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A Cautionary Tale for Old Media


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On Jan. 19, 1990, Robert D. Ingle, then executive editor of the San Jose Mercury News, wrote a remarkably prescient memo to his bosses at the newspaper chain Knight Ridder. Typing at night in his breakfast nook on an Apple II PC, he envisioned that a global information network would emerge, giving rise to all manner of online communities. And he proposed an online service, Mercury Center, aimed, his memo said, at "extending the life and preserving the franchise of the newspaper."

This was nearly four years before programmers created the first Web browser and long before Google (GOOG) and social networking exploded onto the scene, yet Ingle seemed to anticipate much of what would come. He laid out strategies for the entire chain: Give information to readers however they wanted it, integrate the print and online operations, and dream up new forms of advertising. "I saw the Internet as a great opportunity, but also as a great threat," says Ingle, who retired in 2000.

If Ingle's proposal had been enthusiastically embraced by Knight Ridder's 28 dailies, perhaps the fate of the chain might have been different. As it was, an epic shift of advertising over to the Web would cut the economic legs out from under the Mercury News and other Knight Ridder papers such as the Miami Herald and Philadelphia Inquirer. From 2000 to 2003, help-wanted ads at the Mercury News plummeted from $121.5 million to $17.9 million. Last year, Knight Ridder was forced to sell out. The Mercury News eventually wound up with MediaNews Group, whose chief executive, William Dean Singleton, is reviled by many journalists as a low-cost publisher of second-rate papers.

Today, with advertising weak and readers flocking to the Web, the Mercury News is trying desperately to reinvent itself. Executive editor Carole Leigh Hutton has vowed to "blow up the newspaper" to make it relevant to today's plugged-in readers. The overhaul is coming early next year. "I don't see myself as a savior," says Hutton. "I'm figuring out the answers to daunting questions. What's journalism now? Who do we serve? And how do we make it work financially and journalistically?" Meanwhile, Silicon Valley wits derisively refer to the ailing Mercury News as the "Techtanic."

IN DENIAL

The collapse of Silicon Valley's daily newspaper is in many ways the story of American newspapers in the 21st century. The industry has reached a near-crisis point. Many dailies are losing circulation at an alarming rate, and local newspaper ad spending fell 3.1% last year, to $24.4 billion, while Internet advertising rose 17.3%, to $9.8 billion, according to Advertising Age.

But the shivers rippling through the Mercury News also serve as a dramatic example of what happens when industry leaders get complacent in the face of fundamental shifts. Andy Grove, who helped sow the Internet revolution when CEO of Intel (INTC), says that cross-industry disruptions follow a predictable course: Executives ignore the challenges. Then they try to resist. Only when it's too late do they make radical changes. Grove, who now teaches a strategy course at Stanford University's School of Business, summarizes the newspaper industry's prospects: "Your doctor says you're going to die, but if you don't smoke, you'll live a little longer."

RIDING THE WAVE

The Mercury News seemed perfectly poised to reap the harvest of the New Economy. Indeed, Knight Ridder moved its headquarters to San Jose from Miami in 1998 partly to feed off the Valley's energy. Riding the rapid growth of such local tech giants as Intel, Apple (AAPL), and Hewlett-Packard (HPQ), the Mercury News had emerged from mediocrity during the 1980s and '90s to become one of the most profitable papers in the country. Ads bought by tech outfits paid for a vast news operation that stretched from Washington to Ho Chi Minh City. Staffers won the industry's top recognition, the Pulitzer Prize, for coverage of Philippine tyrant Ferdinand Marcos in 1986 and the Bay Area earthquake in 1989. (Full disclosure: This reporter worked at the Mercury News from 1989 to 1993.)

Thanks to Ingle's foresight, the Mercury News and Knight Ridder executives had the chance to fashion a radically different outcome. Yet they were running with their shoelaces knotted together. Ingle, smart as he was, turned out to be the wrong person to lead the digital initiatives. He didn't have the personality to persuade independent-minded publishers to build up their online businesses aggressively. And the dot-com boom masked fundamental shifts in reading and advertising that came about all at once when the false economy collapsed.

At first, Ingle got plenty of support from top brass. He was one of the group's most respected editors and had learned the tech rope earlier, at the Miami Herald, when he got an assignment to modernize the newsroom computers. A wiry Iowan with a sharp tongue and no patience for tardiness or typos, Ingle used corporate funds supplied by CEO P. Anthony Ridder to launch Mercury Center as a destination on America Online (TWX) and then as its own separate site on the Web. Ridder then created Knight Ridder New Media Center and put Ingle in charge. His task: to get all 28 papers online quickly. Ingle accomplished that goal in just one year.

But the nimbleness didn't last. For all the angst generated in the 1980s and '90s about corporate consolidation of metro newspapers, Knight Ridder and other chains were remarkably decentralized. As long as the publishers delivered profits, they were left alone. Yet the world was changing. It was clear to Ingle that the chain's newspapers would be far stronger if they pooled content, adopted common technology for their Web sites, and coordinated online advertising. But he didn't have the power to force anybody to do anything. And early on, there was no dramatic shift of readers or advertisers to the Web. So what was the rush? The publishers resisted the call to collaborate. "I felt extremely frustrated. It was like herding cats."

'DIAMETRICALLY OPPOSED'

The same was true of the industry as a whole. In 1995, Ingle managed to persuade eight other companies, including Tribune (TRB), Gannett (GCI), and the New York Times (NYT), to form an alliance, grandly named New Century Network. The idea was to share content and jointly sell national online advertising. But the effort never got traction because of disagreements among its members, and the alliance came to an ignominious end in a New York hotel room in mid-1998. After an intense six hours of debate, representatives from the companies voted 5-4 to disband. Even Ingle turned thumbs down, convinced the project was doomed because of the chauvinism of the partners.

Meanwhile, Ingle was still running into stiff resistance internally to his calls to consolidate Knight Ridder's Web initiatives. At a publishers' meeting in late 1998 in San Jose's Fairmont Hotel, he faced withering criticism. Ingle had irritated the publishers with his sometimes caustic style, and, at this meeting, when he chided them again for not going digital fast enough, they blasted back. "Bob felt the publishers were late to get on board, and the publishers felt we were under pressure to make our quarterly numbers. We were diametrically opposed," recalls George Riggs, who then ran Knight Ridder's Contra Costa Times and is now president of the MediaNews Group's Bay Area group, which includes the Mercury News. Within a few weeks, Ridder shifted Ingle into another corporate role.

At this point, it helps to recall Andy Grove's rules of disruptive denial. Knight Ridder executives had their eyes locked on Wall Street, where analysts hounded them for faster growth. They missed what was happening in a garage in Menlo Park, a few miles from the Mercury News building, where a couple of Stanford students had just started search engine Google.

Even a couple of years later, as the economy soured after the September 11 shock and ads began shifting to the Web and to Google, executives were slow to respond. So when Knight Ridder's digital initiative finally began to take off in 2003, it was too late. After Ingle, two executives centralized operations, but the resulting Web sites were beset with technical glitches and lost touch with the local news operations. Knight Ridder hired Hilary Schneider, who had run Red Herring Communications--a startup business magazine and Web site--and she tried a fresh approach. After extensive talks with publishers, Schneider began giving the papers credit for online revenues that came from their sales teams and advertisers. In just three years, Schneider tripled revenues, to $200 million. Ridder says the business made a profit. But that paled next to Google's $6.1 billion in revenues and $1.5 billion in profits that same year.

Perhaps if Ridder had pushed Ingle's plan more forcefully and had put it in the hands of somebody with Schneider's diplomatic and business skills earlier, the outcome would have been different. But in the end, Knight Ridder was killed off by a hedge fund manager who made a bad bet. Bruce S. Sherman of Private Capital Management had plowed 14% of his fund's value into newspaper stocks, including a 19% stake in Knight Ridder. His timing couldn't have been worse. By 2004, most of his newspaper holdings were losing value as big advertising and circulation declines set in. He decided to make some of his money back by forcing Knight Ridder to sell out. Ultimately McClatchy Co. (MNI) bought it for $4.1 billion. Ridder choked up when he delivered what he calls the company's eulogy at its last shareholders' meeting. On Apr. 26, 2006, employees learned the Mercury News had been sold to Denver-based MediaNews.

Looking back, Ingle concludes that what sank Knight Ridder was, surprisingly, that the Internet didn't change things fast enough. "We got an early start, but we couldn't take advantage of it," he says. "People think the Internet business developed with lightning speed, but it took a long while. Only the newspaper companies with two-tier stock structures [not Knight Ridder] could support those businesses until they could stand on their own feet."

'NO POSITIVE SPIN'

Today, the Mercury News' fate is in the hands of Singleton and its editor, Hutton. A seasoned newswoman who grew up in blue-collar Boston, Hutton had already overseen one round of firings when she gathered 200 newsroom workers in the company auditorium on Friday, Sept. 7, and revealed what became known as the "$6 million surprise." Revenue had slipped $3 million behind expectations, and, shockingly, accountants had made a $3 million error in tallying expenses.

As a result, Hutton said, she would immediately trim costs--including eliminating some sections of the newspaper. "There's no positive spin here. We're cutting," she said. During a Q&A session, staffers asked for assurances their jobs were safe, but Hutton made no promises.

Hutton is less than three months into her plan to reinvent the paper. When she unveiled her "Rethinking the Mercury News" project on Aug. 7, most of the staff quickly fell in step. That was a switch. In past days, some Mercury News staffers seemed just as slow as their bosses to recognize the importance of the Internet. "I suspect that most of my colleagues never even glanced at my blog back in its early days," says Dan Gillmor, a proponent of "citizen journalism" who launched a technology blog in 1999 and left the Mercury News two years ago. The mood is radically different today. More than 120 staffers, including some from the newsroom, are helping with Hutton's rethinking campaign, including trekking into bookstores, delis, and parks with video cameras and notebooks to ask people about what they read and watch.

Some hopeful signs have emerged. At a brainstorming session in September, employees suggested themed versions of the Mercury News online that provide readers with a world view through a lens of their own choosing. There might be a "green" portal for people interested in environmental causes, for instance. The best of the suggestions will be rapidly prototyped and tried out on consumers.

But it's also clear just how hard it will be to remain relevant. In a video made by canvassers from the newsroom, three teen girls sharing a park bench turned up their noses at the idea of a newspaper. Said one: "We're a fast generation. That slows us down."

Newspapering's journalistic and business leaders believe their industry can recover, but they admit it will be difficult. "The newspaper industry needs to move quickly on the Internet and redefine the news and find new ways of presenting it," says Karen Brown Dunlap, president of the Poynter Institute, a leading school for journalists. "The challenge is to try to do everything at once and yet stay grounded in journalism."

From outside the Mercury News' low-slung headquarters along Interstate 880 in San Jose, you wouldn't guess at all the turmoil inside. But, near the turnoff, the vacant two-story brick building where Knight Ridder New Media Center had its offices provides a clue. A cloth banner on the front reads: "Your Name Here." It's sobering testimony to a newspaper, and an industry, that is still groping for a way into the future.

By Steve Hamm

Photograph: "What's journalism now?" asks editor Hutton. "How do we make it work financially?"

PHOTOGRAPH BY THOMAS BROENING


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