Tuesday, February 17, 2009

L3C's Won't Save Newspapers

Friend Sally Duros, with whom I've had a number of good natured, coffee-infused political arguments, has an interesting piece in the non-newspaper Huffington Post. Dated February 9, Sally proposes restructuring as the path to financial salvation. (We should define "newspaper" before we continue. "Newspaper," as I use the word, is a physical piece of paper or pieces of paper, upon which information about current events is printed. This is important, because it is the physical medium of a newspaper that has become antiquated. The same information is more easily and less expensively published electronically on the Internet. It is also faster and cheaper to distribute that electronic information. That being said, we should not confuse "newspaper" with "newspaper company" or "newspaper publisher.") Duros, a former Chicago Sun-Times Real Estate Editor, apparently did not get into the business end while she was there. To be fair, she was editing stories about the real estate market. (But would she propose L3C restructuring for Countrywide Finance as a solution to its problems?) Chicago's newspapers could find a lifeline to solvency and a return to social purpose in a new kind of business structure called an L3C, or low-profit limited liability company. Why is that? I respectfully disagree with Sally Duros. She attempted to explain why L3C restructuring is a the solution to the financial woes currently being suffered by the newspaper industry. Partial proof of this is the fact that Australian newspaper companies are faring well, thank you very much, unlike most of their counterparts around the world. Their success is due largely to their creative mixing of Internet presence with the traditional dead-tree publications, as well as a different model for advertising revenue. L3C status has nothing to do with the Australian newspaper publishers' recent gains in readership. Unfortunately, she barely even alludes to the root causes of the industry's problems. She wrote, for example: The low-profit, limited liability company, or L3C, is a hybrid of a nonprofit and for-profit organization. More specifically, it is a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit. Unlike a standard LLC, the L3C has an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or investors. (Source: http://www.nonprofitlawblog.com/) Newspaper companies already have low profits, they don't need lower profits. Sally Duros proposes that they voluntarily lower their profits even more by transforming themselves into L3C entities. (Is she writing Barack Obama's "capitalism has failed" speeches?) Deliberately lowering profits is never a solution and would only ensure a faster path to bankruptcy. Any capitalist can tell you that. Duros dwells on the "social purpose" of an L3C: "The L3C is different from a typical nonprofit because it can earn a return, but the social purpose must trump the financial purpose," she wrote, but failed to note that a solid daily newspaper does have a social purpose, and that purpose is informing the public and stirring up debate about current issues. Furthermore, Duros (who admits to being a "progressive" liberal) can't seem to climb out of her neo-socialist mindset wherein "profit" is evil and, therefore, anything "non-profit" is "good" so "low-profit" must be "not so bad." That's just wrong. Newspaper companies are not losing money today because of the way their companies are incorporated. Rather, they are losing money largely because they are losing readers. That trend began well before the recession hit. Competition from the Internet and other distractions have taken "eyeballs" away from newspapers. That's one strike: Lowered profits from reduced subscription revenue. Strike two comes from lowered advertising revenue. Advertisers either decided to not adverstise in a paper that gets less readers than they desire, or they insist on lower ad rates. Add to that the fact that the newspaper industry still operates on a 19th Century basis in one important way. Although they use modern presses, they are presses nevertheless, and they need to be inked, maintained, fed dead tree byproducts (paper). Then, using technology that's as old as the human race, the papers are tossed by hand onto the dwindling subscribers' doorsteps, sometimes landing in puddles, dog poop, or the wrong yard. None of those problems - lower readership, high cost of production, inefficient delivery - would be or could be addressed by restructuring as an L3C corporation. Duros did not address any of those factors. The Internet, obviously, can put information "out there" instantly. You simply cannot do that with a newspaper. Many (most?) newspaper companies these days have their own websites and are updated regularly with breaking news. But that's not a newspaper, it's a website produced by a newspaper company. Newspaper companies' websites are not, literally speaking, newspapers. Duros did not address this, either. There is an interesting passage in the Duros column, which we'll deconstruct: The idea of the Newspaper L3C is to bring back those journalistic contributions like neighborhood reporting, music reviews and book sections and make them part of the community service. And ads are part of the mix too. As if it was an afterthought Duros wrote, "ads are part of the mix too." Wrong again. Ads are one of the two main ingredients, the other being content (reporting, music reviews, book sections, whatever). Regardless of how much profit a particular newspaper is making, that content is still "part of the community service" provided by the newspaper. "I think there is a lot of viability to newspapers still," [creator of L3Cs, Robert] Lang said. Back in the days when automobiles were still novelties, people and goods were transported largely by horse-drawn buggies and carriages. Imagine a buggy whip enthusiast 109 years ago saying something like, "I think there is a lot of viability to buggy whips." He would have been right for the moment, but that viability was waning and the buggy whip soon went the way of the brontosaurus. The difference between buggy whips then and newspapers now is that most people still needed buggy whips in 1900. These days, in America anyway, most people do not need newspapers. Yes, we need sources of news and information, but just as people in 1950 needed transportation just as much as people did in 1900, they no longer needed buggy whips. Or horses. Or carriages or buggies. Whereas the automobile gradually replaced horse-drawn transportation, the Internet is replacing newspapers at a far more rapid pace. Could the L3C save Chicago's newspapers? No, it cannot. Lowering the profits of an industry that is in trouble because of lowered profits is, well, crazy. It may fit into some pie-in-the-sky Utopian dream, but it's still crazy. You might as well ask whether the L3C could save Detroit's automobile industry, or any other troubled industry. "Somewhere you still need a newsgathering [sic] organizations," Lang said. Newspapers still drive much of the news circulating on the web, he added. True. There's no argument about the need for organizations that gather news. But what Lang and Duros both fail to point out is that there are many news gathering organizations do not kill trees or burn fossil fuels to produce and disseminate their information products. Associated Press and other wire services, for example, have driven much of the news circulated in newspapers but have not themselves printed newspapers. A growing number of websites (including bloggers) produce original news reports that are often picked up (almost always without attribution) by newspaper editors. The tail is beginning to wag the dog, and the dog is getting dizzy. The Christian Science Monitor, one of the world's most respected newspaper publishers, will go paperless and entirely online in April, 2009. When that happens, CSM will technically no longer be a newspaper publisher. They will, however, continue to "drive much of the news circulating on the web." The dinosaurs currently dominating the newspaper industry need to understand the new business model. They need to stop floundering around, hoping that L3C-style "fixes" will save them. Unless they evolve, and quickly, the bankrupt and extinct newspaper publishers will become zero-profit companies, not "low-profit" companies. That will provide no service to anybody, including the few subscription holders, the information hungry public, their shareholders, and their out-of-work employees. A final note: It is ironic that Sally Duros chose to submit her article to the Huffington Post, which is strictly online and does not publish a paper version. While she may hope for the salvation of the buggy whip, she does so in a V-8 roadster. RELATED: Dying big papers - The Tribune, TX Newspapers hold on in the online age - Stuff.co.nz, New Zealand CNB RSS Feed