The Real Reason Newspapers Are Losing Money, And Why Bailing Out Failing Newspapers Would Create Moral Hazard in the Media

Conventional wisdom is that the Internet is responsible for destroying the profits of traditional print media like newspapers.

But Michael Moore and Sean Paul Kelley are blaming the demise of newspapers on simple greed.

Michael Moore said in September:

It’s not the Internet that has killed newspapers ...

Instead, he said, it’s corporate greed. “These newspapers have slit their own throats,” he said. “Good riddance.”

Moore said that newspapers, bought up by corporations in the last generation, have pursued profits at the expense of news gathering. By basing their businesses on advertising over circulation, newspaper owners have neglected their true economic base and core constituency, he said...

And Moore cited newspapers like those in Baltimore or Detroit, his home town, with firing reporters that cover subjects that affect the community.

Ultimately, he said, this was self-defeating. It would be like GM deciding to discourage people from learning how to drive, he said.

“It’s their own greed, their own stupidity,” he said...

Similarly, Sean Paul Kelley writes:

I don't buy all the hype that the internet is even the primary culprit of the demise of journalism. The primary culprit is the same as it is all over the country, in every industry and in government: equity extraction.

Let me explain, in short: when executives expect unrealistic profits of 20% and higher per annum on businesses something has got to give. It's an unnatural and unsustainable growth rate. For the first ten or so years of a small to medium size company's life? Sure. But when you are 3M, or GE? Unrealistic and ultimately impossible.

So, when such rates cannot be achieved by organic growth in the business, executives start shaving off perceived fat and before they know it they're cutting off the muscle and then shaving off bone chips. And when they've gotten to the bone chips they borrow other people's money to buy new companies, load up those companies with debt and extract equity form them and then because it looks like the parent is still growing award themselves huge bonuses. It's a shell game.

That is what has happened to the news industry in America. The excessive obsession with unnaturally high profits has led to a vicious circle of cutting budgets, providing less services, which is then followed by even more drastic cuts. The local San Antonio paper is a great example of this. Twenty years ago there were two large dailies in my hometown. Both competed with each other for real scoops. Both had book reviews by local writers, providing local jobs. Both covered the local arts and sports scene. Both covered local politics in depth and local and state news in depth. Both had vigorous investigative teams. Both had bureaus in Mexico and both had offices and reporters on the ground in DC.

And then corner offices of Gannet and Harte-Hanks were populated with Kinsey-esque managers and the rout was on ... So, today, San Antonio has one daily that is as flimsy and tiny as the local alternative ... And 80% of this happened before ... the internet. All in the name of higher industry profits--not some overwhelming fear of the world wide inter-tubes. So, who's profiting? Certainly not the intellectual vigor of the locals? And certainly not the writers who are all now 'journalism entreprenuers.' The only people who profited are the executives who obsessed over profits, to lard up their own bonus pool ...

You can provide a public service with small profits for a long, long time, but if you demand large ones you will destroy it. Just ask the big banks.

Moral Hazard for Newspapers

There has been talk of bailing out newspapers for months.

But the newspapers have largely driven themselves into the ground with their never-ending drive for higher profits, which led to a reduction in news bureaus, investigation and real reporting, and an increase in reliance on government and corporate press releases.

The newspapers made a speculative gamble that reducing real reporting and replacing it with puff pieces would increase its profits, just as the giant banks made speculative gambles on subprime mortgages, derivatives, and other junk, and largely abandoned the boring, traditional business of depository banking.

Bailing out these newspapers would be a form of moral hazard equivalent to bailing out the giant banks. Instead, we should let the bad gamblers lose, and make room for companies that will actually serve a public need.

The banking industry has become more and more consolidated, which has decreased financial stability.

Likewise, Dan Rather points out that “roughly 80 percent” of the media is controlled by no more than six, and possibly as few as four, corporations. As I wrote in July:

This fact has been documented for years, as shown by the following must-see charts prepared by:

• Media Channel

• The Nation

• Free Press

***

This image gives a sense of the decline in diversity in media ownership over the last couple of decades:

If traditional newspaper companies are bailed out, they will be encouraged to continue their business-as-usual, and new, fresh media voices will face a handicap to competition (just as the small banks are now unable to compete fairly against the too big to fails).

We need more real reporting in this country, not less. Bailing out the traditional media will create more consolidation, just as it has in the banking industry.

The last thing we need is moral hazard in media.

What Do Readers Want?

As I wrote in September:

President Obama said yesterday:

I am concerned that if the direction of the news is all blogosphere, all opinions, with no serious fact-checking, no serious attempts to put stories in context, that what you will end up getting is people shouting at each other across the void but not a lot of mutual understanding.

But as Dan Rather pointed out in July, the quality of journalism in the mainstream media has eroded considerably, and news has been corporatized, politicized, and trivialized...

No wonder trust in the news media is crumbling.

Indeed, people want change - that's why we voted for Obama - but as Newseek's Evan Thomas admitted:

By definition, establishments believe in propping up the existing order. Members of the ruling class have a vested interest in keeping things pretty much the way they are. Safeguarding the status quo, protecting traditional institutions, can be healthy and useful, stabilizing and reassuring....

"If you are of the establishment persuasion (and I am). . . ."

So traditional newspapers are also losing readers to the extent they are writing puff pieces instead of writing the kinds of things people want to read: hard-hitting stories about what is going on in the country and the world.

Finally, as I wrote in March, the whole Internet-versus-traditional-media discussion misses the deeper truth:

The whole debate about blogs versus mainstream media is nonsense.

In fact, many of the world's top PhD economics professors and financial advisors have their own blogs...

The same is true in every other field: politics, science, history, international relations, etc.

So what is "news"? What the largest newspapers choose to cover? Or what various leading experts are saying - and oftentimes heatedly debating one against the other?

The popularity of some reliable internet news sources are growing by leaps and bounds. For example, web news sources which run hard-hitting investigative news stories on the economy - and do not simply defer to Bernanke, Geithner, Summers and other people "of the establishment persuasion" - are gaining more and more readers.

It is not because it is some new, flashy media. It's because people want to know what is going on ... and some of the best reporting can now be found on the web.

Subtle, Unintentional Propaganda?

If there are bailouts of the newspaper industry, will the government take ownership of the media corporations, as it has in AIG and some of the giant banks?

Will that - in turn - lead to a situation in which the government representatives subtly and innocently censors anti-government stories? After all, the object of criticism might be the employer or friend of the government representatives on the newspaper board.

Indeed, the most cynical view is that this could eventually open the door to Pravda-style government control of media.

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