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The News & Observer's next life 

It's not going out of business. It's not for sale. What's its future?

Read more:

Part Two: With fewer reporters covering local news, upstarts try to fill the gaps

From our blog: Front-page spoof created by departing N&O employees, plus reactions to the departure of ideas columnist J. Peder Zane

Q&A: Dan Gillmor, director of the Center for Citizen Media, says the future of journalism depends on active citizens

The News & Observer is turning a profit, according to its publisher, Orage Quarles III. It has more readers than ever, if you count online users. Yet last week, another 31 editorial employees said goodbye to the Raleigh daily, as budget cuts forced another round of layoffs and buyouts. The newsroom headcount is down to 132 full-time employees—half of what it was just four years ago. The economic downturn, coupled with the financial catastrophe in which the newspaper's corporate parent finds itself, is making The N&O a radically different newspaper.

With all the bad news about newspapers lately—The Rocky Mountain News closing after 149 years, The Seattle Post-Intelligencer moving to online-only with a fraction of the staff—some worry the Triangle may become one of the first metro areas not to have a daily newspaper.

Quarles says that fear is unfounded. "First and foremost, The N&O is a profitable enterprise that is not about to go out of business," he wrote in an open letter to readers and advertisers last month.

In an interview, Quarles acknowledges the Raleigh management team faced a quandary in determining how to make cuts that won't compromise the paper's value.

"We want to make sure we don't do something that permanently damages the operation," Quarles says. "Our goal is to keep our quality as high as possible, knowing we're going to do it with fewer people. That's the balancing act, and it's not just the newsroom. It's all over the paper that felt this round. A lot of talented people have to go out the door."

Declining advertising revenue in classifieds and in display caused a budget shortfall, Quarles says. "We did our budget for 2009, and unfortunately January came and the revenues dropped more than we budgeted for. So did February. So we had to respond to that." Bad debt is up this year, he says, and the abrupt closings of major national retailers Circuit City and Linens 'N Things, both of which had contracts with The N&O, made matters worse.

But if The N&O is still making a profit, why cut so deep?

The McClatchy Company, which owns The N&O, is struggling to pay more than $2 billion of the debt it took on when it bought the Knight Ridder newspaper chain in 2006. The company has already instituted staff cuts at all of its papers, as well as pay freezes, furloughs and an end to retirement fund contributions. This week, McClatchy announced a nearly 30 percent first-quarter loss in ad revenue. As of this writing, its stock is trading at 51 cents per share. Industry watchers say newspaper chains nationwide can expect more losses this year.

Despite those gloomy projections, newspaper industry analyst John Morton says he doesn't believe The N&O will go under. He thinks it's possible that McClatchy could go into bankruptcy protection in order to restructure, but he says the Raleigh paper is one of its better assets.

"Except during recessions, it's a prosperous, growing market and a good newspaper market," Morton says.

McClatchy is facing the same problem as other newspaper chains that borrowed billions to buy more papers. The Tribune Co. has filed for bankruptcy protection, and the New York Times Co. is threatening to close The Boston Globe if that paper can't cut the company's annual expenses by $20 million.

"In the main, their newspaper properties are still profitable," Morton says. "They're just not as profitable as they were two or three years ago, and not profitable enough to fund the debt obligations the companies took on after having made big acquisitions."

Newspaper companies have historically enjoyed profit margins of 20, 25 even 35 percent. At the industry's peak in 2002 and 2003, Morton says the average operating margin for all publicly held newspaper companies was slightly more than 22 percent.

Quarles declines to disclose The N&O's profit margin. Morton says it's likely close to McClatchy's average profit margin, which was 11.6 percent last year—down from 18.9 percent the year before.

Those who worry McClatchy's woes will cause more downsizing often wonder if someone would buy The N&O.

Former N&O owner Frank Daniels Jr. raised hopes in February when he and a group of investors, including his son Frank Daniels III, offered to buy the Greensboro daily News & Record from the Landmark Media chain. (The preliminary offer was more than half of the $75 million asking price, but the deal fizzled when Landmark pulled the paper from the market.)

Generations of the Daniels family ran The N&O until selling it to McClatchy in 1995 for $373 million. But Daniels says he has no plans to rekindle that family tradition. "I have no interest in buying it back at this time, because I think the price is way, way more than I could afford."

Morton says it's unlikely McClatchy would be willing to sell. "Whenever the recovery comes, and assuming the Raleigh paper and its other papers are able to recapture a significant amount of what they've lost in advertising, [McClatchy] will want to have the cash flow that it throws off."

The company may be willing to sell if the offer were high enough, Morton adds, but few buyers have enough cash to make such an offer. And banks aren't exactly jumping at the opportunity to lend money for a high bid on a struggling business.

McClatchy CEO Gary Pruitt was the target of an N&O front-page spoof, created by departing employees. It mocked Pruitt's "boyish, million-dollar-bonus smile" in a satirical news story that described the company as a hulking, oversized steamship, weighted with debt, heading for an iceberg. But in a style that would make Jon Stewart proud, the most stinging criticism of Pruitt's corporate leadership were his own words, cited in University of North Carolina journalism professor Phil Meyer's 2004 book, The Vanishing Newspaper:

"We always say to our papers: No matter what, the paper must improve. It always drove me crazy where in a downturn, news hole cuts were made and the paper got worse. And I always thought restaurants don't make food worse in a downturn. Car companies don't make cars less safe in a downturn. Why is it OK to make a newspaper worse in a recession? That's your excuse for making your product worse? It makes no sense."

So if it's not going out of business and no one plans to rescue it, The N&O will have to adapt.

Perhaps management should consider cutting back home delivery, like The Detroit News and the Detroit Free Press. They limit it to Thursdays, Fridays and Sundays, days that generate the most advertising.

Quarles says that option "has never been part of any long-term plans at The N&O." He emphasizes the positives that come with McClatchy's ownership. The N&O continues to streamline production and share content with The Charlotte Observer. And Quarles is optimistic about Yahoo's recently launched display advertising platform, which the company promises will help newspapers to sell and target online advertising.

One thing we can predict, Morton says: "[Staff losses] will diminish the journalism. I mean, that's just inevitable. I'm sure they'll do their best to try to make up for it, but the fact is, if your staff is smaller, you have fewer reporters on the ground gathering information."

Today's newsroom is about the same size it was in the late 1980s, following the merger of The N&O and The Raleigh Times, back when Executive Editor John Drescher was a recent graduate of UNC's journalism school.

Drescher emphasizes the paper's commitment to its most essential function: investigative, watchdog reporting. He recently announced the paper would assign a third reporter, Dan Kane, to its dedicated investigative team. Kane and fellow investigator Andy Curliss together reported the stories that helped put corrupt former N.C. House Speaker Jim Black behind bars.

"Public service journalism is our highest calling, and if you look at the work we did on the mental health system and the probation system, there's no one else doing that kind of work," Drescher says. "I also feel like there's a business reason for doing it, in that this is what distinguishes us in the marketplace."

Investigative reporters often spend months digging into a story. With fewer reporters, the paper sustains its day-to-day reporting by writing more briefs and fewer long news stories, Drescher says, which frees time for enterprise journalism.

Whatever stories the reporters write, whatever decisions Drescher and Quarles make, greater forces are at work. Employees at The N&O worry there's no plan, either in Raleigh or in Sacramento, to do anything but try to ride out the storm. And no one's really sure if the storm will pass, or if the industry is actually facing a cataclysmic event more akin to global climate change.

"This goes beyond McClatchy," says Jason Arthurs, a 27-year-old photojournalist who was laid off this month from The N&O. "It's our whole industry, there's a lack of creative vision for how our content is going to reach people in a way that's going to make money. If you were starting a company right now, would you sit down and say, we're going to hire 200 people and put everything online for free? I'm not sure charging for stuff on the Internet is the solution, but I don't see how this business model, as it is, is working."

Arthurs says he plans to stay in Raleigh and work as a freelance photographer. "But I got into this for the journalism. I got into journalism to help people. The demand is huge for what we do. Someone has to figure out how we're going to make a living at it."

Correction 4/29: McClatchy purchased The N&O in 1995, not 2005.

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