Hedge Funds Are Not the Cause of Newspapers' Largest Woes

Their ability to profit off a death spiral is a symptom of deeper problems.

Welcome to Second Rough Draft, a newsletter about journalism in our time, how it (especially its business) is evolving, and the challenges it faces.

There’s been a lot said this year about chain newspapers falling increasingly into the hands of hedge funds, who, cutting costs and degrading product quality, milk them for their remaining profits. The funds will then, likely not too far into the future, shut the papers down. It’s an alarming trend, and a fair critique.

But we need to be careful with this storyline. Hedge funds didn’t cause any of the biggest problems metropolitan newspapers face today, and if hedge fund ownership ended tomorrow, existential difficulties would still lie ahead.

The two challenges

The two biggest challenges to legacy publishers correspond to the two principal revenue streams of their business, advertising and subscriptions, as the business transitions from print to digital delivery. On the advertising side, sharp declines in print circulation cut revenues there, while the digital revolution created an advantage for online offerings at a scale to which newspapers, even those owned by chains (or, indeed, at the level of the industry as whole), cannot aspire. Putting aside the behavior of particular platforms, this is why the platforms as a group are and will continue to be the winners in the competition for online ad dollars.

With respect to payments from readers, the story is a bit more complicated. I have long believed that the result here was not inevitable, that different choices a quarter century ago might have yielded a different outcome. (I actually wrote a short ebook about this.) Those of us who tried to make those choices were greeted with, shall we say, extreme skepticism, on the best days. More often, people who ran magazines hardly anyone now remembers, or companies which have long since disappeared, told us we just didn’t “get it” about how the online world worked.

Instead, when newspaper ad revenues imploded with the rollout of consumer broadband, the general response was to cut costs, eroding product quality, and sending the papers into a downward spiral in which most remain. For many, I am afraid, it has long since been too late to reverse course; the hole they dug for themselves has become too deep. A few exceptions, most at the national level, eventually reversed course and placed a bet not only on metered paywalls (as pioneered by the Financial Times), but also followed through by investing in the sort of quality content that would convince readers to subscribe.

it’s still a death spiral, even if you don’t embrace it

Hedge fund owners, who now control most of the nation’s papers, embrace the death spiral, noting that there is money to be made on the way down, and doing so without explanation or apology. But newspapers owned by those who are less rapacious still face the same trends.

Houston may offer a useful example. The Chronicle is owned by the Hearst Corporation, a well-run enterprise that is privately held and thus able and inclined to be more patient, to take a longer view. Since 2005, the Chronicle’s print circulation has fallen from more than 520,000 to just over 200,000 daily (more than 60%) and from over 700,000 to barely 300,000 on Sunday (about 45%). During this period the population of metropolitan Houston grew by almost 50%. The size of the Chronicle newsroom seems to have declined from over 700 in 2009 to about 300 today.

Hearst’s papers are also suffering

In nonprofit journalism, where I have spent the last 14 years, one of our biggest challenges remains to get potential donors to understand just how serious a threat the business crisis of the press poses to independent reporting. Many have no idea how bad things are. The collapse of chain newspapers into the clutches of the hedge funds is a significant part of that story. But we need to remember that it is a symptom, not a cause, of a much larger malady.