The picture that emerges from Paton’s discussion of the news on his blog, and from reports by Reuters and others, is of a newspaper business that has desperately been trying to bail the boat with digital-first initiatives aimed at boosting online advertising revenue and/or cutting costs, but is still taking on water at a furious pace. According to Paton, the chain emerged from bankruptcy in 2009 with $225 million in debt — down from about $700 million before the filing — and while digital revenue has grown by more than 200 percent since that date, it has not been nearly enough to compensate for the decline in print revenue and the chain’s legacy cost structure. As Paton describes it in his blog post:

“The Company exited the 2009 restructuring with approximately $225 million in debt and with a legacy cost structure, which includes leases, defined benefit pensions and other liabilities that are now unsustainable and threaten the Company’s efforts for a successful digital transformation.”

Legacy costs from a former business model

Despite its attempts to push a digital-first agenda, which includes opening community newsrooms and cutting back on printing plants and other embedded costs, the Journal Register Co. is in the same boat that many other newspapers in the U.S. are: print advertising, which still represents over half the company’s revenue (a ratio that is much higher at some other papers) has fallen by almost 20 percent over the past few years, and circulation revenue has also fallen. And meanwhile, the chain is carrying not just debt but leases for buildings and pension plans that were designed for a much healthier industry: according to Paton, the chain’s projected revenue for 2012 is half what it was in 2005.

As Financial Times columnist John Gapper has noted, one of the obvious legacy costs that many newspapers are struggling with is the burden of carrying pension obligations for the thousands of employees they maintain, many of whom have jobs that are either being phased out or no longer exist — something Rick Edmonds at Poynter says is commonplace throughout the industry.

@jxpatonJournal Er, yes, I might have one or two questions if you'd just stripped my defined benefit pension scheme by declaring bankruptcy

—
John Gapper (@johngapper) September 05, 2012

It may be cruel to think of using bankruptcy to shed those kinds of obligations (Alden Global, the financial entity that is a controlling shareholder of both Journal Register Co. and its parent company Digital First Media, apparently plans to buy back the remaining assets after the bankruptcy is finalized). But is it really that different from the upheaval that other industries have been through over the past few decades? To take just one example, the steel business was disrupted by the arrival of cheap mini-mills — in some ways, the steel equivalent of the Huffington Post or BuzzFeed — and it took years for that to work its way through the system, with an entire generation of workers laid off.

The automotive industry and the airline business have both gone through similar painful transformations, not to mention companies like Kodak and others who have seen their industry disrupted by digital forces. While the upheaval in cars and airlines may not have been caused by the web the way the disruption in newspapers has been, the reality is that all of those businesses were stuck with massive legacy costs as a result of a prior business model that stopped working for a variety of reasons. Moving from print to digital for newspapers isn’t just a matter of shutting down the presses or selling a few buildings — there is much more involved.

Digital first is not a magic wand

Journal Register Co. may be a more extreme version of what is happening elsewhere in the newspaper industry, but it is hardly unusual (other companies that have already gone bankrupt once, like Canada’s national Postmedia chain, are also still struggling). Everyone pays attention to what the New York Times is doing, and how its paywall seems to be generating substantial amounts of revenue — but even that has not come close to making up for the ongoing decline in print revenue, and the high embedded costs of a business that is still based around print. That’s why chains like Advance are shutting down printing altogether, and trying to make the jump to digital sooner rather than later.

Critics are calling foul on Paton’s talk of a digital-first turnaround, and saying the bankruptcy of Journal Register Co. means his vision is questionable — but this is like complaining that a giant steel company hasn’t been able to make its tiny new mini-mill compensate for the billions in traditional revenues it is suddenly missing. And in many ways, the transformation that is required for the newspaper industry is much harder than what the steel or auto markets went through: it’s not just that readers want something different, it’s that advertisers are also fleeing. That’s a double whammy.

So yes, newspapers have to try new things, put digital first — and try at the same time to change the culture within their newsrooms, which is even harder than tangible moves like selling off buildings. And even paywalls might help for some, but they are still ultimately just a line of sandbags against the rising tide. And the reality is that the tide is rising faster, not slower, and the upheaval it is going to cause won’t be measured in months or years, but in decades.

Post and thumbnail images courtesy of Flickr user George Kelly

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What happens to the MediaNews paywalls? It is too early for me to figure the future of Media News Group’s paywall experiment. They have just started and I have to come up to speed on their rationale for launching and criteria for judging success.

Is there a chance you could wind up deciding paywalls — or at least trials of them — make sense in some places while staying away from them at JR? It is possible but clearly I would have to be convinced paywalls are worth management’s time in pursuing and that they are part of a comprehensive strategy to grow audience.

Were you aware of the Bay Area consolidation (from 11 newspapers to two) and do you approve? Will you change it at all? I was not made aware of the Bay Area consolidation prior to that initiative. Again, I have to come up to speed on the rationale before making a comment.

What is the single greatest change MediaNews needs to make to be digital first and how do you go about it? The single biggest challenge at Media News Group – is the same that exists at any newspaper company – culture change. To understand the nature of how news is created and consumed today and what role journalists and newsroom play in the new news ecology.

Using Press +, MediaNews launched metered paywalls — digital subscription required after five free pages a month — at 23 of its papers last month. Unlike the New York Times or some other papers, digital access isn’t bundled with print. Instead, print subs get a discount of $1.99 per month or $19.99 per year for online access, while non-print subscribers who want full access have to pay $5.99 per month or $59.99 per year. Home pages, classifieds, obits and announcements are also free. The Chico Enterprise-Record, York Daily Record and York Dispatch have older online subscription plans in place. Dean Singleton, the CEO at the time, promised in 2009 MNG would avoid a “cookie-cutter approach” in favor of a market-based strategy. Singleton, chairman of the Associated Press, remains chairman of MediaNews.

Despite his feelings about paywalls, it’s not a stretch to see Paton trying a variation that would include bundling to encourage more digital adoption by print subscribers or to look for some other options that may work on a market-by-market basis — particularly if local advertising get hit. It’s also not a stretch to see him shutting it all down.

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It’s a huge jump for Paton, who will be managing nearly 11,000 people and running the second-largest newspaper chain in terms of circulation with a presence in 18 states. He comes in just weeks after a major MediaNews shakeup in the Bay Area. More to come; in the meantime, here’s the way Paton’s pitching it on his Digital First blog.

Paton firmly believes “digital dimes can replace print dollars”, offering Journal Register as an example:

Since implementing our Digital First strategy in mid 2010 our Digital audience has doubled to more than 12.3 million uniques and our entire audience has grown from 14.9 million monthly customers on all platforms to nearly 21 million customers.

That’s more customers for what we have to offer. A lot more.

In Q2 of this year, 10 of JRC’s 18 dailies are up year over year in advertising or within 2% of last year’s ad revenues because of digital advertising growth. JRC newspaper digital revenue grew more than 81% year over year in Q2. That’s against an industry average of less than 10%.

How this will apply to the MediaNews papers remains to be seen. For instance, most of the smaller papers are trialling versions of paywalls now while Paton is firmly on the record preferring open ad-supported access. I’ve reach out to Paton on that and other aspects and will update when I have more.

————————————————-
Journal Register Company, one of the nation’s leading local news and information companies, announced today the creation of Digital First Media Inc. Digital First Media will manage both Journal Register Company and MediaNews Group Inc.

John Paton, as the Chief Executive of Digital First Media, will act as CEO of both Journal Register Company and MediaNews Group.

In a separate release, MediaNews Group, the nation’s second largest newspaper company as measured by circulation, announced its appointment of Mr. Paton as CEO and the new agreement with Digital First Media. Mr. Paton, a director of Journal Register Company, has also been appointed to MediaNews Group’s board of directors. Mr. Paton and Digital First Media will report to the boards of both MediaNews Group and Journal Register Company.

This arrangement provides MediaNews and Journal Register Company with immediate cost benefits, and the ability to leverage the combined scale and expertise of both companies for their mutual benefit.

“This allows these two great companies to accelerate our Digital First strategy of transitioning from what have largely been print-centric businesses to modern, multi-platform media companies focused on local news and advertising,” said Mr. Paton, who is also a director of the Newspaper Association of America. “I am very excited to be working with MediaNews Group and the Journal Register Company teams. This initiative creates a local news powerhouse with more than 880 multi-platform products in 18 States serving more than 57 million Americans per month for the benefit of our communities, customers and employees.”

“Media News is intent on continuing its transformation from a print-oriented newspaper company to a locally focused provider of news and information across multiple platforms. At the forefront of our efforts is developing a successful digital strategy. With ‘Digital First,’ John has implemented just such a digital strategy for Journal Register Company. We are delighted to tap into John’s experience as we accelerate further our successful transition to a digital world,” said Dean Singleton, who will step down as CEO of MediaNews Group. Mr. Singleton, who is the Chairman of The Associated Press, remains Chairman of MediaNews Group and the publisher of the Denver Post and Salt Lake City Tribune.

Digital First Media represents the codification into a management company of a digital strategy that Journal Register Company has been pursuing with great success since February 2010, when John Paton was named Chief Executive Officer of Journal Register Company. MediaNews will benefit from that experience, and from cooperation with Journal Register Company, as it continues its own evolution to compete in the new media landscape.

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As the CEO of Journal-Register Co., a chain of small newspapers located mostly in the northeastern U.S., John Paton has been pushing an aggressive “digital first” strategy ever since he took over the company in 2010. Now he will have a national stage on which to try to prove this is the solution to the painful disruption of the traditional industry: on Wednesday, he was named the new CEO of MediaNews, the second-largest U.S. media chain with more than 150 papers across the U.S. Are Paton and his “print dollars to digital dimes” approach the savior the traditional newspaper business has been waiting for?

If the digital-first approach has a patron saint, it is definitely Paton. A Canadian who worked his way up through the editorial ranks at several newspaper chains before moving into management and acquisitions, Paton took over the Journal-Register after it emerged from bankruptcy protection — the victim not just of a declining industry, but of a crushing debt load of more than $700 million. And he made it clear from the beginning that he was going to remake the chain completely by focusing on the web first, rather than the print side of the business.

“Stop listening to newspaper people”

Other newspapers, including The Guardian in Britain, have also pushed a digital agenda (Guardian editor-in-chief Alan Rusbridger reaffirmed this policy earlier this year), but Paton has been the most aggressive. In his presentations and blog posts directed both to Journal-Register staff and to newspaper executives at large, the new Media News CEO has not been shy about telling the industry that it has been doing things all wrong for years — and that the print side, with all its entrenched management, has to yield power to those with experience on the web.

Stop listening to newspaper people. We have had nearly 15 years to figure out the Web and as an industry we newspaper people are no good at it. No good at it at all. Want to get good at it? Then stop listening to the newspaper people and start listening to the rest of the world [and] put the digital people in charge – of everything.

In a blog post about his new job, Paton reiterated some of the common criticisms about a digital-first strategy, including the idea that “digital dimes” (a phrase popularized by Jeff Zucker of NBC) won’t make up for the print dollars that newspapers give up by focusing on the web instead of their legacy businesses. But the new Media News chief executive says he is convinced — based on his experience with the Journal-Register group — that this transition can work. Says Paton:

We are supposed to be out of ideas, out of money and out of energy. To our competitors, I say keep thinking that. It will make this transformation easier. At JRC we have blown up a lot of that received wisdom from newspaper critics… Digital revenues can pay for newspaper newsrooms.

Digital dimes will replace print dollars

According to Paton, since the company implemented its digital strategy, its online audience has doubled to 12.3 million unique visitors and its audience on all platforms has grown to almost 21 million from 15 million. The Journal-Register CEO said that 10 of the company’s 18 daily newspapers have seen advertising increase or remain flat (the latter being an improvement for most newspaper companies) and the chain’s digital revenue grew by more than 80 percent in the second quarter over the same period a year earlier.

It’s difficult to tell just how much healthier Journal-Register Co. is now because of its digital-first approach, since the privately-held company doesn’t release financial results (as media researcher Chris Anderson noted on Twitter when the Media News announcement was released). The company paid out a profit-sharing bonus to its staff earlier this year because it turned a profit of $40 million, but it’s not clear how much of that was a result of simply getting rid of its massive debt load.

Paton’s ascension to the executive suite at Media News wasn’t really a surprise (he is also CEO of a new management entity called Digital First Media). Martin Langeveld — a former Media News publisher — and analyst Ken Doctor have noted recently that moving Paton into that job would make sense, not just because Media News is looking for help in transforming the company but because both it and Journal-Register Co. share an investor: Alden Global Capital, which has been buying up stakes in newspaper companies throughout North America (including the Canadian chain Postmedia, where Paton is an advisor).

Paton has also made it clear that his new approach at Media News will incorporate a crowdsourcing strategy as well, something that could involve more experiments like the “community newsroom” that one Journal-Register newspaper recently launched — which allows readers to come in and help themselves to free coffee and free Internet access, and take part in editorial meetings. Media News has also been experimenting with crowdsourcing to a certain extent: it recently launched a mobile app called TapIn BayArea that allows readers to contribute photos and other news items.

Will Paton be able to show other newspaper owners how they can adapt to the digital transformation that is disrupting the industry, without simply throwing up walls of digital sandbags the way some newspapers like the New York Times  have? He definitely has a much larger stage on which to work now — but the patron saint of “digital first” will still have to provide some miracles before he wins over any more converts.

Post and thumbnail photos courtesy of Flickr users David Daniels and Si Brindley

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As newspapers everywhere struggle to stay afloat and remake themselves for a web-based world, many continue to debate how much emphasis they should put on digital vs. their traditional print operations. John Paton, CEO of the Journal Register group of newspapers, says the time for debate is over. Newspapers need to be digital first in everything they do, he says, and more than that, they need to take the same approach to their businesses that many web-based startups have, and that means being transparent, crowdsourced, collaborative and flat. There’s no question; it’s an inspiring message, but will anyone listen?

In a speech he delivered Thursday at the Transformation of News Summit in Cambridge, Mass. (put on by the International Newsmedia Marketing Association or INMA), Paton said that the Journal Register — which he took over in February — has been living and breathing these principles for the past year, and they’ve paid off in terms of both revenue growth and profits for the company, which was effectively bankrupt last year. Paton says the Journal Register’s profit margins will be about 15 percent this year.

In effect, Paton says, the Journal Register — which publishes about 170 daily and weekly papers in Pennsylvania, Michigan, Connecticut, New York and New Jersey — is already a digital-first company whether it wants to be or not, because its total online audience is bigger than its print audience. “We are already a Digital company,” he said in his presentation, “with small sales in the area of growth and a burdensome cost structure on the declining business – Print.” The newspaper CEO said the company has dealt with that cost structure problem by outsourcing everything it can to others who can do it cheaper or better.

We are getting out of anything that does not fall into our core competencies of content creation and the selling of our audience to advertisers. Get rid of the bricks and iron [and] focus on core competencies — meaning, get rid of those things that don’t add value to the business. Reduce it or stop it. Outsource it or sell it.

What’s most interesting about the Journal Register’s approach is it doesn’t rely on putting up paywalls, the way that media mogul Rupert Murdoch has done at his newspapers in Britain — which led to a decline in online readership of more than 90 percent — and the way some other media outlets such as the New York Times are planning. Instead, Paton is focused on expanding the relationship his newspapers have with both readers and advertisers in their local communities, and taking that online. He says it’s working even better than expected.

Digital ad growth is 2 times better than the industry. More importantly the company’s digital revenue has grown from negligible to 11 % of ad revenue in November – in less than a year. The company will write about 1,000 digital ad orders this month and has expanded its revenue streams from about 13 basic revenue streams to about 60. And all of that with less costs.

In addition to the advertising growth, Paton says his papers are reaching out to the communities they serve, to make them part of what he calls the “new news ecosystem.” For one paper, the Register Citizen in Connecticut, that means creating a new community newsroom, which the newspaper is moving into later this month — the new offices have no walls, Paton says, and feature “a newsroom café with free public Wi-Fi, a community media lab and a community journalism school.”

The Journal Register CEO has also been taking the same approach to his own company: Earlier this year, Paton launched a project called ideaLab, in which employees from across the company were chosen from an open application process that generated almost 200 comments on Paton’s blog (his post about the lab is here). Armed with their choice of mobile phone, a netbook and iPad, members of the ideaLab get 10 hours of paid time per week to experiment and innovate — and only one rule, Paton said: There are no rules, and no sacred cows. Paton also had strong words in his presentation about why most newspapers aren’t changing:

The reasons… are simple: Fear, lack of knowledge and an aging managerial cadre that is cynically calculating how much they DON’T have to change before they get across the early retirement goal line. Look at the grey heads in any newspaper and you will see what I am talking about.

The solution, according to Paton?

Stop listening to newspaper people. We have had nearly 15 years to figure out the Web and as an industry we newspaper people are no good at it. No good at it at all. Want to get good at it? Then stop listening to the newspaper people and start listening to the rest of the world. And, I would point out, as we have done at JRC – put the Digital people in charge – of everything.

Whether anyone decides to take the Journal Register Co. CEO’s advice, it seems clear that the approach is working for Paton’s chain; he says in the year to date, the company outperformed the newspaper industry, with ad revenue growth three times better than the industry average, and classified ad performance that was six times better. Since costs have shrunk, profit margins have actually increased. On top of that kind of financial performance, it’s refreshing to see a newspaper publisher not just talk about going “digital first” but actually put his money where his mouth is. If you care about the future of newspapers and media, it’s well worth reading the entire presentation.

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Can building a network of local bloggers help turn online journalism into a money-making proposition? Two new media ventures are hoping that it can, and have partnered with a startup called GrowthSpur to try and make that hope become a reality. One of the ventures is another startup, a Washington-based outlet called TBD that is being run by Jim Brady, the former online editor at the Washington Post. The other is a traditional media entity that is trying to remake itself online: the Journal Register Co., which publishes a number of daily and weekly newspapers in Philadelphia, Michigan, Connecticut and New Jersey. Journal Register’s new CEO, John Paton, has been aggressively launching new-media related ventures at the company, including a community journalism lab aimed at training local bloggers.

GrowthSpur will be working with the bloggers who are part of both networks to help them sell advertising on their blogs, both by training them in ad sales and by aggregating them into an ad network that can carry advertising across all of the blogs in the group. The company, which was founded last year, is run by media-industry veteran Mark Potts and has another industry guru — journalism professor and consultant Jeff Jarvis — on its advisory board.

TBD.com, which has been in development for the past year or so and is expected to launch this summer, is being financed by Allbritton Communications, which also owns the online political site Politico. TBD editor general manager Jim Brady has said that the new venture is designed to be hyper-local and community-oriented, and the blog network is at the core of that idea (the Washington Post also partners with a network of local blogs). The company says it has built up a core of almost 100 local bloggers who cover the Washington area from a number of different perspectives, and content from these blogs will appear alongside news and opinion writing from TBD staff:

When you come to TBD’s home page or one of our topical pages, you will see content from across the region from a variety of sources. We will present the biggest stories that we think will be important and interesting to people throughout the metro area. And we will sort news by location, offering you news that’s important to you because it’s close to where you live, work, play or shop. When you click the links, some headlines will take you into the TBD site to content produced by our staff. Other links will take you away to content from our network members or other news sources in the community.

Local journalism-based blog networks have been tried in the past, but not always with great success. One of those efforts, Backfence.com (which closed down in 2007) was founded and run by Potts, who is now running GrowthSpur. (Potts talked to Mark Glaser of PBS MediaShift about the lessons he learned from Backfence.) Some hyper-local blog networks and blog aggregators have prospered, however, including BaristaNet — which recently took over a local news venture that was originally started by the New York Times. Two of the newer entrants in this race are AOL’s Patch.com, which the company is aggressively expanding into a number of U.S. markets with $50 million in funding, and a venture-backed startup called MainStreetConnect.

The Guardian newspaper in Britain also recently introduced a plugin for WordPress blogs that allows them to republish content from the newspaper (provided they include advertising from the company along with the news stories), and there has been some speculation that the paper is planning to use this feature as a way of assembling a blog network of its own, which would syndicate blog content into the Guardian and also redistribute Guardian content (and advertising) through the blog network.

Despite the entrance of heavyweights such as Patch.com into the market, however, it’s still not clear whether hyper-local blogging and journalism in general can generate enough revenue to make them viable as businesses in their own right. Anyone with a stake in that market will undoubtedly be watching TBD and Journal Register’s attempts closely.

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