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Friday, November 24, 2006

The newspaper side of the business

Chain Gang
"Donald makes the money and Si spends it."
Carol Felsenthal, biographer of Si Newhouse

The long-time Sam Newhouse newspaper economic model is monopoly within a geographic area. The purpose is to eliminate competition in order to more easily increase prices and, thus, increase profits.
Monopoly (wikipedia): "In economics, a monopoly (from the Latin word monopolium - Greek language monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service. Monopolies are characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods."
Donald Newhouse - Sam's younger son - understood the secret of his father's success: monopoly creates an artificial floor for profits, with huge upside potential from the elimination of advertiser and subscriber resistance to marginal price increases.

For decades, the cash flow from monopolized statewide daily newspaper markets like Oregon has sustained Si's stable of glitter, power and glory loss-leader magazines and the Newhouses' extravagant, over-spending Manhattan lifestyle.

Why is a geographic newspaper monopoly a problem? Because all consumers in a community ultimately pay the cost of advertising for goods and services. We all ante-up for excess Newhouse profits - in the form of higher prices. A monopoly leaves communities poorer, compared those who enjoy a competitive market.

The "charitable" contributions that monopoly newspapers return as a measure of atonement make good PR yet amount to a bare fraction of the local losses, both in real value and from stifled innovation due to suppressed competition.

Monopoly degrades the so-called "content" (reportage and editorial) side of newspapers, which tends to yield to the advertising & advertorial imperative. It also results in a reflexive bias against competition in general. Editors have few qualms about squelching diversity of public opinion and playing favorites, such as routinely endorsing most political incumbents for re-election. And editors act as if naturally entitled to assume a strident, intolerant posture, and to apply multiple standards to any subjects. A monopoly newspaper pays little or no price for such arrogance.

For example, note how The Oregonian threw stones from its glass house (as usual) trying to shatter one of its pet peeves, the voter initiative process, today:
"We need to recognize that there is a new form of nobility among us that's as dangerous as the kings and nobility of old. This new nobility consists of a wealthy few who use their money to to bankroll initiatives designed perpetuate their wealth or power or to advance narrow social causes. It may have been possible once to argue that the initiative process was a partial cure for a do-nothing government. The better argument these days is that initiatives themselves are more of an affliction and not a cure for anything."
Oregon serves as a good example in many other ways. Sam Newhouse purchased The Oregonian in 1950 for $5.6 million; at the time, the largest newspaper sale ever. In 1961, he purchased the Oregon Journal for $8 million. In 1982, three years after Sam's death, Donald officially merged the two papers and the Oregon Journal, founded in 1902, disappeared. (Future posts will examine the Oregon example in far greater detail.)

Sam Newhouse had taken 11 years to create a statewide daily newspaper monopoly that has held for 45 years and whose greatest threat today is not a direct competitor, but the changing technology and market segmentation of advertising itself.

These are some of the newspapers in the Advance Publications empire, like The Oregonian - owned by the billionaire Newhouse brothers from New York. (Click the image to enlarge.)

Part 4 in a series: "Getting to know The Oregonian's owners"

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