The economics of non-profit newspapers

By Felix Salmon
March 30, 2010
Alan Mutter is a genuine expert on newspaper economics, which is one reason why his bizarre blog entry today on the economics of non-profit newspapers is so puzzling. This has to be one of the most innumerate things he's ever written:

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Alan Mutter is a genuine expert on newspaper economics, which is one reason why his bizarre blog entry today on the economics of non-profit newspapers is so puzzling. This has to be one of the most innumerate things he’s ever written:

The math, as detailed below, shows that it would take $88 billion – or nearly a third of all the $307.7 billion donated to charity in 2008 – to fund the reporting still being done at America’s seriously straitened newspapers.

The good news is that he does indeed detail his math, making it easy to see where he goes wrong.

Rick Edmonds, the estimable media economics expert at the Poynter Institute, calculated that American newspapers are spending $4.4 billion today on news-gathering…

If you wanted to sustain the current level of newspaper coverage by replacing for-profit funding with non-profit dollars, the typical approach would be to raise an endowment that would be invested conservatively to produce an annual return of 5%. The investment income would be distributed each year to provide the operating budgets for non-profit news organizations.

The endowment necessary to provide $4.4 billion in annual newsroom funding would be $88 billion.

There are two huge errors here. The first is the way that Mutter confuses stocks with flows. The $308 billion donated to charity in 2008 is an annual figure; he should therefore compare it to the annual figure of $4.4 billion, rather than applying a multiplier of 20 to that $4.4 billion first in order to convert it from a flow to a stock.

But even the $4.4 billion figure is far too large, since a non-profit needs to cover only a newspaper’s losses, not its total newsgathering expenditures. After all, it’s not like anybody’s suggesting that newspapers stop carrying ads the minute they get bought by a non-profit.

What’s more, a non-profit which owns a newspaper can, in theory, fund those losses out of future profits, in the way that for-profit newspaper owners find hard. In a capitalist system designed for the efficient allocation of capital, it only makes sense to fund short-term losses if the long-term profits will more than make up for them. If the long-term return on investment is lower in newspapers than it is anywhere else in the economy, then you should invest your money somewhere else, rather than covering near-term losses.

A non-profit, on the other hand, is interested foremost in the perpetuation of the institution, rather than the maximization of profits. Of course, the more profitable the newspaper is, the longer it will be able to survive. But if the non-profit sees a path to a sustainable model of small-and-steady profits in the future, it just needs to get the newspaper there from here: it doesn’t need a massive endowment.

Newspapers, just like websites, are in the business of monetizing readers. Historically, they’ve done that by selling advertising; in the future, they’d be well advised to develop other revenue streams as well. Their total readership is generally higher than it’s ever been, thanks to the internet, even if their print readership is down. And their readers are often well-heeled and very loyal to the newspaper brand: that’s a relationship which should be worth a lot of money, somehow.

If you found an inventive, business-savvy, and optimistic non-profit, then, I think it could in theory run a newspaper with a pretty modest sum in the way of up-front costs. Of course, it might fail — but any newspaper might fail. Non-profits should be allowed to fail just like anybody else. Which is another reason why raising a full endowment up front is not only unnecessary, but is also arguably counterproductive.

So while the non-profit route is probably not going to happen very often, it’s certainly an intriguing one which can make quite a bit of financial sense. It’s not remotely the impossible money-pit painted by Mutter.

Update: David Cay Johnston weighs in, along similar lines.

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