Editor’s note: John Morton, head of Morton Research Inc. in Silver Spring, Md., is a well-known and well-respected industry analyst. He has worked with a number of media companies and has appraised more than 200 firms, in 35 states.

Morton

Morton has written numerous technical and general articles on the media business and is a monthly columnist writing about the media industry for the American Journalism Review.

After a stint as a reporter, he became an analyst of the newspaper industry for a Wall Street firm in l971, formed his own company in l976 operating as division of a Wall Street firm, and then in the mid-1990s, left Wall Street and has operated on his own since. Below, newspaper techniques correspondent Adam B. Kushner asked Morton to assess the challenges facing the newspaper industry today.

Newspaper techniques: As newspapers try to offset declines in their core business models, the biggest growth strategy seems to be breaking into new markets and launching new publishing units. This also carries the biggest risk, doesn’t it?

Morton: You mean online or offline?

nt: Well, both.

Morton: I think there’s a much bigger risk if they don’t do it. Clearly, there’s a shift going on from traditional media to the Internet, and newspapers can’t afford to allow that business to escape without trying to capture it online themselves. And that’s what’s behind the Web sites that newspapers have been creating. And, so far, they’ve been pretty successful.

The revenue is still a small part of the whole — probably about 7 percent last year of total advertising revenue — but it has grown very rapidly: more than 30 percent a year.

And, clearly, as that base gets bigger, the percentage growth will decline. But even if, five or six years out, the growth is only 5 percent or 10 percent, that will be more than what they’re doing with their print publications.

So that’s a crucial part of their strategy going forward. The disadvantage to it is that the Internet is more competitive than what most of them face in their local markets with their print products. But the good side of it is that advertising revenue is highly profitable — the margins can reach 50 percent — because you don’t have all the infrastructure, newsprint, delivery trucks, printing plans, and all of that. But, clearly, as this transformation goes on, newspapers are going to have some bumpy years.

Last year was one and this year is likely to be one. But they’re hopeful that their strategies in the long run will pay off in maintaining their profits. I’m not myself convinced that they will remain as profitable as they have been, but they’ll probably still remain far more profitable than most other businesses.

nt: And what about new publications on the print side?

Morton: Well, I think the ones that hold the most promise — and the ones that newspapers have been investing in the most on the print side — are various kinds of niche publications, usually free, oriented to a specific interest of some kind (everywhere from home-decorating to automobiles to anything that moves on wheels), and these are efforts to try to expand their advertising base.

It’s not what we’d normally think of as newspapering, but it is revenue-generating.

nt: It can be tough to figure out which kinds of expansions make the most sense for newspapers. What about acquisitions?

Morton: I think most newspaper companies will still be interested in acquiring new newspapers, though there will probably be a dearth of them available. But it’s an unsettled time, and I think one of the things that’s going to give newspaper companies pause about buying new newspapers is not knowing what they’re worth.

We’ve seen what’s happened to the values of The Boston Globe and the (Minneapolis) Star Tribune, and you could probably repeat that for most the major metropolitan dailies.

nt: What do you look for to tell if a company is expanding the right way?

Morton: The primary measurement is the bottom line, and, clearly, some of these investments don’t pay off right off the bat. So you just have to look and see if what they’re doing makes sense for the long run, even though it may not pay off in the bottom line. That’s not an easy thing to quantify.

nt: Is there a particular pattern to detect early in the ones that aren’t ever going to pay off?

Morton: I don’t think they’ve been into this long enough to say something like that. And every newspaper market is different. In some newspaper markets, your niche publications will be ones appealing to Hispanics or some other ethnic group, and newspapers — particularly in the Southwest and the West have been doing a lot of that. But a lot of it depends on what kind of market it is.

One newspaper that’s done an awful lot of this is The Houston Chronicle, and they’ve created a slew of special products and have seen, as a result, their ability to reach adults really go up dramatically.

nt: Other than The Chronicle, what are some examples of companies who have done this well?

Morton: Most of the major metropolitan papers have been doing a fairly good job of it and some have done it through acquisition rather than creating new products.

The Atlanta Journal-Constitution, for example, acquired an Hispanic weekly operation in the Atlanta market rather than go out and create its own.

nt: Of all of the times that newspapers have faced major competitive challenges in the past, have newspapers received the message that they must react quickly and aggressively this time around?

Morton: Yes. First of all, they’ve successfully maintained their position against the challengers of the past — radio, television, cable, free weeklies.

What’s different about the Internet, which is the big challenge now, is that it’s moving so rapidly, and it’s draining both readers and advertisers from their traditional core operations.

I do think they’re learning very quickly that you can’t be slow about any of this — and those that don’t react fast enough are really going to be in trouble. And I can’t name names because I have consulting relationships, but there are some newspapers that were slow to respond.

nt: Philip Anschutz, who reportedly trademarked the Examiner name all over the country, has only rolled out a few Examiner newspapers so far, even though he had a very targeted readership and ad base. Why do you think he’s taking his time?

Morton: What he has done is to expand less with new print products but (instead has created an) Internet presence (in multiple markets). I think that’s probably where he’s going to expand in the future. It’s a hell of a lot cheaper.

nt: So we won’t be seeing more Examiners?

Morton: No, I don’t think so. I think his expansion will be all on the Internet. He’ll be establishing Internet dailies in markets. And there, you basically have the costs of a newsroom; you don’t have the printing plant and all the other infrastructure.

nt: What happens when newspapers can’t think of any new markets to invent?

Morton: They’re going to have to depend on doing a good job at their core mission. In every local market, there’s only one media operation economically organized to provide massive amounts of news coverage, and that’s the newspaper — however it’s delivered (on paper, the Internet, whatever).

That’s their core strength: No one else does it. So long as they honor that and do a good job of it (and, believe me, I don’t think they all will), they’ll have a business.

This article was first published in newspaper techniques, the monthly magazine of Ifra. If you have any comments or questions about this article, please send them to ntreader@ifra.com.