With joint operating agreement intact, challenges still face Seattle dailies

by Eric Pryne, Seattle Times

Seattle's two daily newspapers have settled their four-year legal dispute. Now comes the hard part.

The April 15 deal between The Seattle Times Co. and The Hearst Corp., owner of the Seattle Post-Intelligencer, means both papers will continue to publish, at least for now.

But it doesn't solve deep-seated problems — shrinking circulation, eroding ad revenues — that threaten not only both Seattle dailies but the entire newspaper industry.

Observers expect changes post-settlement at both the P-I and The Times as they search for new paths to profitability. The agreement eliminated some options and pushed others into the foreground.

At The Times, executives maintained for years that the company's joint-operating agreement (JOA) with Hearst was slowly killing their family-controlled newspaper and that Seattle no longer could support two dailies.

Until last month, The Times' legal strategy focused on closing the P-I, terminating the JOA or both. As part of the settlement, however, The Times agreed to make no moves to end the arrangement for at least nine years.

Times Publisher Frank Blethen has said he's still skeptical the JOA can become profitable, but he intends to try. The company is talking about getting smaller, looking for new revenue, trimming staff size and perhaps even selling assets to make ends meet.

"Transformation" is the new buzzword.

The settlement gave the smaller P-I a new lease on life. It could have ceased publishing if The Times had prevailed in a binding-arbitration hearing scheduled to start the day the deal was announced.

The settlement also eliminated Hearst's previous right to 32 percent of The Times' profits until 2083 if the P-I ever closed and The Times became Seattle's only daily. P-I Publisher Roger Oglesby said that change demonstrates Hearst's commitment to Seattle.

"No one can say now that Hearst has an incentive to shut down the P-I," he said.

But he also suggested changes were likely. According to the P-I, Oglesby told jubilant staffers the day the deal was announced that it "isn't nine years to sit around — it's a nine-year opportunity."

One possible option: switching to a tabloid format.

Here's a look at challenges and choices each paper faces:

The Seattle Times

Under the JOA, The Times and P-I maintain separate news and editorial operations, but The Times handles the business and production side for both. In return, it gets 60 percent and Hearst 40 percent of what's left of their pooled advertising and circulation revenue after those expenses are paid.

Blethen says both The Times and P-I have been losing money under that arrangement. The settlement keeps it in place.

While the deal means The Times no longer will be paying lawyers millions each year, it saddles the company with new costs. For one thing, The Times must pay Hearst $24 million, money company officials have said they intend to borrow.

The Times also made numerous concessions to Hearst in the settlement that may have a financial impact. One example:

From now on, The Times must pay career-development expenses for the generation of Blethens now in their 20s and 30s out of its own pocket, rather than from pooled Times-P-I revenues. The Blethen family holds the controlling interest in The Seattle Times Co.

In 2000 and 2001, those costs amounted to more than $300,000 annually, according to Times documents made public during legal proceedings.

Another change requires The Times and Hearst to pay more out of their own pockets if they want to maintain the current "newshole" — space devoted to news in the daily papers.

All this may put The Times in a deeper hole as it strives to start making money again.

Options that management has discussed include:

• Cutting expenses. "There is no question we must look at our cost structure," the company said in a message to employees last month.

The Times' biggest expense? People. "I think ultimately they're going to need to rescale their work force to reflect their revenue projections," said Peter Horvitz, former publisher of the now-shuttered King County Journal of Kent.

Times officials have said no layoffs are planned now but haven't ruled them out later. Layoffs would be counterproductive, said Liz Brown of the Pacific Northwest Newspaper Guild, which represents about 600 news, advertising, circulation, marketing and composing employees at the paper.

"I would hope the company doesn't respond to this like many other papers by slashing and hacking at their news staff, because that doesn't work," she said. "It gives readers even less reason to buy the paper."

Most Times employees already have been living with wage freezes for at least a year. The newspaper is negotiating new contracts now with two Teamsters locals that could establish a new pattern.

• Looking for new revenue. The Internet is a prime target. The Times says revenue from its network of Web sites increased 39 percent last year. "That's where the future of the industry lies," said Brown.

The settlement agreement says both The Times and P-I can develop "niche" products — highly targeted print or online publications outside the regular newspaper that focus on such topics as health, travel or fashion — without sharing the proceeds.

Niche products are becoming an increasingly key source of new revenue for newspapers as their traditional advertising shrinks, said Rick Edmonds, a media-business analyst at the Poynter Institute, a Florida journalism think tank. "Geography is not the only way to slice and dice audience," he added.

Blethen also has said The Times may go after potential advertisers it hasn't paid much attention to before.

That could mean intensified efforts to draw small retailers to the paper's "zoned" suburban editions, Horvitz said.

• Selling assets. In an interview with the Puget Sound Business Journal last month, Blethen raised the possibility that, as a last resort, The Times might sell its remaining land in South Lake Union to generate cash.

The company owns about 9 acres in the rapidly redeveloping neighborhood. Commercial real-estate experts say one block now used mostly for surface parking, at Fairview Avenue North and Denny Way, could fetch $30 million or more.

Altogether, according to one expert's calculations, The Times' properties could be worth well over $100 million.

Selling them would be short-sighted, said David Martens, an Anacortes newspaper consultant. "Selling off assets is a short-term solution," he said. "They need a long-term solution."

Maybe not, others counter. "Time's on their side," Edmonds said of The Times.

If The Times can wait out Hearst and move to end the JOA in 2016, as the agreement provides, it might make sense to consider selling not only the land, but The Seattle Times Co.'s papers in Maine, Yakima or Walla Walla to stay afloat until then.

Times spokeswoman Jill Mackie said in an e-mail last week that the company isn't considering selling its other papers. She also said selling the South Lake Union land "would be very undesirable," but that the company would consider joint ventures to develop the properties if they would help sustain the newspaper.

Seattle Post-Intelligencer

Experience elsewhere suggests that, despite the settlement, the P-I's future remains more precarious than The Times'. The circulation gap between larger and smaller papers in two-newspaper towns usually only gets bigger, Edmonds said, making the smaller paper less viable.

The P-I's average weekday circulation has dropped 34 percent, to 128,012, since 1999, compared with just 4 percent for The Times, whose circulation now stands at 219,722.

In legal proceedings, Hearst charged The Times had worked for years to undercut P-I circulation in violation of the JOA.

While The Times denied the charge, the settlement contains several provisions designed to boost P-I subscriptions.

According to the P-I, Oglesby told staffers the day the settlement was announced that the P-I's circulation still wasn't likely to catch The Times'. But he also said he thinks the JOA can be profitable. And Blethen has told Times employees in private meetings that Hearst now has an incentive to make the arrangement work.

Other than saying no layoffs or buyouts are planned, Oglesby hasn't said much about what's in store for the P-I.

Hearst's options include:

• Making the P-I a tabloid. Parts of the settlement hint at the possibility. Oglesby said it's worth exploring. And The Times said in a message to employees that, while the decision is Hearst's, "it could be a good outcome for both parties."

Horvitz, the former King County Journal publisher, said he wouldn't be surprised if Hearst makes the switch. "I think it's important for them to try to differentiate themselves from The Times," he said.

A tabloid could appeal to the region's growing transit-commuter audience, Horvitz added.

But Martens said that if The Times remains a traditional broadsheet paper and the P-I becomes a tabloid, ads running in both papers would need to be made up separately for each format, increasing costs.

"From a production standpoint, that one doesn't make sense," he said.

• Going online-only. New York-based Hearst has invested heavily in online technology. Brown, the union leader, said she wouldn't be surprised if the P-I becomes an entirely or primarily online publication sometime in the next nine years.

Producing a newspaper online wouldn't require presses, trucks or carriers. Newspapers' online revenues, while still only a fraction of total revenues, have been growing rapidly while print-advertising revenues stagnate.

According to some projections, the lines could cross within a decade.

But experts say online revenues aren't yet sufficient to support a newsgathering operation the P-I's size and probably won't be for many years.

Oglesby wouldn't rule out the online-only scenario. He also wouldn't say it's likely.

• Selling or closing the P-I. While The Times can't move to end the JOA until 2016, the settlement imposes no similar restriction on Hearst if the P-I is losing money.

Oglesby demurred when asked whether Hearst is committed to publishing the P-I for another nine years, saying the industry is too volatile to predict anything.

Blethen has said it's unlikely the P-I will shut down.

Horvitz agrees. "They've demonstrated every evidence that they want to remain in this market," he said of Hearst.

Giving up its right to 32 percent of The Times' profits underscores that, he added.

One possible motive for Hearst to keep the JOA going: It holds a first right to buy a majority interest in The Times if the Blethens decide to sell anytime before 2083.

Frank Blethen has said repeatedly that won't happen. But he also has said that, even with a renewed commitment from both The Times and Hearst, the JOA's economics still may not work.

"There are some people who believe Hearst is just biding its time until the Blethens give up," The Guild's Brown said.

article originally published at http://seattletimes.nwsource.com/html/businesstechnology/2003695093_joa06.html.

The media's job is to interest the public in the public interest. -John Dewey