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MARCH 20, 2006
Technology
By Steve Rosenbush

Newspapers: From Print to Pixels

Some Old Media outfits, including soon-to-be-sold Knight Ridder, have embraced the Web. In the Digital Age, their grasp of its potential must be a lot firmer

Over the last decade, the Internet has disrupted one industry after another. Travel, music, retail, and telecommunications are just a few of the sectors that have been forced to adapt to the new reality of the Web. Now, the newspaper business is starting to feel the full force of fundamental technological change.

It's a traumatic transition. The latest ripple was felt Mar. 13, as newspaper giant Knight-Ridder (KRI ), publisher of The Miami Herald, The Philadelphia Inquirer, and 30 other dailies, announced that it would sell itself to McClatchy (MNI). The smaller chain agreed to pay $4.5 billion and assume $2 billion in debt.

MINIMAL GROWTH.  The price reflects the slump in industry revenue and market valuations. McClatchy agreed to pay the equivalent of 9.4 times 2005 earnings, according to Merrill Lynch analyst Lauren Rich Fine. She says that newspapers historically have fetched a multiple of 12 to 13 times earnings in acquisitions.

The Internet has been putting pressure on newspapers for years, but there are signs it's now forcing real changes in the way paper owners do business. Newspapers no longer own a monopoly on disseminating basic information, such as stock prices and classified ads. The New York Times (NYT ) said March 13 it would cut back on stock tables in its print edition because readers now routinely go to the Web for that information.

The loss of market power is felt across the industry. Revenue from newspaper ads is growing in the 3% range, underperforming the GDP, according to media-and-communications investment firm Veronis Suhler Stevenson.

NET VALUE.  Online advertising is on a tear, though. Consumer Internet advertising is expected to grow 25% this year, to $16 billion. And the compound annual growth rate is expected to remain above 20% for the next three years, creating a market worth $28 billion in 2009, according to Veronis Suhler.

Knight-Ridder's plight underscores the challenges facing even newspapers that embrace the Web aggressively. The company used The San Jose Mercury News, located in the heart of Silicon Valley, to get an early start in online journalism. Knight-Ridder Digital, based in San Jose, runs the Web sites for the Knight-Ridder chain. It also built Real Cities, a network of local and regional Web sites. And it invested in a number of online joint ventures in the classified and shopping arena, including CareerBuilder.com, Cars.com, and Apartments.com.

It's a significant operation, with strong growth. Knight-Ridder Digital's ad revenue jumped 54.5%, to $164.5 million, last year from 2004. It had 9.7 million average monthly visitors at the end of 2005, a 9% increase. With overall growth rate in the low single digits, online revenue is just a fraction of the total, which was $3 billion in 2005. It would have been many years before online operations became a major feature in the company's financial profile.

THE WEB, LIKE IT OR NOT.  While Knight-Ridder Digital leaves the online operations of some print and broadcast news rivals in the dust, it lacks scale in the larger world of the Web. It is dwarfed by Internet rivals such as Google (GOOG ), Craigslist, eBay (EBAY ), and others by almost any online measure. Yahoo News (YHOO ) had more than 27 million unique monthly visitors at the end of 2005, according to market researcher comScore Networks.

Google, the Internet's current behemoth, has a market cap of $101.7 billion. That's more than 20 times the value of Knight-Ridder. And when it comes to growth, there's News Corp.'s (NWS ) MySpace, which has 37.3 million unique visitors and adding 60,000 users a day, according to analyst Rich Greenfield, of Pali Research.

Newspaper companies are going to have to shift more resources to the Web, making it a much bigger part of their business models and identity. Most newspapers are just beginning to change. "Online editions have largely been an afterthought," says Richard Fetyko, an Internet services and applications analyst with investment bank Merriman Curhan Ford & Co.

PICK OF THE BUNCH.  Until recently, the newspaper industry has bet its future on the belief that its high-quality news gathering operations and brands would help it beat back rivals on the Web. Unfair as it may seem, Web sites that aggregate other providers' news reports have built up much bigger audiences than traditional news organizations offering unique high-quality reporting and analysis, much of it co-published online and in print editions.

Why visit one paper's site, when My Yahoo lets users sample feeds from an array of providers, from the Associated Press to The New York Times, CNN (TWX), and the BBC. It also incorporates features such as Yahoo! Mail, instant messaging, weather reports, stock prices, sports scores, digital maps, and more.

To catch their larger Web rivals, newspapers and other traditional news media must incorporate many of the features that the portals offer, without sacrificing the quality of their own branded content. "Newspaper companies have the major online asset that they need, which is content," Fetyko says. "Now they need to create online destinations, and it's not as easy as just putting their content on the Web site. They have got to offer people new kinds of features and ways to find content, and perhaps ways to communicate and share ideas with other readers".

LONDON CALLING -- AND LISTENING.  Newspaper sites need to incorporate tools such as Web-page tagging. That allows users to organize libraries of links to favorite news stories by subject matter, and share those lists with friends or the public if they choose. And tagging is faster and easier than traditional ways of creating book marks and links, which require many more steps. They might even have to let their readers create their own home pages, where they could blog about the news and share lists of their favorite stories.

Most newspaper companies are still reticent about letting users access a full rang of basic blogging tools, such as the ability to share comments, says Susan Mernit, a blogger and former newspaper consultant. She says the BBC Web site is a notable exception when it comes to opening up the news to reader comment.

Mernit adds that The Washington Post Co. has been perhaps the most aggressive newspaper company when it comes to using new tools. The Post has hired Adrian Holovaty, the creator of chicagocrime.org, to develop "mashups" combining two or more Web services, in the manner of Chicago Crime. That site combines the city's crime stats with Google maps, allowing users to plot patterns.

BLOOMBERG'S EXAMPLE.  Now, Holovaty's Post Remix center invites independent developers to create new services using Post content. Jeroen Wijering used Post stories and other content to create What's up?, which allows readers to plot stories on a global map.

If they want huge audiences that stay with them all day long, newspaper Web sites must learn a lot more about how to incorporate the sorts of communications tools and basic information that keep users of Yahoo and Google engaged for hours a day. Readers always appreciate well written and thoughtful analysis, too. Bloomberg, one of the few truly successful news startups of the last few decades, has incorporated news stories into a foundation of financial data and analytic tools. In the future, news organizations that can't do both will essentially invite their readers to go elsewhere for important sources of information.

News companies need to get the hang of community building, too. The traditional newspaper was more of a one-way conversation. Few readers bothered to write letters to the editor on a regular basis, and those who did were often viewed as local cranks. That's not true on the Web. Upstarts like Newsvine invite readers to comment on every single story, without editors placing limits on the conversation.

MISSING LINK.  Newspaper companies have started to go beyond the "online newspaper" approach to the Web. Last year, The New York Times bought information portal About.com for $410 million. Dow Jones, owner of The Wall Street Journal, acquired financial news site MarketWatch for $519 million in late 2004. Both deals help the companies expand their online audiences, increase their access to online advertising, and create additional outlets for existing content.

But newspapers remain too focused on print. As broadband proliferates, the Web is increasingly about all forms of media, not just the written word. Dow Jones already has taken steps in this direction by using MarketWatch as a platform for TV and radio distribution to other partners, says investment banker Ken Marlin, managing partner of Marlin & Associates, a tech- and Internet-focused firm.

The hardest step of all may be learning to share credit. Newspaper people are a competitive and feisty lot. But the culture of the Web is built around the idea of people sharing links from a variety of sources. "Newspapers need to accept that other people write about the stories that they write about, and they need to link to those other stories," Marlin says. He says The New York Times online M&A digest, Dealbook, is an example of how even the Times is referring its readers to other sources.

BEHIND THE CURVE.  The pace of innovation must pick up as well. Many newspapers are still struggling to catch up with ideas such as aggregation and personalization, which have been part of Internet culture for years. But the Internet is changing. A new generation of technologies called Web 2.0 is infusing sites with the power and features of sophisticated desktop applications.

Web 2.0 technology allows a Web page to save new bits of data without saving the entire page. That means a user can drag an e-mail from one Web mail folder to another without waiting for a page to reload. The newspaper industry has barely acknowledged the existence of such changes, let alone incorporated them into its own business plans.

The newspaper business faces life-altering changes, but it can survive them. People still want and need news. But before that can happen, newspapers will have to think of online operations as more than just ancillary services.