Newspapers in an Electronic Age

As innovative technologies and business models with transformational potential continue to emerge, the world of the newspaper publisher has grown progressively darker. Five years ago, eBay and Monster.com started to slice off pieces of the classifieds. Recently, Google's news and search offerings and the Web logs began to threaten the hegemony of the traditional media's command-and-control structure. Throw in podcasts and free commuter newspapers and you have a potent brew indeed.

The newspaper industry is now roughly 400 years old, and, generally speaking, it is confronting a "disruptive" change unprecedented in its history. The emerging challengers can't comprehensively measure up to leading newspapers' detailed reporting capability, institutional advantages and deep local reach. All of them, however, feature revenue streams and content delivery models that run counter to those of most newspapers -- and they are breaking paths into new territories.

Still, newspaper companies are not standing idly by. Every major player has made a move on the Internet, and their properties -- and appetite for acquisitions -- are growing rapidly. Knight Ridder, Gannett and the Tribune Corporation built CareerBuilder.com and bought a controlling stake in news aggregator Topix.net. In the last year, the New York Times acquired About.com, the Washington Post picked up Slate, Dow Jones bought CBS MarketWatch and News Corp. acquired Intermix and MySpace.com.

So how, then, do we judge the recent spate of acquisitions? Are these rational choices meant to extend these companies into the online space, or are these the signs of panicked companies reacting to the threat of online media?

Our research over the last year in the newspaper industry suggests market analysts (and media companies) can use three criteria to resolve these questions. First, do these acquisitions enable companies to reach into new market spaces populated by "nonconsumers," people who can't solve the problems they face because they lack access, knowledge or expertise?

On the consumer side, consider people who use searchable databases and blogs to access content not available in traditional media or to engage with the content in new ways. "Nonconsuming" advertisers might be companies who do not currently advertise with print media but are very active online. Only one of the top 25 online advertisers at a major U.S. newspaper we worked with was a leading print advertiser. Some companies are increasingly turning to online advertising brokers, but only paying for promising leads on new customers. Brokers eschew print media in favor of more targeted and efficient "local search" advertising.

The second criterion is whether or not an acquisition plugs a capability gap, particularly related to employing new business models. Most newspaper Web sites remain almost entirely reliant on classified listings and display advertising. Serving new advertisers requires behavioral and demographic marketing that many newspaper companies lack. Lead generation is another example. Autobytel generates almost 70% of its revenue from leads it provides to auto dealers. Many newspaper sites do not even have this as a product offering.

Through these first two lenses, the recent acquisitions like Topix appear promising. Not only do these companies have large audiences, they provide newspapers with new business models and access to segments where online brokers are actively participating.

Finally, there is the issue of post-acquisition integration. Companies oftentimes unintentionally destroy the very asset they were hoping to acquire when they integrate it too closely with the parent organization. Therefore, our third question is: Does the acquirer recognize that reaching nonconsumers and leveraging new implied business models requires substantial autonomy from the core print business, even while efforts are made to transfer those capabilities into the newspaper?

It's still too early to answer that third question for the recent slate of mergers. But along the first two dimensions, much of the activity appears promising. While these deals (ironically) are getting less ink than mega-mergers in industries such as oil and medical devices, they have a greater chance of letting incumbent firms sail through turbulent waters. The key now will be for newspapers to manage those acquisitions effectively so they continue to grow in new directions.

Mr. Gilbert is a professor at Harvard Business School. Mr. Anthony is a partner at Innosight LLC.

Circulation Continues to Decline
At Most Major Newspapers

The latest circulation figures for U.S. newspapers show a continued decline in the number of readers at most major publications.

The newspaper industry's twice-yearly report showed weekday circulation at the more than 700 newspapers with audited data was down 2.6% compared with the same period a year ago. The report, issued by the Audit Bureau of Circulations, follows a 1.9% decline during the previous reporting period ended March 30. The circulation figures, which are used to set advertising rates, are scrutinized by advertisers and Wall Street.

Among the top 10 largest newspapers, only the third-ranked New York Times, owned by New York Times Co., eked out an increase in average weekday circulation during the latest six months, rising 0.5% to 1,126,190.

The newspaper industry has been hit hard by the migration of readers to electronic media, but the declines also reflect how circulation scandals have forced publishers to more sharply define readership for advertisers.

The Monday-through-Friday circulation of the San Francisco Chronicle, owned by Hearst Newspapers, dropped 16.5% to 400,906 from the same six-month period a year ago. Patricia Hoyt, a spokeswoman for the Chronicle, said the paper has reduced so-called sponsored sales, which are newspapers sold in bulk to hotels, airlines and other outlets. Advertisers consider such circulation less valuable.

The Chronicle was among the first wave of newspapers required by ABC to break out sponsored-sales figures as part of new auditing rules that went into effect in April. By next March, all newspapers with daily circulation of more than 25,000 will have to report such sales.

The average daily circulation for Washington Post Co.'s flagship paper slipped 4.1%, with its Sunday publication also down 4.1%. The daily circulation for the Los Angeles Times, owned by Tribune Co., dropped 3.8% compared with the year-earlier period, with the Sunday circulation down 3.5%. The drop for the Los Angeles Times follows a 6.5% decline for the last six-month reporting period ended March 30.

The New York Post, owned by News Corp., reported a weekday circulation decline of 1.7% for the six-month period from a year earlier, following a 3.2% increase for the last six-month reporting period ending March 30. Douglas Arthur, a newspaper analyst for Morgan Stanley, said the New York Post's drop was probably due in part to the recent growth in free newspapers distributed to New York commuters. The Post declined to comment.

Gannett Co.'s USA Today, the nation's largest-circulation newspaper, remained relatively steady this period, reporting an average weekday circulation of 2,296,335, down 0.6% for the period, compared with a year earlier.

The Wall Street Journal, the second-largest newspaper, which is published by Dow Jones & Co., said the Journal's average weekday circulation was down 1.1% to 2,083,660 in the six months ended Sept. 30 compared with the year-earlier period. Compared with the period ended in March 2005, Journal circulation was up 0.6% in the latest six months. The Journal's latest figure included 333,586 unique online subscribers whose subscription payment met ABC standards to qualify as paid circulation. The Journal's total online circulation is 764,000, according to the company.

The Newspaper Association of America responded to the latest figures by promoting an alternative measure of newspaper reach called "readership," which counts the number of readers in a household, not just the subscriber.

Write to Joe Hagan at joe.hagan@wsj.com

Stop IP Theft

To most people, piracy invokes the music recording industry, which has been decimated by illegal peer-to-peer file sharing. And counterfeiting conjures up images of the street vendor with impossibly cheap Rolexes or hit movies on DVD. But in our digital age, anyone who has a new invention, a creative idea or a technological breakthrough is at risk of a rip-off, whether it be in the automotive, entertainment, pharmaceutical, software or any other intellectual-property-dependent business sector.

This is the dark side of our Internet age. Digital technology, which can be such a boon to consumers and businesses, makes all data and information easily replicable and able to be transmitted at the speed of light around the world. With theft rendered effortless, it is becoming more pervasive. Indeed, the weight of piracy and counterfeiting could be taking the global economy toward a tipping point.

The statistics are startling. The Business Software Alliance estimates that 35% of software deployed world-wide last year was pirated. In some countries, the figure exceeds 90%. Pharmaceuticals are harder to duplicate than computer files, but, even here, industry losses are in the billions, while individuals who unwittingly ingest counterfeit drugs do so at great risk. GM claims to have lost millions of dollars when designs and technology for two new cars were stolen by a foreign manufacturer. The overall cost? Piracy and counterfeiting is estimated to cost companies around the world more than $600 billion a year, about equal to the GDP of Australia.

It's a global issue -- but with a disproportionate effect on the U.S. Our economy is increasingly driven by high-value, innovative, technologically advanced businesses, with IP becoming an ever-larger part of the total. My colleagues and I at NBC Universal were interested in quantifying this, so we asked a leading economic-research firm to analyze the data. The findings indicate that IP-based industries account for nearly 20% of the total private-industry contribution to GDP. In addition, because these industries are growing faster than the overall economy, they account for 40% of our real economic growth; and because they depend on highly skilled workers, they pay, on average, 40% more than the average compensation paid to U.S. workers.

More to the point, when we measure the contribution of the IP industries as a percentage of U.S. industries that produce exportable goods and services (excluding local service-based sectors and pure commodity producers, which don't have a role in driving U.S. productivity and export growth), the numbers are even more striking. By this measure, IP industries account for 40% of the total and nearly 60% of real growth. In other words, more than half of our growth derives from industries that are wholly or significantly dependent upon adequate protection of IP from theft.

The solutions to digital piracy are not easy, but there are glimmers of hope. President Bush recently created a new Office of International Intellectual Property Enforcement under Commerce Secretary Carlos Gutierrez, who has himself been outspoken on this issue. The Justice Department, with its Intellectual Property Task Force, has increased its focus on IP crime. The global business community is starting to act as well. A Coalition Against Counterfeiting and Piracy has formed in the U.S. And a new initiative of the International Chamber of Commerce called Bascap -- the Business Action to Stop Counterfeiting and Piracy -- has signed on more than 100 businesses from around the world.

Our Founding Fathers recognized the connection between IP rights and economic growth. This is why they authorized Congress to grant to "authors and inventors the exclusive right to their respective writings and discoveries." Congress has consistently enforced this for more than 200 years. But the threats to IP today are unprecedented. Congress and other legislative bodies around the world need to act quickly to strengthen criminal enforcement, and need to focus not just on the movement of physical goods across our borders but on digital information traversing cyberspace. At the same time, we urgently need the hi-tech sectors -- Internet service providers, consumer electronics manufacturers, and tech companies -- to push the technological solutions that will support the wide dissemination of digital technologies and at the same time erect barriers to theft.

As important as intellectual property is to the economy today, it will become even more crucial in the future. Business leaders around the world and their respective governments have no choice but to mobilize the resources necessary to protect our most precious economic goods.

Mr. Wright, vice chairman of GE and chairman and CEO of NBC Universal, is a founding member of Bascap's Global Leadership Group.