Profits aren’t the only consideration for newspapers

June 7, 2012, 8:17 PM UTC

FORTUNE — One of the challenges of discussing the besieged newspaper business is that it’s not like just any business, or it shouldn’t be. There is a public-service component to newspapering that is often at odds with the pursuit of maximum profits. That, in fact, is the industry’s core problem as readership and revenue continue to dwindle: Many of the nation’s newspapers are owned by corporations that are concerned primarily or solely with profits, which often isn’t good for journalism. The only way to maintain profits in the short-term is to cut costs.

The New Orleans Times-Picayune, for example, is owned by Advance Publications. That company recently announced that it would soon cut production from daily to three days a week, and that there will be layoffs. The paper reportedly is profitable — it’s just not profitable enough for Advance.

Many of the discussions of the paper’s travails leave out that fact. Some also leave out some other salient facts: The Times-Picayune‘s penetration — the proportion of the potential audience that actually reads the paper — is among the highest in the country, at more than 75 percent. And although Advance spins its plans as a bold step into the digital future (it promises more emphasis on its typically terrible Web site), more than a third of New Orleans’ population has no Internet access. Nevertheless, that beleaguered city, still recovering from the flooding after Hurricane Katrina and dealing with an endemically corrupt political culture, this fall will become the first major American city without a daily printed newspaper.

A “digital first” strategy might be a great idea in some cities. It might even be a good idea for some papers to cut back or even eliminate their print editions. But New Orleans is perhaps the worst possible place to try it first, even if dispensing with the Monday, Tuesday, Thursday and Saturday editions will improve the paper’s margins in the short run.

David Carr, a media writer for the New York Times, didn’t mention that the paper is profitable in his (otherwise fine) writeup of the decision. Nor did GigaOM’s Mathew Ingram — a reliable digital triumphalist and champion of “citizen journalism” — in either of his writeups. Ingram sees the decision as just more evidence that “dead tree” media (he actually uses that hoary phrase) is on its way out, and that newspaper companies had better get with the online program. Maybe so, but you simply can’t address this topic without even mentioning that the Times-Picayune is, right now, a profitable enterprise. Advance’s decision isn’t an investment in the digital future — it’s simply proof that Advance wants to squeeze every nickel it can out of the operation as quickly as possible.

By this “stumble-footed decision,” Advance has revealed that it doesn’t “understand the New Orleans market,” writes Harry Shearer in a column for the Columbia Journalism Review. “You can’t care about what you don’t understand.” Shearer, the political satirist, actor, radio host, and New Orleans resident, believes that since newspapers are unique in the First Amendment protections they enjoy, their owners “owe a little something back — perhaps a calm acceptance of a lower profit margin than could be attained, say, in the car-leasing business.”

Of course, nobody wants newspapers to lose money. The question is, at what point does the pursuit of profit begin to do serious harm to the communities served by newspapers? In many cities, that point was reached years ago. This is another factor that often goes unaddressed in such discussions. How many local-government scandals have gone unreported?  How many parents, who would have been well-informed in the ’70s and ’80s, are ignorant as to what’s going on in their school districts because of cutbacks in reporting staffs? How many voters make uninformed decisions, or just decide not to show up at the polls, because they have little idea about what’s going on in their state capitals? These things can’t be measured by an income statement.

Theoretically, newspaper owners might be forgiven for their nostalgic yearning for the profit margins of the past, which a couple of decades ago were often around 30%  and sometimes went north of 40%. (Just a decade ago, the average was more than 20 percent). But those days are gone, and publishers have known it for years. Estimates vary widely, but margins now tend to average somewhere between 8% and 15%. The continued disinvestment in newspapers (which, it must be noted, began well before the Web came along) points to only one conclusion: owners, rather than investing in the digital future, are trying to wring as much money out of newspapers as they can by cutting costs as much as they can get away with. In the meantime, they’re faced with a conundrum: although revenues from print ads are falling fast, online ads still draw far less, and rates for online ads are falling fast, too. Which is another fact that rabid digital enthusiasts tend to gloss over when they hector publishers to convert to all-digital publication.

Along with cutting out four print editions per week, Advance is also reportedly planning to cut as much as a third of the staff, including some newsroom employees (specifics aren’t known yet). This shows that they are interested in only one metric: the net present value of future returns on existing assets — and not all that far into the future. Otherwise, they’d be taking the cost savings from the print cutback and investing them in the Web operation. By adding some Web-savvy reporters and editors to the staff, say. But they aren’t. They’re doing the opposite.

Advance’s move is “unsustainable over the longer term,” wrote Warren Buffett in answer to a letter from a New Orleans musician.  He said that, given the high penetration rate,  he was “puzzled as to why the economics don’t work on a seven-day basis. But I would have to have the detailed figures to make an analysis.”

He also noted that Advance doesn’t tend to sell off its properties, so it’s unlikely he could buy the paper even if it looked like a good investment. He does, however, believe that local newspapers can be a sustainable business, whether in print or online. His company Berkshire Hathaway (BRK.A) now owns or has stakes in stakes in the Omaha World-Herald, the Washington Post (WPO), the Buffalo News and Media General (MEG). On Tuesday, it was revealed that Berkshire had purchased a 3.2 percent stake in Lee Enterprises (LEE), which owns the St. Louis Post-Dispatch and 47 other dailies. Informed speculation has it that he means to buy more of the company — perhaps with an eye toward snapping up the whole thing.

And what kinds of profits does Buffett expect his newspaper investments to generate? Probably not in the 30% to 40% range, or even 20%. “The kind of earnings we’ll draw from our newspaper properties will be a very tiny fraction of, say, Burlington Railroad,” he told Howard Kurtz of the Daily Beast. “But it’s not a dumb decision financially.”