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Hearst may be remaking, not eliminating, The P-I

Crosscut Focus: Red Ink by the Barrel.

In the wake (pun intended) of Hearst’s announcement of the Seattle Post-Intelligencer’s demise, let’s deal with some realities.

No one is going to buy The P-I. Six years ago, Hearst’s then-chief executive Victor Ganzi wrote himself a note after a day of negotiating with Seattle Times Co. executives. Ganzi’s blunt assessment of his own paper, which came to light in court documents during the Joint Operating Agreement fight between Hearst and the Seattle Times Co: a “failing newspaper — in ’81, in ’99, and now and future.” Ganzi lost his job last year during some top-level Hearst in-fighting, but his assessment stands solid. The P-I is the second paper in a city that won’t support two dailies; it hasn’t made a profit in eight years, and, after the globe on top of its rented headquarters on Elliott Bay, there’s nothing to sell. When Hearst put The P-I up for sale in 2004 as a legal maneuver, the offering prospectus gave those who read it a chuckle. Nobody offered to buy then, and they certainly won’t now.

Hearst isn’t killing the print P-I just because the paper lost $14 million last year. Less than two years ago, Hearst renewed its agreement to pay the Blethens $10 million just for rights to buy the family’s 50.5 percent Times Co. stake. It spent several million more fighting The Times from 2003 to 2007 to keep The P-I going. And it got $24 million from The Times in 2007 because Times Publisher Frank Blethen made a strategic mistake and thought he could run the New York-based Hearst out of town. Is Hearst on the financial ropes? Well, it paid $500 million, in cash, for its new Manhattan headquarters in 2006. And last year it reported record cash flow for 15 of its last 16 years.

Hearst has given up on making newspapers profitable. It was no coincidence that Lincoln Millstein, Hearst’s senior vice president for digital media, was standing alongside Hearst Newspapers President Steve Swartz in The P-I newsroom Friday. Millstein and Swartz engineered the newspaper industry’s alliance with Yahoo, a move that gives Hearst and other media companies access to Yahoo’s online employment, search, and ad operations. He also helped set up the online sales network, quadrantONE and he is behind the alliance between Hearst and ten other media outfits and Seattle’s Zillow online real estate site. Anyone see a strategy emerging here? Hearst dumps its print paper, in part because much of The P-I’s classifieds have migrated online, but forges a bunch of alliances with Web-based classified outfits so they can be integrated into a new e-paper and recapture some of that lost revenue.

An online P-I might make money for Hearst. Here’s where we veer off into speculation — but backed by some interesting data. Loyal Crosscut readers will recall we ran a projection a little over a year ago showing how an electronic paper might already be profitable. We created an imaginary paper, the Bugle-Interrogator, that was just about the P-I’s size (100,000 daily circulation) and using industry data we calculated killing the B-I’s print paper would save more than half its annual expenses. We also figured online ad revenue would arc upwards without a print option for advertisers, making an online B-I profitable.

The numbers have shifted substantially, but the conclusion still works. According to the Newspaper Association of America, the industry’s trade group, print-ad revenue for U.S. papers dropped 18.2 percent to $34.54 billion in 2008, while their online ad revenue fell by 1 percent to $3.13 billion. At that rate, it would take more than a decade for print and online ad revenue to be equal. But those figures could change dramatically if a couple of things happen this year.

First, print alternatives will have to disappear, leaving advertisers with no choice but an e-paper to reach a local mass market. In Seattle, that means The Times would have to stop publishing its print paper. The Times faces some grim realities of its own: its bankers are demanding payment on some $91 million or more in debt, its revenue stream is shrinking, and the cash it hoped for from the sale of its Maine papers and local real estate hasn’t happened. Times Co. CEO Frank Blethen says he was surprised by Hearst’s announcement, but his response was hardly a ringing promise that the Times wouldn’t dump its own print paper. “The Seattle Times has limited resources to ride out the recession,” Blethen said, while predicting that “long term, post-recession” “single metro newspapers/Web sites will still be viable businesses. Blethen also noted, without naming names, that several papers and newspaper chains “are in or are on the verge of bankruptcy.”

Second, newspaper advertisers will need a more attractive venue, since hardly anyone likes the ads that now pop up on news websites. Hearst says it will start offering advertisers a more attractive wireless e-paper alternative this year. The e-paper, based on a technology known as E Ink, which is mostly owned by Hearst, is already used in Amazon’s Kindle e-reader and can be seen on UK-based Plastic Logic’s website. “We are hopeful that we will be able to distribute our newspaper content on a new generation of larger devices sometime next year,” Hearst executive Kenneth Bronfin told the New York Times last September. Industry experts have speculated that faced with the loss of a print alternative, and the prospect of using an e-paper to more accurately targeted potential customers, perhaps half a city’s print ad revenue could migrate to an e-paper. Add in those online operations Swartz and Millstein have gathered under Hearst’s umbrella and Hearst might turn the Seattle P-I into a profitable e-paper this year.

Of course, those are mighty big ifs. For example, any remaking of The P-I into an e-paper under the JOA may require the Times’ approval, and it isn’t clear what will happen if Hearst wants to take that route. Oddly, when they recast the JOA in 2007, Hearst and the Times Co. didn’t say much about online operations. But Swartz, who has a reputation as a corporate hard-charger, promised “100 Days of Change” for the Hearst’s newspaper division when he became its president last month.

Eliminating the JOA and transforming The P-I into an e-paper may be his first change.

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