The Cost of Sustaining Local Journalism: A Working Paper

Context: Local News Is Threatened

Local news is threatened … and the problem will not abate.

In fact, the problem has become existential to the continuation of in-depth journalism in thousands of communities across the entire country.

The sources of these threats are long in coming: consumer preferences have been evolving (unfavorably for the industry) over decades. During the initial wave of the?Internet ?in the nineties and early aughts, consumers’ willingness to pay for journalism eroded as they were trained to expect free content.

During the second wave of the Internet — in the 2010s — massive social platforms provided convenient, free alternatives to traditional publishers: the word of their friends or the unbranded content that filled their social media feeds. Consumers increasingly relied on these platforms for “news” and advertisers’ dollars followed.

Negative changes in consumer behavior related to news consumption has propelled the decline of several, highly profitable forms of print advertising: classified ads, display ads, retail insertions, and required governmental notices. Declines in print ad revenue could not be made up, even remotely, by growth in digital advertising given the pricing of digital ads and the many intermediaries needed to sell and deliver digital ads.

The industry has not been able to absorb this shift in consumer behavior. Profits at local papers first steadily — and then rapidly — declined. Print circulation at local newspapers is down, while much of the costly infrastructure to support print circulation remains. Total advertising revenue at local newspapers — print?plus?digital — has dropped by ~65% over the last decade. The two publicly traded companies with local newspapers, Gannett and Lee Enterprises, have a combined market cap of ~$350M, down ~70% since the end of 2017. Their combined debt is ~$1.9B or ~5.5 times the combined value of their equity. In February 2023, Gannett reported its first quarterly profit since Q3 2021 but margins at both companies remain stubbornly low.

The results are worrisome. Today, ~50% of America’s daily newspapers are controlled by a private equity firm or hedge fund which reasonably have mandates to deliver attractive returns on their investors’ money. A typical and rational lever for these private equity firms and hedge funds is to reduce costs to create those returns. But a company cannot cut its way to growth and there is only so far one can cut before a business can no longer function.

The resulting difficulty of running a newspaper profitably is seen in the drumbeat of newspaper closures: ~2,500 local papers have shuttered over the last ~15 years (8,900 to 6,400 newspapers). Newsroom staffing has been slashed by ~60% over the same time (71,000 to 31,000 journalists).

It is clear that the for-profit model cannot be sustained except at a few national news brands. As suggested above, consumers’ and advertisers’ willingness to pay is not sufficient to cover the costs of creating, distributing, and operating local newspapers. But there is no doubt that a local newspaper is a necessary public good: keeping citizens informed and connected, ensuring governments and elected leaders are in check, and providing a forum and a record for the public sharing of facts and opinions. When an entity cannot survive as a sustainable business but is inherently valuable to the public: this is the definition of a market failure.

You may ask: Is local journalism worth saving? Can other outlets replace the role that newspapers play?

The answer to the first question is an unabashed?yes. A weakened local journalism infrastructure undermines America and its institutions. Analyses show that civic engagement decreases when availability of local news shrinks. One study (“As Local News Goes, So Goes Citizen Engagement” in?The Journal of Politics ) shows that voters with reduced exposure to news are less able to express opinions about their elected representatives and less able to evaluate the performance of their representatives. Voter participation declines and incumbency rises in communities with less access to news. It seems axiomatic that the presence of watchdog journalism keeps those in power under some examination. And without examination, power is left unchecked.

And it is not clear that the remaining local news media — local television stations, local commercial radio, and local public radio — produces sufficient output to fill what local newspapers produce. Local television stations produce news — but limited by the number of hours of available airtime — and they cover vast physical territories. Local commercial radio rarely reports news, having moved to mostly centralized distribution of music and talk programming years ago. Local public radio stations provide in-depth reporting but the aggregate number of reporters across the hundreds of public radio stations is less than a tenth of the total number of newspaper journalists in the country.

We, therefore, believe local newspapers must be saved.

And, why a not-for-profit solution?

Ultimately, the harsh math of revenue minus cost equals profit, and the equally harsh expectations of shareholders, do not provide much flexibility for for-profit operations, especially those in publicly traded companies. Not-for-profits can access multiple sources of capital to support their missions: mass donors, wealthy individuals and philanthropists, foundations, and even governments. They can also operate at different cost structures to support their mission without the ire of shareholders, assuming they have the endowments to support their spending.

Already, not-for-profit support for local news is a broadly accepted lever. It is advanced in breadth and it is meaningful in financial contribution. Efforts to-date have been impactful for the communities, journalists, and outlets to which they have been directed. They have helped offset some of the industry’s headwinds, likely forestalled additional closures or layoffs, and perhaps even motivated action from additional stakeholders. The brevity with which we discuss existing programs in this paper is not commensurate with the impact these programs have had; existing programs and initiatives warrant celebration.

In all, we believe up to $150M annually is being deployed to support local news. However, we believe?more?is needed. Fully addressing the problem first requires understanding its scope and then creating frameworks to construct comprehensive solutions. Therefore, the purpose of this paper is twofold:

(1) First, to size the funding need to support local news

(2) Second, to identify not-for-profit solutions that could be deployed to address the problem

“Size Of The Problem”: It Will Take $0.75–1.75B To Fund Not-For-Profit Local News

The future we consider — one with a robust, nationwide not-for-profit local journalism apparatus — has a (hopefully) simpler business model than that of current “legacy” newspapers. We modeled four cost categories: (1) newsroom expenses, (2) digital operating expenses, (3) general and administrative expenses (“G&A”), and (4) ad sales and ad serving expenses. Revenue from digital advertising would offset some of these costs.

What remains after tallying up these revenues and costs is an estimated annual operating deficit of $0.75 — $1.75B. This shortfall must be covered by the sources available to not-for-profits: donations, philanthropy, and endowments.

The purpose of this analysis is to assert the magnitude of the societal problem our nation faces, help to get common agreement on its scale, and use this as a rallying cry among funders of all types to drive towards a sustainable model that yields the necessary annual funding to address this market failure.

An overview of our methodology is below. There are several simplifying assumptions that we also point out, necessary to manage the scope of our assessment

Annual Newsroom Costs: $2.5–3.5B

We calculated newsroom costs using three methods, resulting in an annual cost of $2.5–3.5B to cover the salaries and benefits for 31,000–41,000 journalists.

The lower bound has newsroom expenses of ~$2.5B to support ~31,000 journalists. This is based on the number of local journalists today (~31,000 per?Northwestern University’s Medill Local News Initiative ) and their average fully loaded compensation (~$86,000 per the?Bureau of Labor Statistics ; note our figure assumes additional personnel expenses on top of the salary reported by the BLS).

The higher bound has newsroom expenses of ~$3.5B which covers ~41,000 journalists. This estimates the number of journalists needed to cover every American county and applies the same average fully loaded cost per journalist (~$86,000 per the Bureau of Labor Statistics). The smallest counties (those with fewer than 25,000 people in them) were allocated 5 journalists each. The number of journalists per county increased with county size as shown in Exhibit 3:

Digital Distribution Costs: ~$0.5B

Annual digital distribution costs were estimated two ways, resulting in an annual cost of ~$0.5B. Digital distribution costs include internal productivity tools. For example, a content management system (CMS) to support asset management, content creation, workflow optimization, and distribution and the newspaper’s website.

One method to estimate these expenses is to price out the cost of a CMS for one newspaper per county.?Arc XP ?is a modular CMS owned by The Washington Post. Pricing varies but several outlets suggest publishers could pay?up to?$100–150K per year for Arc XP. Adding a 50% expense buffer to capture additional costs and applying this to ~3,100 papers (one per county) results in ~$0.6B of annual spend.?Labrador , another CMS, is ~$10–20K per year per license. Pricing scales with publisher size and the largest papers would have higher fees. Assuming every journalist has a license results in ~$0.5B of annual spend. Both CMSs are robust and may provide more horsepower than required by smaller outlets. Also sharing infrastructure across a network of not-for-profit newspapers could lower these costs in the long run.

General and Administrative (G&A) Costs: ~$0.25B

We assumed G&A is ~10% of newsroom costs, or ~$250M. This estimate was based on conversations with industry participants. Of course, G&A is frequently a cost bucket that includes many different costs and the precise model and structure of these newspapers could impact this estimate.

Net Digital Advertising Revenue: ~$2.5B

Local newspapers earned ~$5B in digital advertising revenue in 2022 (per?MAGNA ). We estimated a ~50% margin on this revenue, after accounting for ad sales staff, necessary data and tech infrastructure, and ad serving costs. This results in annual net digital advertising revenue of ~$2.5B. That 50% margin comes from industry interviews and our own experiences working with clients, but is highly dependent on the sales compensation, ad serving technology and partners, and the types and quality of ad inventory sold.

Four Simplifying Assumptions

Like all analyses, we have made some simplifying assumptions. Making these assumptions allows us to size the magnitude of the problem rather than resolve every operational consideration. We also wanted to get our number into the marketplace of ideas for discussion, instead of an endless loop of analysis. Removing these assumptions does not necessarily impact the magnitude of our answer — that saving local news requires a massive shift in the amount of not-for-profit dollars currently supporting the cause.

Our four simplifying assumptions are:

· There are no print costs considered.

· The size of the newsroom is static.

· Digital ad spend with local newspapers does not grow or shrink.

· Inflation is not accounted for.

On the print assumption: we do not expect print to disappear; it will remain an important medium for a portion of people for some time. However, we assume print costs should be fully covered by those consumers who still want access to a physical copy. Why? Print is expensive and our goal of supporting a healthy local journalism infrastructure is more easily achieved when donors and institutions fund the creation of news — not the subsidization of physical delivery. There are markets still where print is both desired and remains profitable. For those markets, a model that generates both subscription and advertising revenue from print is a reasonable approach. We don’t expect that to be a long-term or a nationwide solution.

Potential Solutions: Building The Not-For-Profit Local News Future

For this working paper, we are focused on the magnitude of the fiscal volume needed to provide a comprehensive, not-for-profit solution for local news in America. But we are keen observers of the media landscape, cheerleaders for the activists and foundations trying to solve the problem today, and passionate about opening the aperture for future solutions. The magnitude of the problem will require many solutions — not just one.

We are highlighting six solutions that, in combination, can be the way that the funding could flow to keep sustainable local news. Some of these solutions are, in part, already in the market and those existing organizations could be the platforms upon which future investment from philanthropists could flow.

(1) Support existing for- and not-for-profit newspapers with funding to ensure the stability of their operations (e.g., the work of the?American Journalism Project ?or?Report for America )

(2) Launch new not-for-profit digital news properties with new brands, coverage models, voices, and distribution paths (e.g., the work of?The Baltimore Banner ?or?Lookout Santa Cruz )

(3) Acquire a legacy for-profit newspaper and convert it into a not-for-profit outlet (e.g.,?The Philadelphia Inquirer ?and the?Lenfest Institute )

(4) Turn an existing for-profit company comprised of a network of newspapers (e.g.,?Gannett? or?Lee Enterprises ) into a not-for-profit entity, preserving the brands, consumer/advertiser relationships and network benefits (e.g.,?National Trust for Local News )

(5) Fund journalists under a new umbrella organization to distribute content, for example, establishing a journalist corps in each state capital which can provide content pieces to local outlets for their subsequent distribution (e.g., akin to a focused?Associated Press )

(6) Expand local news coverage through other news mediums (e.g., public radio stations /?NPR ), using their existing digital distribution through which additional news coverage would flow

We are not taking a view on a preference across these models. They range in terms of their complexity, achievability, sustainability, and capital requirements. We will share more detail of those choices in the subsequent paper. But relevant to the purpose of this paper, we did want to stress that these models come with them different capital (i.e., not operating) expenses and therefore would affect the total dollars needed to execute on funding strategies.

For example, acquiring papers requires a significant capital outlay and the new owner is immediately burdened with existing operational cost structure; however, it provides an instant brand name which reduces the need for marketing expenses and provides audience scale to attract advertisers. On the other hand, subsidizing existing for-profit newspapers is less capital intensive upfront but does not necessarily fix news deserts or address the fundamental market issues facing the industry.

Funding existing not-for-profit entities (like public radio stations) to increase their ranks of journalists is expedient and prevents the need to launch new properties. The institutions also should have the infrastructure to support distribution and manage journalists. But it may require different formats for distributing content given that public radio is primarily (but certainly not only) an audio-based medium.

We believe the future of local journalism will require a combination of these (and potentially other) solutions. What is clear is the absolute need to raise awareness?now?as to the dramatic magnitude of the financial chasm between what is currently deployed to solve the local news problem and what we believe will be required in the near future. With agreement on the size of the problem, those interested in solving the problem — foundations, donors, philanthropists, advocates, and even governments — can accelerate their dialogue and their action. All with one goal in mind: to create a vibrant cadre of journalists that cover the local communities that make up this nation, sustaining our democracy and ourselves.

The authors would like to thank?Daniel Wayland ?and?Sana Qureshi ?for their contributions to this article. Any errors or omissions are solely the responsibility of the authors; please contact us at [email protected] or [email protected] with any reactions.