The Newspaper Industry's Hardest Choice (NYT)(GCI)(MNI)

Prisoners in an escape tunnel have two choices if the structure starts to collapse. Go back to jail or run for the light and hope not to get buried.

This week Scripps (SSP) said it would close its newspaper in Cincinnati on December 31. The daily in Savannah said it will shut down circulation in areas out of town. A column in BusinessWeek suggested that the San Francisco Chronicle shut down and go completely online. The same piece quotes management from the paper as saying it lost $330 million between mid-2000 and 2006. Yesterday, large real estate operator Realogy said newspapers will receive only 70 percent of its home-sale advertising by 2010, down from 84 percent this year.

The newspaper industry cannot decide its future based on collected anecdotes, but the hard figures out for Q2 are grim. McClatchy (MNI), which doubled down on the business by purchasing Knight-Ridder, showed pro forma numbers which said that total advertising at the chain dropped 9.8% during the three months ending June 30. Automotive, real estate, and employment classifieds were all down more than 15%. The company’s papers in California were off 16%. In Florida, the number was over 21%.

Numbers from The New York Times (NYT), Gannett (GCI), and Dow Jones (DJ) are a bit different, but all tell fundamentally the same story.

Almost any investor can find a story every day about the death of the newspaper industry. Almost none offer any solutions.

But, the industry may be able to salvage itself and find a way to make money long term.

Based on some conversations with an industry expert, a road out might look like this.

Circulation in areas any real distance from printing presses has to be cut. If the people want to read the news, they can do so on the newspaper website. Circulation in areas closer to plants would be cut into two pieces. People who want to continue to get the physical paper can have it delivered, but their rates would rise to cover more of the costs of paper and distribution.

Newspapers would continue to use their presses and distribution networks to deliver mini-papers to all of the households in the geographic area near the plant. The same delivery system that distributes paid subscribers the entire paper would drop a smaller paper, perhaps eight pages, at every home. The newspapers are already incurring the expense of driving down these streets, so the additional cost of this distribution is de minimus. The program would increase the footprint of the paper without adding a great deal of cost. These mini-papers would also be used to distribute pre-printed inserts, a big revenue base for the industry.

The goal of the mini-paper would be to push readers to the internet. Each story would be a summary with a web address attached. The entire story would run in the online version. Print would exist to feed web versions of the paper.

As costs for the full paper increase over time, more and more people get the mini-paper and readers are pushed online.

The easy argument against this program is that internet revenue, even with this kind of promotion, would not rise fast enough to offset print advertising. But internet advertising is only about 5% of total newspaper ad revenue, so on its own it is not growing fast enough.

It has been obvious since the advent of the internet that getting web traffic for specific sites is difficult without using other media or internet properties. While newspapers still have fairly large readerships, they have that opportunity. But, it won’t be there forever.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.