Can the Washington Post survive? (p. 2)

By Marc Gunther, Fortune senior writer

Between 1940 and 1990 about 267 papers shut down, victimized by big forces: TV news (which killed afternoon papers), the movement of people from cities to suburbs (which made delivery more costly), geographic mobility (rootless people tend not to read the local daily) and a decline in civic engagement dating back, as it happens, to Watergate.

The Post's daily circulation peaked at 832,000 in 1993. It has dropped by nearly 20 percent since then, while the region's population has grown by about 20 percent. Says Buffett: "Per capita readership really is falling rapidly." Even so, the Post retains the highest penetration of any paper in a top-ten market.

In an effort to recapture young readers, the Post in 2003 started a free weekday tabloid called the Express, which now publishes 185,000 copies a day. It's profitable. A year later the company acquired El Tiempo Latino, a Spanish-language weekly. It also publishes five paid-circulation suburban newspapers, 34 free suburban weeklies, 12 military newspapers and real estate and auto guides. To squeeze a few more dollars out of its presses and trucks, the Post Co. distributes The Wall Street Journal in Washington, and it prints and circulates the local edition of the satirical newspaper the Onion. Bar mitzvah invitations may be next.

This year the Post will generate nearly 50 percent of its revenues from display ads, about 30 percent from classified ads, and about 20 percent from circulation sales. All three revenue streams are under pressure. Display advertising has been hurt by the consolidation of department stores, classifieds have been whacked by online competitors and the Post sells fewer papers.

Five years ago Graham reluctantly raised the newsstand price to 35 cents; he does not want to increase it again, because that could accelerate the decline in single-copy sales. "We strongly believe in the mass model," says editor Downie. By contrast, The New York Times has just raised its price to $1.25, and the Journal costs $1.50.

Graham's singular accomplishment as CEO has been to reduce the company's exposure to print. In 1990 the Post Co.'s newspaper division contributed 48 percent of revenues and 51 percent of operating income; last year newspapers accounted for 25 percent of revenues and 14 percent of operating income.

The company bought cable systems in the mid-1990s, when prices were low. But Graham's best move has been to invest in the sprawling array of education businesses - a test-prep firm, colleges, an online university and professional training businesses - that make up the Kaplan unit. It contributed 43 percent of the Post Co.'s $3.9 billion in revenues in 2006.

While the Post Co. diversified, the New York Times Co., the Tribune Co., Knight Ridder, Gannett (Charts, Fortune 500) and McClatchy (Charts) invested heavily in print during the 1990s. They have paid dearly for it. One example will suffice: In 1998, McClatchy bought the Minneapolis Star-Tribune for about $1.2 billion. The Post Co. then owned about 28 percent of the Minneapolis paper, and it chose to sell. Smart move. McClatchy sold it last year for $530 million.

This dependence on print is the big reason why, over the past five years, newspaper stocks as a group are down by nearly 30 percent. The Times Co. is off by 45 percent. During that same period, Post Co. shares are up by more than 40 percent.

"I can look our shareholders in the eye," Graham says, "and say we should have a steady, to some extent growing, stream of income from our businesses while we try to sort out, if we can, the problems of the newspaper."

Those problems are daunting, all agree. "The Post has enormous national and international importance," observes Buffett. "That does not make it a good business."

Growing into the Web

Joshua Bell, one of the world's great violinists, owns a Stradivarius worth millions. If he played it for spare change during morning rush hour at a subway stop in Washington, would anyone notice?

Gene Weingarten, a 55-year-old staff writer for the Post's Sunday magazine, decided to find out. When his 7,400-word story about the experiment, called "Pearls Before Breakfast," went up on the Post's Web site, accompanied by a three-minute video and a 45-minute recording of Bell's performance, it became an Internet sensation.

"I got more mail than I've had on anything, ever - from all over the world," Weingarten says. "One guy wrote to me from an Internet cafe in Beijing."

This is the kind of thing that gives Graham hope. A tour de force of storytelling, fashioned by a consummate stylist ("The violin is an instrument that is said to be much like the human voice, and in this musician's masterly hands, it sobbed and laughed and sang - ecstatic, sorrowful, importuning, adoring, flirtatious, castigating, playful, romancing, merry, triumphal, sumptuous ... So what do you think happened?") was married to the power of digital video and magnified by the viral nature of the Internet, to bring eyeballs and advertising dollars to the Post.

Graham showed the video at the Post Co.'s annual shareholder meeting to highlight the creative possibilities of online journalism. He likens newspaper Web sites to the early days of television, when the networks did 15-minute evening newscasts.

"I don't think any news organization has maximized the potential of the Internet," he says. "I know this one hasn't." Imagine if, when big news breaks, the Post's Web site routinely offered a print story, a video version, an audio point-counterpoint by op-ed columnists, maps, photos, links and reader reaction. Could washingtonpost.com become a leading online news destination?

To a degree, it has - ranking behind nytimes.com and usatoday.com but ahead of cbsnews.com and time.com. About 90 percent of the Post's online audience comes from outside Washington, thanks in part to Robert Redford and Dustin Hoffman. "Why are people coming?" asks Caroline Little, the president of Washington Post Newsweek Interactive. "It was Watergate."

The Post has two goals online. It wants to become a must-buy in Washington while increasing its share of national ad dollars. Right now ads aimed at local readers account for about 60 percent of revenues. The site offers a vast trove of local content - going-out guides, traffic, weather, sports. Says Graham: "We have a map of D.C. with every school listed, with test scores and other things parents would want to know. It's not all-inclusive, but it's a lot of information, and you couldn't do that in the paper."

No news is too trivial for a new hyperlocal site that was just launched to serve Virginia's fast-growing Loudon County. "This is about things like going to every place of worship in Loudon, writing a summary of what they do, and giving the priest or minister or rabbi a recorder so they can podcast their sermon," Little says. Whether the town pizza parlor and muffler shop will spend the ad dollars to support such small-scale stuff remains a big unknown.

Getting a bigger share of national spending will be even harder, because advertisers who want to reach news readers have so many other places to spend their money - other newspapers, TV news sites, Yahoo and MSN, news aggregators like the Drudge Report and Huffington Post, even blogs. "You're almost always going to be able to find inventory," says Jordan Bitterman, director of media for Digitas, which buys Internet advertising for American Express, AT&T and General Motors. "So the buyer has more leverage than in the print category."

Another problem is that readers feel a deeper affinity to the newspaper that lands on their doorstep than to a Web site that's one click away from everything else. Most of the eight million monthly users of washingtonpost.com come to the site "horizontally," following links from other Web sites. A minority are "vertical" readers, who start at the Post's home page and then dig deeper. Jim Brady, executive editor of washingtonpost.com, spends a lot of time thinking about how to turn incidental readers into loyalists. "We love visitors at washingtonpost.com, but we prefer residents," he says.

Advertisers seem to like video, so the Web site employs six videographers and sends them all over the world. More than 100 reporters in the Post newsroom have been trained to use simple videocameras. Says Downie: "Rather than think of ourselves as a shrinking newspaper, we think of ourselves as an expanding multimedia newsroom."

A few critics say Graham needs to move even faster to get the business online. While the CEO is beloved in the Post newsroom, he is also viewed as a "conservative with a small 'c'" leader. "Don has always been allergic to master plans," says Downie. Guided by Buffett, among others, he is loath to gamble.

This may be a time when bold strokes are required. Murdoch has talked about hiring "all the best business journalists in the world" and making The Wall Street Journal free and online only. Could newspapers join to pressure Google, Yahoo and other aggregators to pay them for their content? Could they combine their Web sites?

Buffett muses out loud: "The ideal combination would be if The New York Times, The Wall Street Journal and the Post had a joint Web site, and you couldn't get any one individually. That, you could sell for a fair amount of money, and it would have one hell of a readership."

Might the Graham family find a way to give the Post to a private foundation, a model pioneered by the St. Petersburg Times? Not likely, Don Graham says. He'd prefer to keep the paper in the family. It's widely believed that his niece Katharine Weymouth, the Post's vice president of advertising, is being groomed to take over.

But to take over what? That's anyone's guess. "No one," Graham says soberly, "can sit here and tell you how people are going to be getting news stories ten or 20 years from now." But people will want to know the scoop from the White House, the prospects for peace in the Middle East, and who's pitching for the Nationals, and someone will be there to tell them. We just don't know who that someone will be.  Top of page

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