By the Project for Excellence in Journalism and Rick Edmonds of The Poynter Institute

Newspapers are still far from dead, but the language of the obituary is creeping in. The industry has been in declining health for some time now. It got sicker rather than better in 2007, and 2008 offers no prospect of a quick cure.

The dismal fundamentals, chronicled in the last several years of these reports, continue. Basic indicators were as bad or worse in 2007 than in 2006:

• Circulation continues to fall at about 2.5% year-to-year for dailies and 3.3% for Sunday editions.¹ The total reach of newspaper organizations including their online and niche products is growing, but this does not translate readily into sustaining advertising revenue.
  
• Advertising revenues, flat in 2006, fell by 7% industry-wide in 2007.² The burst of the real estate bubble took away what had been a positive for papers in the overheated markets of 2005 and 2006. Retail and national advertising were only off a little, but all categories of the once-lucrative classifieds are losing share. a gradual decline that looks to be irreversible.
  
• Despite cost-cutting initiatives earnings at public companies were also down by more than 10% for the year.³ Newsprint expenses are on the rise, and interest payments are significant for some.
  
• Newspaper company stocks were battered for a third consecutive year. McClatchy lost more than 70% of its value, Gannett 35%.⁴ Rupert Murdoch’s 60% premium bid for Dow Jones and Sam Zell’s more modest takeover offer for Tribune (both deals that closed in December) bucked the trend. Entering 2008, however, the pool of potential buyers, even at current depressed prices, looks shallow.
  
• A shrinking of news staffs and space committed to news continued though 2007 and spread from the big metros to many mid-sized papers. Some of the lost “feet on the street” end up as jobs added to online and niche, but the ambition of newspapers to cover their regions or even basic government functions in nearby exurban towns is on a sharp decline.

Bright spots? Online audience and revenues again are both up substantially, but advertising revenue growth has slowed to 20% on average, compared to 30% or more in the earlier years of this decade.⁵ Moderately optimistic analysts now think the growth could equal print revenue losses within two to three years, which would constitute welcome equilibrium but hardly an industry turnaround.

Like fans of a struggling sports franchise, newspaper watchers typical have a “maybe-next-year” scenario. For 2008, the hope is that a collaboration of more than 400 daily papers with Yahoo will generate a kick of as much as 10% to 20% in online advertising because it will be much easier to buy and place ads under the new arrangement.

On the plus side, newspapers have improved their Web sites -- with a 24/7 diet of breaking news, an array of multimedia features and a wave of redesigns. This builds visitor traffic and induces at least some readers to spend more time on the site. Put online audience together with print, and newspapers can rightly say that they are reaching as many readers as ever.

On the other hand, the industry is no closer to charging for the growing cost of generating this content. During 2007, the New York Times ended its $50-a-year Times Select premium service, despite having 200,000 subscribers. Murdoch has decided to stop charging for some of the content of the Wall Street Journal Online, with more than 700,000 paid subscribers for the full service at $100 per year. In both instances the idea is that increases in traffic and ad revenues will more than make up for lost subscription revenue.

And beyond the slowdown in online ad revenue growth, questions are emerging about the effectiveness of ads on news Web sites. Print ads have a high-degree of acceptance among readers, and many begin the shopping week by hunting for bargains in the fat stack of Sunday newspaper inserts.

Online advertising, with its dancing mortgage offers and drop-down display ads, by contrast, is often as intrusive as the worst of television advertising. Besides, it has become clear that the typical online shopper is on a narrowly targeted buying mission and thus just as happy to search commerce-only sites (which some papers are experimenting with now in their home communities).

As for cuts, the end of 2007 and the beginning of 2008 are shaping up as a time of you-ain’t-seen-nothin’-yet. On the business side, newspapers companies are busily outsourcing, taking functions like payroll, circulation service complaints and ad production to vendors across town or as far away as India.

On the news side, the game plan is to do less with less but in an artful way that will minimize negative reader reaction. As one executive, ordered by headquarters to plan a fresh round of newsroom cuts for 2008 told us, “I’m past bleeding – we’re into amputation now.” Foreign bureaus at all but the biggest papers were decimated in 2006; current targets for deep cuts include satellite bureaus, specialty beats like science and religion, and in-house movie and television critics. What remains of stock tables is the target of more cuts, and some freestanding business sections are being collapsed to a couple of pages inside the metro section.

Phil Bronstein, executive editor of the San Francisco Chronicle, which eliminated more than 100 newsroom jobs in 2007, including that of the managing editor, put it succinctly: “We can’t afford to cover the Richmond City Council anymore,” a reference to a municipality in the Chronicle’s circulation area.⁶

This sort of development risks driving readers to seek their local news elsewhere. Few hyper-local sites have succeeded yet in generating revenue or serious meat-and-potatoes coverage. But a host of start-ups, some driven by foundation support, others funded with venture capital, are emerging to pick up business if newspaper coverage becomes truly uncompetitive. Their scale remains a question.

A year ago, we cited the sheer bulk of the newspaper industry as a saving grace. Even with numbers slightly lower at the close of 2007, nearly 50 million newspapers are sold on an average day and 117 million read one.⁷ The industry remains profitable, but it has come time to take the “obscenely” out of that commonplace observation.

On average, the industry recorded a pre-tax profit margin of about 18.5 % in 2007.⁸ Some papers were still in the cash-cow, 20%-plus range of the good old days, but many of the nation’s best metros were in the low single-digits or flirting with actual losses. Smaller newspapers – with much less direct competition – are still doing relatively well.

What is true all over is that margins have begun to decline quickly and that high fixed costs from the era of print dominance are not sustainable. That puts some papers facing the possibility of going into the red, and sales of extraneous business units or buildings and land have become commonplace.

Were print advertising losses to accelerate, it might even make sense three to five years hence to look at pulling the plug on print and rolling the dice on getting readers and advertisers to follow to a Web-only format. That would eliminate, in one swoop, the cost of paper, pressmen and circulation delivery – perhaps as much as 35% of a typical newspaper’s expense base. Still the scenario would make sense only if savings exceeded the loss of print revenues.

Certainly the last few years have wrung nearly all remaining complacency from a once-stodgy industry. A focus on online development and novel business models (for now, mostly in the early concept stage) has become universal as has urgent attention to cost control.

You could call the industry’s situation, as a friend who is expert in new media has, a “race against time.” For businesses that prospered for decades slow and steady as a tortoise, success in 2008 and beyond will require developing new sources of audience and revenue at sprint speed, while tending as well to the old print business that still pays the bills.