness to take risks even at the potential expense of the core business. It shouldn’t come at a cost to the compensation of managers and employees.

2 — They jammed a print business model into an online environment.

Publishers and circulation managers in particular believed that newspaper websites should require paid subscriptions in the same way that most newspapers require them.

From the beginning, they made repeated attempts to make people pay for access. Nearly all of them failed, but they continued to spend money, use valuable time and energy, and chase away website visitors with more attempts. Free TV station websites gained customers as a result.

One exception was the New York Times, which made a substantial investment in new content for a paid online product that went far beyond the daily print version.

“Digital-only subscriptions totaled approximately 2,644,000 at the end of the fourth quarter of 2017, a net increase of 157,000 subscriptions compared with the end of the third quarter of 2017 and a 41.8 percent increase compared with the end of the fourth quarter of 2016.” — The New York Times

Publishers didn’t understand that people could now get local news, sports results, weather forecasts and other information from free websites produced by TV stations, other businesses and a wide variety of nonprofits, schools and government agencies.

Innovation thrives in part because of creative thinking and a new way of looking at a business. It doesn’t thrive with restrictions from old and sometimes outdated rules.

The cost structure of print newspapers can’t compete with more efficient digital publishing. Credit: Pixabay Creative Commons license

3 — They didn’t understand they lost their monopoly status.

Newspapers in recent decades largely had a monopoly status in the cities and towns where they were located. As a result, they had exceptional reach and control over readership and advertising.

During the 1990s, rising national websites offered much of the same information newspapers had traditionally offered such as TV programming, stock quotes, national and international news, national sports news, cartoons, recipes, columnists and movie reviews. Those sections in newspapers shrank or even vanished in response.

Even more painfully came the competitors to advertising, especially the highly lucrative classified ad categories of employment (Indeed and Monster), automotive (AutoTrader, Cars.com and many more) and real estate (Zillow and Realtor.com). In response, many newspaper companies tried to protect their employment advertising business and instead destroyed it by partnering with the now-defunct Yahoo! HotJobs.

Local innovators learned how to publish their own local news, weather and sports. The above mentioned nonprofits, schools and government agencies built websites that had much more information than newspapers could offer in print because of space limitations. No such limitations exist on a website.

Successful innovation is a timely, proactive response to a change in the business environment. It requires an open mind and careful observation of trends in the community and industry.

4 — They undermined their own innovators.

Many entrepreneurs within major newspapers were required to follow harsh rules that undermined their own profitability.

One newspaper company required its own website operation to pay $1 million a year for the right to publish the newspaper’s content. The same newspaper was making a small fraction of that amount by selling it to other electronic services such as LexisNexis.

Exorbitant fees prevented profitability, which in turn raised accusations that newspaper websites weren’t financially viable. The lack of “profitability” also undercut future growth and critical investments in content and staff.

Internal jealousy and opposition blocks innovation. Executive management has a responsibility to remedy the causes of any opposition. If necessary, those remedies include firing or demoting managers who stand in the way of innovation.

5 — They either over invested or under invested online.

Credit: Pew Research Center

Some newspaper companies did make major investments in online operations during the early years of web browsing. But the investments were so large that the financial losses resulted in massive pullbacks and staff layoffs.

In their case, they invested too early in online before online advertising revenue had risen enough. The financial scars made them reluctant about future large investments. When the Great Recession hit, they could no longer afford big investments at all.

Managers who are given the responsibility for innovating a new product, service, division or even company need constant vigilance over the rate and timing of investments.

6 — They got addicted to 40 percent profit margins.

Astonishingly, some newspapers achieved profit margins as high as 40 percent as a result of having a local monopoly. It was a drug too good to give up.

As print margins started declining, these same newspapers opposed online investments in order to protect the print profit. It was a fixation on short term solutions to smaller problems at the expense of much bigger problems in the years ahead.

Few print newspapers if any now enjoy 40 percent profit margins. As a result, low margins inhibit innovation because of the potential risk of failure and unacceptable costs.

“The Richmond Times-Dispatch on Monday laid off 33 full-time employees and announced a reorganization of the printed newspaper as a result of declines in print revenue.” - The Times-Dispatch, April 3, 2017

7 — They got lazy.

Google and executives at other online companies were famously known for working more than 100 hours a week to build their high-growth companies. Likewise, those same companies had lucrative compensation packages for people in middle management to encourage their own exceptional workload and a constant focus on innovation.

Anecdotally, I didn’t know any newspaper executives who regularly worked those kind of hours during a lifetime in the industry. I certainly didn’t know any managers in the lower ranks who worked more than 50–55 hours a week on a regular basis because they weren’t paid to work that way. Besides, the high profit margins needed protecting.

No newspaper executive or senior manager will ever admit to being lazy, which is a harsh and relative term. Some like myself did have temporary spikes in their hours, especially during budget time. But it’s true that they simply were outworked by the competition.

“The other piece that gets overlooked in the Google story is the value of hard work. When reporters write about Google, they write about it as if it was inevitable. The actual experience was more like, ‘Could you work 130 hours in a week?’” said Marissa Mayer, former Yahoo! CEO and one of the first Google employees.
“The answer is yes, if you’re strategic about when you sleep, when you shower, and how often you go to the bathroom. The nap rooms at Google were there because it was safer to stay in the office than walk to your car at 3 a.m. For my first five years, I did at least one all-nighter a week, except when I was on vacation — and the vacations were few and far between.”

8 — Executives paid themselves first.

As a fairly successful small business owner after leaving senior management, I learned the survival of my newspaper consulting business came first and my personal financial desires came second. I pocketed the smallest amount of monthly compensation possible and waited until the end of every year either to take profit out of the business or reinvest the profit into it.

Even during the depths of the recession, some newspaper companies increased their executive compensation despite plunging profits. They also gave away zero-based stock options that diluted their stock equity. (A zero-based option is the right to buy company stock without having to pay for it, then sell it on the market at full price.)

In the meantime, many of these executives laid off employees, stopped salary increases, killed pensions and ended matching contributions for 401k plans. Demotivating employees while increasing executive compensation is not a way to protect the business or encourage innovation.

9 — They took on too much debt.

Some newspaper owners recognized the severity of the trends and sold their companies. Examples include the Pulitzer family and the Graham family of the Washington Post.

Other owners went in the opposite direction. They bought the media properties including newspapers and TV stations that went up for sale before the Great Recession. Remarkably, they bought these properties even as their own numbers were declining.

When the Great Recession hit, a combination of their debt payments and plunging profits made it more difficult than ever to innovate. Some declared bankruptcy; others will declare it during the next recession.

Aggressive innovation is possible with strong financials. Google couldn’t afford the $571 million loss during the first quarter of 2018 in its Other Bets subsidiary without the company’s 22 percent net profit margin.

10 — They ignored new online streams of revenue.

Newspaper executives think of two critical business metrics for print: readers and advertisers. They provide nearly all of the revenue that has made newspapers so profitable over decades and even centuries.

But the same isn’t quite true about online publishing because competition decreases the potential revenue from readers and advertisers. Some newspaper publishers understood that point. They tried to diversify into other revenue streams such as website hosting and design and even selling the products of competitors such as Google AdWords.

Many publishers became so captivated by trying to defend plunging profit margins that they had no time, money or staff to pursue other streams of revenue with enough success.

Newspapers as we have known them are going through historic changes that showcase the impact of innovation at a societal level on an entire industry. It also showcases what happens when the industry struggles with its own innovation in response.