Profits up, circulation down for Thomson papers in 80s

This comparison of Thomson papers with comparable newspapers indicates they lost more revenue and circulation during 1980s when high profit goals were set.

Scholars and journalists have expressed concern that a desire for high profits at some newspapers will result in lower newsroom expenditures.1 The concern is that lower budgets will produce lower quality newspapers, and readers eventually will abandon newspapers in favor of alternative sources of news.

This study explores the relationship between profit goals and circulation, using the example of the Thomson newspaper group during the 1980s. In a 1988 speech, the editor and chairman of McClatchy Newspapers identified Thomson as one of three newspaper groups whose emphasis on profits had produced the "worst newspapers in America."2

Then, in 1993 a new Thomson CEO told Editor & Publisher that during the previous decade the chain's dailies enjoyed profit margins that consistently "approached 40 percent." The high profits resulted from a strategy that combined price increases with cost cuts. However, there was a side-effect. Thomson CEO Michael Brown said the emphasis on profits resulted in "cruddy" newspapers, and by 1992 profit margins had decreased to 17 percent.3

How much quality a newspaper contains depends to a degree on who is evaluating it.4 However, few scholars or people in the industry would use the term quality to describe Thomson newspapers during the 1980s. Thus, the Thomson papers during the 1980s offer a chance to examine what happens when the pursuit of profits reduces the money spent producing newspapers and quality declines. This study examines the connection between Thomson's emphasis on high profits and a resulting circulation decline.

Perhaps in response to its problems in the 1980s, Thomson Newspapers drastically changed its corporate strategy in the 1990s. The company sold more than 50 newspapers, and by 1997 it had 71 dailies in the United States. According to Stuart Garner, who was president and CEO of Thomson Newspapers in 1997, profit margins are now expected to be about 20 percent. He said the company's current strategy calls for starting with a good editorial product and integrating that with excellence in circulation, marketing and other organizational functions.5

Theoretical background

Economic theory offers a framework for understanding the relationship between newspaper profits and circulation. Industrial organization is the branch of economics that studies the behavior of firms competing in the continuum of market structures that lies between the classic models of perfect competition and perfect monopoly.6

A central question explored by industrial organization models is whether firms attempt to maximize profits. The models suggest that competitive firms must reconcile profit maximization with other goals such as maintaining market share.7 These models describe competition as taking place over a range of dimensions, including attempts to differentiate products by offering varying levels of quality, and generally suggest a strong connection between profitability and market share.8

Newspapers are joint commodities that compete simultaneously in two economic markets.9 One market is the information market, where newspapers provide information in the form of news and advertising to readers. The second market is an advertising market, where newspapers provide advertisers with access to readers. This study is concerned with the demand for newspapers in the information market because the share of this market - measured by circulation - determines a newspaper's ability to attract advertising.

Media Models

Barry Litman and Janet Bridges first reported a connection between editorial quality and a newspaper's commitment of financial resources to news coverage.10This was called the financial commitment theory.

Stephen Lacy reviewed research based on the financial commitment hypothesis to develop a model of how market competition relates to market performance.11 The model suggests that as competition becomes less intense, less money is spent on news. The decrease in newsroom spending lowers the newspaper's quality. As quality declines, readers get less utility from the newspaper. This results in decreasing market performance in areas such as circulation. Thus, the financial commitment model explains how profit decisions by news organizations may ultimately hurt demand for newspapers.

Another theoretical model suggests more direct relationships between quality, competition and demand.12 This model of news demand is based on the premise that many readers have a minimum level of acceptable quality that they expect from a newspaper. This minimum is represented by a kink in the newspaper's demand curve. Below the minimum quality level, demand is relatively elastic - readers will more readily substitute other media as quality continues to decline. Above the minimum level demand is relatively inelastic - readers substitute other media less readily in response to declining quality. The kinked demand curve also implies opposite effects - that gains in readership from quality increases are greater below the kink than above the kink.