Editor’s Note: The following is an excerpt from “Saving Community Journalism: The Path to Profitability,” by Penelope Muse Abernathy. Copyright © 2014 by the University of North Carolina Press. Abernathy is the Knight chair in journalism and digital media economics at the University of North Carolina at Chapel Hill. This excerpt is a condensed version of Chapter Three, titled “How Newspapers Must Change.”

It’s been a little less than two decades since the Internet revolution began, and yet the change to the news landscape – and the business model that supported it – has been seismic. In the 1930s, economist Joseph Schumpeter coined the term “creative destruction” to describe how a new technology makes one industry obsolete while creating the opportunity for another to subsume or replace it. In purely economic terms, resources flow away from the aging industry (newspapers) to a vibrant successor or successors (search engines, social networks, blogs or portals). Something of an optimist, Schumpeter believed creative destruction was capitalism’s way of “re-shuffling the deck” and renewing itself.

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The recent experience of other industries that have faced creative destruction – from software companies to financial service providers – leads to this conclusion: newspapers, both large and small, need to re-create themselves for the twenty-first century. If they do not develop a plan for confronting and accommodating today’s very intrusive and disruptive technological innovations, they risk being lost in the “re-shuffling of the deck” and going the way of black-and-white motion pictures and other outdated media forms, consigned to the periphery with severely diminished prestige, influence, and profitability.

Because the creative destruction wrought by the Internet has undermined the traditional business model of news organizations by siphoning off both readers and advertisers, the critical and unique historic mission of newspapers –informing and educating the public instead of just maximizing profit – is now in jeopardy.

Therefore, it is vital for the health of our democracy that the country’s community newspapers find a path to renewal.

New technologies such as the Internet attack the business models of existing companies by leveling disruptive and potentially lethal blows to cost structure, customer base and revenue. In the digital era, community newspapers are disadvantaged in three ways:

• First, they carry into the twenty-first century huge costs associated with supporting a system of production and distribution that essentially dates to the nineteenth century. The finances of owning and operating a printing press, once a significant barrier to entry that deterred potential competitors in local markets, is now a financial albatross that puts a newspaper at a distinct disadvantage in relation to competitors who can distribute digitally for a fraction of the cost.
• Second, their readers’ habits and media preferences are changing quickly, as reflected in the dramatic declines in print circulation and household penetration over the last two decades.
• Finally, a good portion of newspaper advertising – the primary source of revenue and profit – has been lost to competitors who have the potential to provide advertisers with a more efficient return on their investment.

A Tricky Transition: Two Types of Customers

“Follow your customers and follow the money.” That is the standard advice given to industries facing the “gales of creative destruction.” But newspapers face a number of unique challenges in pursuing that strategy. A newspaper, of course, has two types of customers, and the relationship between the two is complicated, to say the least. Advertisers – not readers – actually furnish the majority of the revenue, yet, without readers, there would be no demand for the advertising.

So, while the audience for the print edition is declining and younger readers are moving online, newspapers cannot simply abandon the physical paper and follow their readers online without losing the majority of their advertising revenue, which is tied to the print edition. And because the rates for digital advertising are a tiny fraction of the price similar display space commands in the print edition, any additional advertising revenue created by attracting a larger online audience is not sufficient to support the level of journalism most papers currently provide. In many markets, given the loyalty of current readers and advertisers to the print edition, some version of the physical paper will continue to exist for some time – perhaps in a more abbreviated form, or published less frequently, but it will be an important part of the mix.

This means that the next decade will be a period of transition for community newspapers. Publishers have an option of actively managing the inevitable transition to a multimedia world of newspapering, and tailoring it to meet the needs of their markets. In order to do so, they must simultaneously pursue a three-pronged strategy of significantly cutting printing and distribution costs, even as they invest in rebuilding their customer base and revenue options digitally. Specifically, they need to:

1) Shed outdated legacy costs associated with the print era, being careful to keep pace with the changing preferences of their readers and advertisers;
2) Simultaneously build vibrant community on many platforms (digital, print and mobile), taking advantage of the interactivity of the Internet to build loyalty among both current and potential readers;
3) Aggressively pursue the new advertising revenue opportunities unleashed by the Internet, positioning the newspaper as a competitive multi-platform marketing medium.

By actively implementing this transition strategy, newspapers not only begin to follow their customers, but also position themselves to follow the money in future years. In the meantime, many publishers may come to realize that cross-platform delivery of both news and advertising is a tremendous competitive advantage over traditional rivals, such as television stations, and digital start-ups, both of which are primarily tied to a single platform.

“In this environment, you have to learn to fail quickly.”

As Charles Broadwell, publisher of the Fayetteville Observer (circulation 50,000) in eastern North Carolina, put it, “In this environment, you have to learn to fail quickly. . . .We have to try some stuff, and when it has failed or outlived its purpose, we have to move on. We have to realize that right now we are building sand castles, not fortresses.”

Shedding Legacy Costs of the Print Era

In order to “follow your customers” – and build robust and engaging digital editions across multiple platforms – newspapers need to find money they can invest in new ventures. At most newspapers, the cost of producing and distributing the print edition consumes more than half of all costs. So, with profits declining, publishers need to produce the print edition as efficiently as possible, especially as advertisers and readers move increasingly to other platforms of delivery. In recent years, newspapers of all sizes have laid off staff, centralized certain functions (such as administration or production), cut back on the amount of space devoted to news – and in some cases – cut back on back on the number of days the print edition is published. But in many instances, the savings have been pocketed and not reinvested in new digital initiatives.

There are three processes involved in creating a newspaper – creating content, aggregating (packaging) content and distributing the content. The Internet has irrevocably destroyed a barrier to entry (the printing press) and, as a result, costs associated with distributing and printing the paper are a drag on the bottom line in a digital age, especially as print advertising and circulation decline, reflecting changing media habits. However, in the digital world, newspapers can still add customer value from creating unique local content and aggregating it. Therefore, the challenge is to align the cost drivers of producing a community paper with its value drivers (content creation and aggregation). Therefore, “shedding legacy costs associated with the print edition” is not so much about cutting costs as it is about coming up with a system for financing growth – by channeling funds to areas where newspapers can still add considerable value and fulfill their historic mission of informing democracy.

Publishers have to first shed their broadsheet newspaper mindset and attachment, and instead, focus on building a robust cross-platform delivery system. They should not underestimate how difficult this can be. For one thing, it goes against conventional publishing wisdom. In the twentieth century companies that used recessionary periods to invest wisely in their core business were often able to out-maneuver their competitors. Using this logic, during downturns, newspaper publishers and editors should invest in the print edition, since it remains the “cash cow,” producing most of the revenue and all the profit. The problem with this business logic is, of course, that it ignores the changing media consumption habits of both readers and advertisers.

And there is an additional problem – the strong emotional attachment that both readers and employees have to the print edition. Compared to the physical paper, digital editions can seem to be very ephemeral substitutes. There is no press time to mark the end of the day, no sense of holding history in your hands. That is why the commitment to shed legacy costs must be made from the top down – by publishers who can anticipate and counter fallout and pushback from both employees and customers, and override their own sentimental attachments to a symbol of a fast-receding era.

When a 2011 spring flood in central Vermont destroyed the press that printed the 12,000 circulation Pulitzer-Prize-winning Rutland Herald, general manager Catherine Nelson “went into overdrive,” arranging to outsource the printing of the paper to a firm that prints more than forty newspapers and shoppers in New England. “Only when I walked through the empty press room a few weeks later,” she says, “did it suddenly hit me: an era is over. It was something of an emotional moment.”

If we were creating this newspaper today, what skills would we need?

Having adopted a cross-platform mindset, publishers then need to totally rethink their cost structure by asking this question: if we were creating this newspaper today, what skills would we need? This question should be asked of every department – the news and advertising staffs as well as the production and distribution arms. Publishers can successfully shed legacy costs a number of ways, including outsourcing printing and distribution of the paper, cutting back on the days they publish a print edition, rethinking what features they publish online and in the print edition (moving many features online, and, in the process offering a much richer reader and advertiser experience) and, finally, re-evaluating staffing needs in every department, not just the production area.

Forward-thinking publishers take an expansive view of “legacy costs”: it is any dollar expense or process associated with the “print-only” world. Can either of these be done more effectively or efficiently in a cross-platform, digital world? In today’s world, the economics of distributing a physical paper prevent publishers from allocating funds to the two processes at which newspapers can excel in the digital era – that of creating and aggregating content that attracts readers, and, in turn, advertisers.

Establish Vibrant Communities Across Many Platforms

In the digital era, a newspaper must rely solely on an intangible asset – customer loyalty – to serve as a “barrier to entry” that potential competitors must overcome. So it is critical that newspapers train their sights on following their loyal readers into the digital space.

After studying the customer base of a variety of industries, author and consultant Frederick Reichheld observed in the 1990s that the loyalty of a company’s current customers is directly correlated to its future profitability. That’s because loyal customers become, in essence, a free marketing department, recommending a product to their friends and colleagues. In the process, they buy more and sell more. To gauge the loyalty of readers, newspapers can use a simple measurement tool designed by Reichheld, which asks readers, “On a scale of 1 to 10 (with 10 being highest), would you recommend this newspaper to a friend or colleague?” To account for grade inflation, only those readers who answer “9” or “10” are considered loyal. The very good news is most readers of community newspapers remain exceptionally loyal to both the print and digital editions.

Readers are “loyal” to newspapers that they perceive are “the most credible and comprehensive source of news and information” they “care about.” So, in order to retain the loyalty of current readers and then attract new ones, editors need to understand what news readers “care about” and then provide that content in an engaging way on whatever medium or mediums readers are using. With more and more consumers comfortable toggling among multiple media platforms – their phone, tablets and laptops – newspaper publishers need to attract a new generation of loyal online readers, as well as convince current loyal readers of the print edition to sample the digital versions. This means newspapers need to be multi-platform mediums, designed to engage loyal readers – regardless of whether they are on the website, or holding a physical paper or tablet in their hands.

In the pre-digital age, the newspaper created and aggregated content and defined community around geographic or political boundaries. In the digital age, large search engines and social networking sites have supplanted the aggregation function and redefined community around special interests. Readers often volunteer that while they identify with the geographic community in which they live, they also passionately care about such topics as sports, or parenting, or local politics. In other words, they also feel very connected to these smaller “communities of special interests,” often populated with friends and neighbors.

Many newspapers are already attempting to serve these communities in the print edition through the sports pages, or the lifestyle and society sections. But they have failed to re-create similar “community” in their digital version where editors can use the interactivity and interconnectedness of the Internet to significantly enhance a reader’s attachment to the paper.

In a highly publicized example of building community based on an affinity for certain values or subjects, CEO Clark Gilbert at the Deseret (Utah) News, a 90,000 circulation daily owned by the Mormon Church, reorganized news coverage around six areas that extensive research identified were of special interest to readers of the paper: family, faith, educational excellence, media values, financial responsibilities, and care for the poor.

Reader research conducted by the University of North Carolina in a half dozen geographic communities located in both urban and rural areas identified at least five sub “communities of special interests” grouped around such topics as sports, family life, culture, daily comings-and-goings, and social life. Within these broad groups, passions often varied considerably by region of the country or by ethnicity. For example, in the rural South, many sports enthusiasts not only were passionate about local prep sports but also were huge fans of NASCAR racing. In Chicago, readers of ethnic newspaper tended to be passionate about following popular sports in their homeland, such as soccer or cricket.

Not surprisingly, social life was of special interest to teens and young adults, regardless of region or ethnicity. That is why Magdalena Pantelis, the general manager of the 105-year-old Polish Daily News, has added a section that covers local concerts and events in a way that is “a little more gossipy – or lighter – than the other news stories” and has begun streaming live video of these events on the paper’s website, accessible for viewing over mobile phones. “The newest generation (of Polish immigrants) – those who have come in the last decade since Poland joined the European Union – tend to be much younger and professionally successful,” she says. “They are very connected to the cultural scene and know the local Polish artists and musicians, as well as the successful national ones.”

Newspapers in the digital age need to think of themselves as the “glue that binds” multiple communities…

Newspapers in the digital age need to think of themselves as the “glue that binds” multiple communities to one another – the geographic community and the others built around shared passions and affiliations. To build loyal and passionate reader engagement across multiple platforms (print, digital and mobile), editors must take a very expansive view of their responsibility to nurture not only a traditional geographic sense of community, but also communities defined by shared passions and affiliations. As a bonus, these newspapers are able to offer advertisers the ability to target a message to an engaged audience that cares passionately about a certain subject.

Aggressively Pursue New Revenue with Advertisers

For many publishers, the “disconnect” with the reality they face in the marketplace occurs at this point. Even if they significantly increase readership of their digital and mobile editions – and more local businesses decide to advertise online – they do not see how they can compensate for lost print revenue when digital newspaper ad rates are so low. So, before they can “follow the money,” publishers need to understand the history of the digital rate problem, which harkens back to the dotcom era, when the goal for new websites was to “attract eyeballs” and “build traffic.” Portals, followed in more recent years by search engines, reach a mass audience, and the digital rates these online companies charge is based either on scale or the actual number of people who click on an advertisement. Most community newspapers initially set their rates using these same measures, which is why digital advertising brings in only a fraction (one-tenth or one-twentieth) of the revenue from the print edition.

In recent years, however, as web marketing has matured, there has been a shift among a growing number of advertisers away from “mass audiences” toward “engaged audiences” who are much more likely to notice advertisements adjacent to content that readers care about. Given the strong loyalty of current readers, newspapers in many of the markets are the best medium for delivering an engaged audience to local businesses – better than the local radio station or television station, as well as digital competitors. Therefore, publishers need to re-think and re-calculate the actual value they deliver to local advertisers, and then adjust their rates accordingly.

They also needed to understand the tremendous marketing potential unleashed by the Internet, and how newspapers can benefit. In the twentieth century, economists generally assumed that all media companies were playing a “zero-sum game.” Since the amount of money spent on advertising (adjusted for inflation and economic cycles) stayed relatively constant, a new medium (such as television) benefitted at the expense of the existing mediums (newspapers and magazines) by taking advertising dollars away from them. However, recent research has cast serious doubt on this notion of a “zero-sum game” – most especially since the Internet has opened a variety of new channels and a whole new type of marketing, built around an interactivity and immediacy in advertising and marketing that was impossible in the twentieth century. So while print advertising may have declined dramatically since 2000, there are other potential sources of revenue for newspapers to pursue – provided they are positioned as a multi-platform medium, and not a print-only one.

Publishers who successfully and profitably pursue new advertising revenue opportunities adopt a three-step sales retooling process. First, they revamp the rate card and ad pricing structure to entice local merchants to use at least three different “newspaper” mediums (including the print edition, web site, and mobile). “Bundled” sales got a bad reputation in the early 2000s, when many newspapers gave away the online component. However, recent industry research found that advertisers who use two or more platforms in tandem substantially increase both the reach and effectiveness of their message by as much as fifty percent. Therefore, the pricing of cross-platform newspaper advertising needs to reflect the real value that a bundled sale of the print and online editions actually delivers.

After revamping the rate card, publishers must rework their compensation plans so that they reward sales representatives who sell advertisers on matching their messages with the best medium available, and delivering their messages across the many platforms offered by the newspaper. Simultaneously, they need to develop a very structured training program, teaching sales representatives how to move from selling space in the print edition to selling solutions.

“We have a very small retail base here in Romney,” says Sallie See of the 7,000 circulation West Virginia’s Hampshire Review. “So I look at where our readers are shopping and working in adjacent counties and I explain to those businesses why they have to be advertising with us – why we are the best way to reach their customers in Hampshire County.”

The Santa Rosa Press Democrat in California (circulation 55,000) set up an in-house digital-ad agency that helps local advertisers with everything from search-engine optimization to website development and the use of social media. “We’re just following the money,” says publisher Bruce Kyse. “There’s a real need in the market for that expertise, and if we don’t provide it, someone else will.”

Similarly, the Chicago-based weekly La Raza (circulation 150,000) offers a “360 solution” that includes mobile and event sponsorship. “Our national advertisers demand it,” says publisher Jimena Catarivas. “Many of our local advertisers don’t take advantage of it yet – but that is the way the market is going.”

As these examples illustrate, the very good news is that newspapers are no longer playing a “zero-sum game” – consigned to the periphery as other mediums eat away at their print advertising franchise. But, as Kyse warns, newspapers need to aggressively pursue these new forms of revenue or risk being shut out of the market by competitors who get there first.

The 30 Percent Solution

Based on his experience in other industries, Richard Foster, senior fellow at Yale University and author of “Creative Destruction: Why Companies that are Built to Last Underperform the Market,” concludes there is a very small window of opportunity for a firm to respond to a disruptive innovation. In order to stay competitive and survive, companies must pursue “transformative change” of their business models “keeping pace with the change in the market.” His proxy for the market is the S&P (Standard and Poor’s) 500 composed of the world’s 500 largest companies in terms of market value. Over the latter half of the 20th century, the average “lifespan” of companies on the S&P 500 dropped from 50 years to a mere 16. This means that there is an average annual turnover of six percent in the companies listed on the S&P 500. It also suggests that “the market” is turning over – or changing – at a rate of six percent annually. So, it follows that in order to “keep pace with the market,” a publisher should strive to transform a newspaper’s business model at the same rate.

Put another way, this means that in order to keep pace with the market around them – and to preclude obsolescence at the hands of competitors – newspapers need to have in place a strategy that aims for an average annual six percent decrease in costs, coupled with a matching increase in new revenue. Therefore, at the end of five years, newspapers should aim for a 30 percent change in both costs and revenue.

The roadmap to recovery laid out here assumes that all newspapers are on the first leg of a journey, from the print-only world inhabited yesterday to tomorrow’s destination. Over the next decade, some community papers may move to digital-only delivery. Many others may conclude that cross-platform delivery is profitable and a key point of differentiation between them and other local competitors. Regardless, community newspapers need to respond to the challenges they are facing by pursuing the three-pronged strategy of shedding legacy costs while simultaneously building vibrant communities of readers on many platforms. This then allows them to profitably pursue new advertising opportunities.

Newspapers that survive and thrive will have an ability to regroup, re-imagine the possibilities in this changed world order, and then rebuild using a strategic framework, such as the one laid out here, to measure progress and adjust course.

— From “Saving Community Journalism: The Path to Profitability,” by Penelope Muse Abernathy. Copyright © 2014 by the University of North Carolina Press. Used by permission of the publisher. www.uncpress.unc.edu.  Learn more at the book website:  savingcommunityjournalism.com.