Clustered Newspapers Operate More Efficiently

Newspaper Research Journal, Fall 2003 by Martin, Hugh J

Clustered newspapers report sharing resources, such as local newsgathering and printing presses, far more than non-clustered newspapers. They also have smaller newsroom staffs.

Newspaper companies are trying to increase efficiency by assembling clusters of commonly-owned newspapers in geographically adjacent markets.1 Companies argue that clustered newspapers can reduce costs associated with administration, production, advertising sales and newsgathering.2 Cost reduction, the industry argues, can be accomplished by combining production or by sharing resources across multiple newspapers to create economies of scale. These arguments have been used to justify numerous acquisitions by a single owner of previously competing newspapers in the same or in adjacent counties.

However, creating scale economies is not easy.3 Firms in a variety of industries, including the mass media, have found that mergers do not always result in lower costs.4 New efficiencies cannot be realized unless companies coordinate "functions that are sensitive to economies of scale."5 Such coordination often requires the rearrangement of existing production processes.6

Clustering drove many newspaper acquisitions in the last decade.7 Therefore, it is important to examine whether clustered newspapers actually try to create scale economies. Direct examination of newspaper costs is difficult because such information is considered proprietary. However, newspapers must take deliberate steps to create economies that will reduce costs. Operating efficiency can also be measured with non-cost variables such as staff size and workload. If newspapers that take steps to create economies operate more efficiently than newspapers that do not, this would suggest efficiencies are being created.

Information about the operations of individual newspapers can be obtained from newspaper executives. This study reports results from a survey that compares responses from executives at clustered and non-clustered newspapers.

Literature Review

Trade publications frequently discuss clustering8 and newspaper sales involving clusters.9 Clustering is also practiced by cable television and by radio companies.10 One newspaper study found the proportion of United States dailies that were part of a cluster increased from 27 percent in 1988 to 33 percent in 1998.11

Newspapers operate in geographic markets defined by the extent of their circulation. Newspapers compete when one paper crosses another's circulation boundary and enters its rival's market. The acquisition of one newspaper by another in an adjacent market is a form of "horizontal integration"12 that eliminates a competitor and creates a cluster.

Horizontal mergers can result either from normal business motives or from attempts to profit by reducing competition.13 Companies that cluster newspapers cite normal business motives, such as reducing production costs, as reasons for their strategy.14 Larger firms that acquire smaller firms may also make investments in new plants or equipment that the smaller firm could not afford.15 This might occur if a newspaper group acquires independently owned newspapers and clusters them.

Researchers have examined how clustering affects newspaper competition, newspaper advertising prices and newspaper subscription prices.16 However, no other systematic study of efforts by clustered newspapers to reduce production costs was found.

Reducing Costs

Horizontal mergers may reduce costs if the merging firms rearrange production to create economies of scale. Economies of scale exist when a firm's long-run average costs per unit decline as more goods are produced.

There are four kinds of scale economies. The first, product-specific economies, exists if specialized production processes require substantial preparation before a production run begins.17 The cost of setting up production is substantial, so average production costs decline as production increases. Productspecific economies are available to newspapers if preparing to produce news and advertising entails substantial initial costs for labor and specialized machinery, such as computerized equipment and presses.18

A second kind of scale economies is associated with the output of an entire production plant.19 Economies exist if output increases disproportionately with the size of equipment that is used. This occurs if the ratio of cost to production capacity does not increase with size. Newspapers will realize plant-level economies of scale if they can expand their presses, and their output, without a disproportionate increase in associated costs.

The third kind of economies is called economies of scope. Economies of scope exist if the cost of separately producing at least two goods is higher than the cost of producing those goods together.20 This is because the cost of producing a product is affected both by the volume of production and the size of the plant where the product is produced.21 If the volume of production is not large enough to realize all available scale economies, then producing more than one product may result in economies of scope.