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38 I learn’d to love despair —Byron, “The Prisoner of Chillon,” 1816. To appreciate how the locale for Byron’s poem serves as a metaphor for the American newspaper industry, drive a short distance north of Montreaux, Switzerland, and visit the Rock of Chillon. It sits on the eastern edge of Lake Geneva, and it was fortified in the ninth century. In the twelfth century, the counts of Savoy built a castle on the rock. With the lake on the west side and a mountain on the east, the castle commands the north-south road between. Any traveler on that road had to choose between paying a toll to the owner of the castle, climbing the mountain or swimming the lake. It was such a sweet deal that the lords of Savoy and their heirs clung to that rock for three centuries. For generations, U.S. newspaper publishers were like the Savoy family. Their monopoly newspapers were tollgates through which information passed between the local retailers and their customers . For most of the twentieth century, that bottleneck was virtually absolute. Owning the newspaper was like having the power to levy a sales tax. But new technology bypassed the bottleneck. Just as today’s travelers can fly over Chillon or pass it in a power boat or on an alternate road, today’s retailers are finding other ways to get their messages out. Newspapers have been slow to adapt, because their Chapter 2 How Newspapers Made Money How Newspapers Made Money 39 1. Non-accountants sometimes confuse margin with return on investment. They are not the same. Margin is the proportion of revenue left to fall to the bottom line after expenses are paid. Return on investment (ROI) depends on the size of the investment, i.e., what was paid to create the money-making enterprise. Thus a supermarket can have a larger ROI on its two percent margin than a newspaper with twenty percent margin because it takes less investment to create. culture is the victim of that history of easy money. For perspective, consider the following comparison: In most lines of business there is a relationship between the size of the profit margin—the proportion of revenue that trickles to the bottom line—and the speed of product turnover. Sell a lot of items, and you can get by with just a little profit on each one. If sales are few, you’d better make a bundle every time. Supermarkets can prosper with a margin of 1 to 2 percent because their buyers consume the products continually and have to keep coming back. Sellers of diamonds or yachts or luxury sedans build much higher margins into their prices to compensate for less frequent sales. Across the whole range of retail products, the average profit margin is in the neighborhood of 6 to 7 percent.1 In turnover, daily newspapers are more like supermarkets than yacht dealers . Their product has a one-day shelf life. Consumers and advertisers alike have to pay for a new version every day if they want to stay current. Absent a monopoly, newspaper margins would be at the low end. But because they owned the bottleneck, the opposite was true. Before technology began to create alternate toll routes, a monopoly newspaper in a medium-size market could command a margin of 20 to 40 percent. As recently as 2007, the average was still close to 25 percent. That easy-money culture has led to some bad habits. If the money comes in no matter what kind of product you turn out, you become production oriented instead of customer oriented. You are motivated to get it out the gate as cheaply as possible. If your market position is strong, you can cheapen the product and raise prices at the same time. Innovation happens, but it is often directed at making the product cheaper instead of making it better. Before newspapers were controlled by publicly held companies, their finances were secret. A few retailers may have noticed that a publisher’s family took flying vacations to Europe while they drove theirs to the local mountains or the beach, but publishers were usually careful not to flaunt their wealth. It is unwise to arouse resentment from one’s own clientele. When newspaper companies began going public in the late 1960s, the books opened, and Wall Street was delighted with what it saw. Analyst Patrick O’Donnell, in an industry review prepared for E. F . Hutton clients in...

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