A 16-year-old law designed to bail out failing newspapers and preserve independent editorial voices in U.S. communities has become a source of big profits for newspaper companies, including many of the nation's largest and most profitable newspaper chains.
The Newspaper Preservation Act of 1970 has saved some newspapers; papers in at least 21 cities have been spared what appeared to be certain bankruptcy by opting for the government-sanctioned agreements to share manufacturing plants and commercial operations that would be an antitrust violation in most other businesses.
But the same law has meant huge new profits for some of the biggest media conglomerates in the United States, an outcome not envisioned when the law was passed, but one that reflects the sweeping changes in patterns of ownership of American newspapers in recent years. Now the Justice Department is scrutinizing what could be the largest and most lucrative such agreement in U.S. newspaper history -- the partial merger of The Detroit News, owned by Gannett Co. Inc. (1985 profits: $253 million), and the Detroit Free Press, owned by Knight-Ridder Inc. (which earned profits of $132 million last year).
Arguing that the Free Press was in danger of failing, the two owners said it could be saved only through a joint operating agreement permitting them to merge printing, advertising and circulation functions. Under the proposed deal, as stipulated by the 1970 act, the two papers' newsrooms and editorial pages would remain separate and independent.
If approved by Justice -- and no proposed joint operating agreement has been rejected by the government -- this agreement is expected to turn losses of $63 million for both papers over the last 10 years into massive profits. By some estimates, the two newspapers could split at least $110 million a year in profits for 95 years -- "The Trillion Dollar Deal," as some in Detroit are calling it.
As rivals, the News and Free Press have felt compelled to offer low circulation prices and bargain advertising rates. As business partners, they would have far more room to increase prices and ad rates. In the crucial advertising sector, a joint operating agreement (JOA) between two papers allows them to increase ad rates to merchants and businesses substantially, leaving advertisers who think they need access to the newspapers' readers little choice but to pay up. The law gives the papers limited antitrust immunity that allows them to set advertising rates jointly without fear of legal reprisals.
The Detroit agreement has added to the debate about the legal privileges newspapers enjoy. With their journalistic efforts protected by the First Amendment of the Constitution, should newspapers also have such special economic protection within the market place, particularly newspapers whose parent companies are among the most profitable of U.S. corporations? critics ask.
The law has its origin in a 1969 Supreme Court decision that joint newspaper operations of the kind the law now permits were illegal. Responding to that decision, publishers of affected papers appealed to the Nixon administration. Richard E. Berlin, who was president of the Hearst Corp. in New York, wrote the attorney general in 1969 (with a carbon to President Richard M. Nixon) urging passage of new legislation.
"There was almost unanimous support of the administration by the newspapers who are proponents of the Newspaper Preservation Act," Berlin wrote. "It therefore seems to me that those newspapers should, at the very least, receive a most friendly consideration. . . . "
Congress passed the law, and Nixon signed it. Without the exemption it provides, its supporters say, weak No. 2 newspapers in metropolitan markets would be on the ropes, facing a "downward spiral" of shrinking advertising revenues and eventual death, the fate that befell The Washington Star, whose last owner, Time Inc., unsuccessfully sought to arrange a joint operating agreement with The Washington Post before folding the paper.
The San Francisco Examiner is an example of a No. 2 paper that might have faced extinction without a JOA. Its publisher, William Randolph Hearst III, calls his agreement with the larger San Francisco Chronicle "a license to commit journalism."
By contrast, Stephen R. Barnett, a law professor at the University of California, calls the joint operating agreement sanctified under the law "a license to print money." And Donald Pember, professor at the University of Washington's school of communications, calls it "a license to steal."
In Detroit, Gannett and Knight-Ridder have asked the Justice Department to approve their agreement swiftly because of the deteriorating balance sheet of the Free Press. The two companies even want to bypass a public hearing on their proposed JOA on grounds that it would cause a dangerous delay.
"With the JOA, both The Detroit News and the Free Press will survive ," Allen Neuharth, chairman of Gannett, recently told the Greater Detroit Chamber of Commerce. "Without it, the Free Press would not. Anyone who doesn't understand or accept that is not getting it straight." A Few Major Questions
Despite Neuharth's assurances, however, some powerful Michigan residents have a few major questions. Detroit Mayor Coleman Young, United Auto Workers president emeritus Douglas Fraser, former Free Press executive editor and screenwriter Kurt Luedtke and Democratic Reps. William D. Ford and John D. Dingell have asked the Justice Department for public hearings.
Among questions that Young and the Detroit newspapers' smaller competitors want answered is the major legal one -- whether the Free Press is a "failing newspaper" as defined by the law. Was it sliding toward an inevitable bankruptcy? Or were much of the losses deliberate and exaggerated, resulting from an aggressive "Tiger" plan, as executives nicknamed it, which was designed to push The Detroit News out of the top slot?
Advertisers are asking what will happen to their rates, which normally go up under JOAs. Suburban newspaper publishers are concerned that their markets would be invaded by large metropolitan dailies that would no longer have to worry about competition from each other.
There are also unanswered journalistic questions. What sort of newspapers would survive under the JOA? How would they differ from the two giants whose war has meant a dynamic, if cutthroat, style of journalism in Detroit? Critics of the Detroit JOA want those questions answered in a public forum.
In the document filed by Gannett and Knight-Ridder, lawyers said that the Free Press had suffered $39.1 million in operating losses in the last five years. They also said that the decline in Detroit's economy, plus the News' lead in circulation in the key metropolitan area, is "an insurmountable barrier to profitability" for the Free Press. The paper forecast operating losses of $10.4 million in 1986 and $9.7 million in 1987.
"We meet the test," said a disheartened David Lawrence, publisher of the Free Press. "I do not believe that is the same as saying it is a failing newspaper. That is a very very painful word. We all have our egos tied up in this."
However, Luedtke, who wrote the screen play for "Absence of Malice," argued that the paper has not operated in the way of traditional failing newspapers which get caught in a "downward spiral." That theory argues that once the No. 2 newspaper in a community falls significantly behind the leader in circulation, advertisers desert it in droves, creating an irreversible impression that the paper is headed for the newspaper graveyard.
In recent years, Luedtke said, the Free Press was in "a drive, not for profitability, but for dominance. . . . The law in this case is being perverted. It says that you have to have a failing newspaper. Does that mean that you don't have to show up with anything other than red ink on the books?"
Knight-Ridder Chairman Alvah H. Chapman said recently that such arguments "do not have any validiity in the newspaper business in the 20th century. . . . There is no safe niche for a second newspaper that anybody can pull themselves into and survive. Once you cease trying to be dominant, you then go into a tailspin."
Newspaper analyst John Morton agreed. "So long as those two newspapers battle it out in Detroit, neither one of them will be significantly profitable, or profitable at all."
The history of the newspaper business in America offers some support for the pessimistic view. In 1909, 609 U.S. cities had competing daily newspapers; in 1968 there were 45; today there are 27.
Stephen Calkins, associate professor of law at Wayne State University, has questioned whether the Free Press would have invested $22 million in a new plant, would show circulation increases every year since 1977 and would show increases in advertising revenues of 31 percent in the last three years if it were truly a failing newspaper. Argument for Owners
But court tests of the Newspaper Preservation Act make plain that heavy economic losses like those rolled up in Detroit are powerful arguments in the owners' favor and that courts are reluctant to second-guess publishers and editors by concluding that a paper need not fail if managed better.
During the congressional debate over the Newspaper Preservation Act, some House members worried that the economic gains for major newspapers provided by the act would come at the expense of smaller rivals.
Frank Wetzel, editor of the Bellevue Journal-American, a small daily newspaper on Seattle's outskirts, said that threat is imminent.
In 1983, Seattle's two metropolitan newspapers -- the morning Post-Intelligencer and the evening Times -- combined business operations under a joint operating agreement. The Hearst-owned P-I, which appeared to be rapidly failing in the early 1980s, has since recovered. Its circulation and advertising revenues are growing faster than those of the larger, stronger Times. Seattle now has two economically healthy, competing metropolitan newspapers.
Times Executive Editor James B. King said profits from the JOA are being plowed back into the Times, which has a $1 million a year fund to improve news coverage and printing quality. Ad rates at the combined papers have increased no faster than industry averages, said Times President H. Mason Sizemore, whose newspaper controls the Seattle JOA. "The JOA has not been a club," Sizemore said.
The act may have saved a second editorial voice in cities like Seattle, Wetzel said. "But that overlooks the possibility that other papers with divergent points of view could spring up if the failing newspaper did fail.
"The Times no longer has to worry about its principal market, and it can worry instead about the markets of the future," he said.
Wetzel's paper, with a circulation of 27,000, grew only a few percentage points last year. The Seattle Times sells about 40,000 copies a day in the Bellevue area, he estimated. To penetrate more deeply into Bellevue, the Times publishes a special "zoned" edition each day with news and advertising keyed to the area.
But whatever the future threat, the existence of JOAs has not hurt smaller rivals yet, according to Morton, the newspaper analyst. He cited a 1982 study that compared the growth of suburban newspapers in Seattle and comparable cities. "Based on that data alone, the JOA markets have not had any less growth in number of suburban publications and in circulation in either paid or unpaid publications." The Seattle JOA has not hindered the metropolitan papers' smaller rivals, he said.
Seattle also offers evidence as to the journalistic consequences of a JOA. The most obvious one in that city was the demise of the Sunday edition of the Press-Intelligencer, the price it had to pay to get the JOA.
"The single most important fact of life is the loss of the Sunday paper," said Thomas A. Read, P-I managing editor.
One incident involving the Sunday paper rankles some P-I and former P-I staffers. To ease the blow of losing the Sunday paper, the P-I was permitted to publish a small section of its material called Focus, which was included in the Sunday Times. At first, P-I editors and reporters made that their showcase, saving much of their best journalism for those pages. But the Times objected, citing provisions of the joint agreement that reserved control of Sunday news coverage for The Times, and last October the P-I gave in, agreeing to confine Sunday material to features and editorials.
"We do not do hard news or spot news on Sunday," P-I Publisher Virgil Fassio said. "We backed away from using reporters on Sunday and changed our tack. That was something some of our staff lamented on. The alternative was to be out of business."
Many in Seattle feel the JOA also caused a personality change. "What characterized the P-I was a kind of spirit one rarely sees in newspapers today," said William Asbury, the former editor of the P-I who opposed the JOA and left the paper in 1981. "It was never great but always trying to be great. That spirit died when the JOA went into effect."
The P-I has changed, said Steve Botkin, editor of the suburban Valley Newspapers, south of Seattle. But it also survived. "They're a strong competitor. If the JOA hadn't occurred, maybe they wouldn't be there at all," he said.
"You're better off with two independent voices," Morton maintained. "It's one of those self-evident truths. But how do you prove it?" Moreover, he noted, the law does not, and constitutionally could not, stipulate what kind of editorial voices should be preserved under a JOA.
"It comes down to the will of the owner," Morton said. "Will Hearst of the San Francisco Examiner is a believer. He believes there is a place in a JOA for a vibrant, aggressive, colorful, entertaining afternoon newspaper, and he thinks they can get their circulation up substantially. I don't think he can, but maybe he can hold onto what he's got." 20 Years of a JOA
The JOA in San Francisco was established in 1965, when the Examiner and Chronicle were competing on nearly equal terms. The agreement gave each paper an equal share of profits from the advertising and circulation revenues, but it locked the Examiner into a shrinking afternoon newspaper market while giving the Chronicle clear sailing in the morning. Twenty years later, the Chronicle's average daily circulation is 550,000, while the Examiner's has shrunk to 150,000.
For the 36-year-old Hearst, grandson and namesake of the fabled founder of the Hearst newspaper empire, the mission is revive the Examiner. In one sense, the JOA is a crutch. In another, it is shackle.
"The fact is that without a JOA, a 150,000 circulation newspaper in the afternoon would be an absurd subject for editorial investment," he said. But it is unlikely the Examiner would still be an afternoon publication if the JOA did not require it, he added.
Because the San Francisco Newspaper Agency controls the business operations of both papers, it has a powerful influence over some basic questions affecting Examiner's competitive strategies.
For example, Hearst and his staff recently decided to redesign a life style section to focus it on food and wine. To Hearst, it was not a small, tactical shift, but part of his plan to attract readers.
"The agency, upon hearing of this decision, said 'Gee, this is fine. But it's unfortunate.' " It would be better, the agency said, if both papers launched food and wine sections simultaneously, giving the agency the chance to get restraurants and others in the food and wine industry to buy so-called combination ads in both papers." (Such ads are important money-savers for JOA papers because they can run two ads -- in both papers -- for the cost and effort that had been required for a single ad.)
"We had to decide whether to ignore the agency, and go forward with the food and wine section, which we thought was a good idea, or simply delay it so we could all launch on the same day," Hearst said. They waited, and then found that for obvious reasons, the agency wanted the Chronicle to be the prototype shown to potential advertisers.
So a decision that made sense economically wound up hurting Hearst's struggle to give the Examiner a more exciting identity.
So far, Hearst's campaign has not been rewarded with circulation gains. "He hasn't got a viable paper there now, economically," Morton said. But Hearst is using increased profits from the JOA to improve the paper. "So that works to the reader's benefit," he added. Competition, Quality Link
But there is a close connection between competition and quality, said Robert Picard, head of a three-year project at Louisiana State University focusing on press concentration such as the JOAs. "The journalism suffers. There are exceptions, but in general if there is no direct head-to-head competition, no incentives, it depends on the pride of the organization. If you don't have that pride, you get cutbacks in news services, cutbacks in locally produced copy, staff reductions."
In Detroit there are fears that the lack of competition will sap some of the fire from the city's two big papers, leaving Detroit poorer. "If you believe in capitalism and that there is some economic incentive in putting out the best product you can, you're not going to like this," said Hillel Levin, executive editor of Metropolitan Detroit Magazine and a strong opponent of the JOA.
"Our newsroom was like a morgue," said Louis Mleczko, reporter and Newspaper Guild representative for The News, recalling the day last April when the agreement between the Detroit papers was announced. "That afternoon, Gannett sent down the word and said 'Let's celebrate. Everybody come back to the cafeteria for free beer and pretzels.' But, people were mortified. 'Celebrate what?' we said. 'The death of competitive journalism in Detroit?' "
Neuharth responded that Gannett is participating in a half-dozen JOAs and in every case "news and editorial products of individual papers are superior to what they were before."
"We are not interested in letting greed dictate how we do business if we can be satisfactorily profitable and make a contribution to the community," he said of the Detroit JOA. "The cynics and the skeptics ain't going to believe that, but I care very deeply about this market." Expressions of Cynicism
There have been expressions of cynicism and skepticism in Detroit about Neuharth's motives since he paid $717 million last year to acquire The News and other properties, including five television stations and several small newspapers. From the moment the sale was announced, there was speculation that Neuharth planned to seek a JOA with Knight-Ridder's Free Press, on the theory that he must have anticipated a JOA to think the News was worth such a high purchase price.
In a speech last January to the Detroit Economic Club, Neuharth was asked if Gannett and Knight-Ridder were considering a JOA.
"The answer to that question is that there have been no discussions between Gannett, the owners of The Detroit News as of next month, and Knight-Ridder, the owner of the Detroit Free Press, on that subject at all, nor have we given any real thought to it," he said.
In fact, Neuharth had already discussed the possibility of a JOA with Knight-Ridder executives the previous August and September, and again in November. Asked about this, Neuharth said in a recent interview: "I should have said serious discussions, and I may have," adding that the earlier talks with Knight-Ridder had been more exploratory.
"I did not become serious about a JOA in Detroit until Sunday, March 23, because I had set a condition. . . in all of those discussions I said, we can negotiate a JOA, if or when you are willing to let us run it. Period. That's not negotiable. When they said, 'So the issue is control?,' I said, 'You got it.' You know, 'Call us, we won't call you.'
"Everything else was negotiable, that was not," Neuharth said.
Knight-Ridder Chairman Chapman said that his corporation ceded control of the JOA to Gannett for all but major "stockholder matters" such as the sale of property in return for items their company considered crucial. Although the Free Press has been declared the failing paper, Chapman said his corporation was pleased to keep the Free Press as the morning paper and to split profits 50-50 after the first five years.
The agreement will bring together the sixth and seventh largest papers in the country in terms of circulation. A combined Sunday newspaper with The News in charge of hard-news sections and the Free Press in charge of features could bring in 1.3 million or more in circulation, Chapman and others believe. That would make the combination third-largest metropolitan newspaper in the country behind the New York Daily News and The New York Times.