How To Save Newspapers

Chicago's newspapers could find a lifeline to solvency and a return to social purpose in a new kind of business structure called an L3C, or low-profit limited liability company.

Why is that?

Illinois foundations have $350 billion in assets and they are required to invest 5% of that, or $17 billion, in programs that serve a social purpose each year. If the Chicago Sun-Times and the Chicago Tribune were to be reborn as L3Cs -- a structure that encourages foundation investment while allowing a profit --they could tap into some of that $17 billion. With foundation heavyweights on board, other investors seeking a decent, but not excessive, return might contribute to the coffers.

Bill SB 239 creating the L3C hybrid was introduced to the Illinois legislature Feb. 4 by Sen. Heather Steans (D-Chicago). Prospects for the bill are good, supporters say.

The L3C structure was signed into law in Vermont in 2008, and into law in Michigan and the Crow Nation in January. Legislatures in Georgia, Montana, North Carolina and Oregon are also expected to pass L3C legislation this year.

In Washington, D.C., draft legislation called the Program Related Investment Promotion Act of 2008 is being considered by staff in the Senate Finance committee. While many types of businesses--from community yoga centers to affordable housing--could benefit from L3Cs, the successful creation of newspaper L3Cs is largely contingent on passage of the Federal law, which would effectively expand charitable purposes to include newspapers.

The L3C structure plays well in Peoria where the Peoria Newspaper Guild, and a coalition of
Journal Star employees and community leaders have been quietly looking for two years at alternatives including co-ops and employee stock ownership plans (ESOPs) to operate the Peoria Journal Star.

The one idea that really clicked was the L3C.

"We are looking at long-term ownership that puts journalism first," said Jennifer Towery, President of the Peoria Newspaper Guild and also Neighbors Editor for the Peoria Journal Star. "[The L3C] just resonated. It has so much potential."

Because it can tap into foundation money, an L3C is sustainable, and because an L3C business must meet a social purpose, it realigns newspapers with their mission of community service.

"It insists that serving the readers is your mission," she said. "If it doesn't serve the readers to cut your newsroom staff you can't do it."

While good news judgment is essential to accomplishing the social return, the L3C structure has significant sweeteners to generate returns for investors.

"The participation of the foundation, which is seeking high social return but low monetary return serves as a catalyst for high investor return," said Marc J. Lane, a Chicago-based attorney who authored the Illinois L3C legislation and last year launched Chicago's chapter of the Social Enterprise Alliance, which believes in investing in businesses that do well by doing good. "You can end up with a blended financial return that is fairly modest but skewed toward the private sector investor."

"Capital is formed," Lane said. "Social purpose is achieved."

The L3C is different from a typical nonprofit because it can earn a return, but the social purpose must trump the financial purpose.

Lane says that he expects the Illinois law will pass with little debate. "I see it sailing through," he said. But even if it doesn't, Illinois news gathering organizations could incorporate in Vermont or other states that have legalized L3Cs.

The creator of L3Cs, Robert Lang, CEO of the Mary Elizabeth & Gordon B. Mannweiler Foundation, says the Federal legislation is essential for any of these good news scenarios to play for newspapers.

Lang, an economist and businessman by trade, devised the L3C structure to address the problems he was having while trying to invest family foundation money in a sustainable and effective way.

"Historically, the IRS has not accepted newspapers as nonprofits," Lang said. "The Federal legislation mentions L3Cs specifically and it lists newspapers specifically."

The problem newspapers are dealing with today is that investors turned news-gathering into Wall Street product.

"The Peoria paper still makes money," Lang said. "The problem is it cannot make enough profit for all the games normal for-profits get involved in."

But in the L3C scenario, newspapers can make "enough" money.

"What we are looking at is the newspaper as a self-sufficient entity," he said.
"It will not be a high profit entity."

The idea of the Newspaper L3C is to bring back those journalistic contributions like neighborhood reporting, music reviews and book sections and make them part of the community service. And ads are part of the mix too.

"I think there is a lot of viability to newspapers still," Lang said.

Could the L3C save Chicago's newspapers?

"Somewhere you still need a newsgathering organizations," Lang said. Newspapers still drive much of the news circulating on the web, he added.

"I'm not saying that we can save the Chicago Tribune and make it what it was 10 years ago," he said. "But at least the money that's made today can go toward improving the product not paying off leveraged debt."

Meanwhile back at the Journal Star, which has an owner and is not for sale, Peoria Guild President Towery says, "We are all interested in finding models that others can replicate. It's not saving the paper, it's saving journalism. "

"One of the bright spots is that [newspapers] have lost so much value that it is now feasible for communities to buy their newspapers."

Comments

[FlyingCloud1]

Interesting concept. I think a lot of good ideas are touched on here including preserving newspapers in some form for social enterprise, improving journalism, moving toward digital media, and making sure there is a revenue stream to support it without relying on massive corporate profits. I do believe it is both necessary and inevitable to move away from the print format, and this does seem to make it harder to maintain revenues.
Perhaps improved journalism, distributed by some form of Kindle-type device that just receives the papers to which you subscribe and includes on screen advertising, supported by the LC3's ability to reduce the amount of revenue needed would be the next step!

[ella52]

Interesting proposition. Could work. I have been thinking about this thorny problem for awhile and really I haven't seen any "new" ideas.
I really thought that newspapers should return to their roots; let advertising be the economic engine and lower the price on single issues to say 25 cents a piece. Everybody has a quarter they might spare to have something to read on the train, on the bus, over their coffee.
But newspapers kept raising the price of subscriptions; out in more rural communities, mine included, they want nearly $70 for 12 weeks for our daily. Crazy!!!!
I know the price of paper and ink went up but it seems to me that if the free papers in the cities could find a model that kept them alive then the paid papers could still charge but make it so nominal that it would make sense to the consumer.

[Sally Duros]

Thanks Ella. Advertising would definitely be part of the mix in a newspaper L3C.

[murderBYzeN]

if newpapers would report the news instead of campaigning for the democrats people might start buying them again

[Sally Duros]

Thanks for your comment. Any thoughts about the value of social enterprise?

[userw014]

I thought that the reason the Chicago Tribune and Chicago Sun-Times are in such dire condition is because the parent organizations went on a buying spree with borrowed money. My understanding is that the individual papers are still profitable (although less than they were), but because the parent companies went on an empire building expedition there is this huge debt hanging over them.

[Sally Duros]

That's hardly the case, but I am no expert – just reporting on the L3C, a potentially useful tool for newspapers. Do you have any thoughts on the social mission of newspapers or the value of social enterprise?

[DuPageDem]

As it is now, the MSM gives a wide berth to issues their corporate masters want ignored. What happens, then, to coverage of foundations and their issues under this model? Do potential deep-pocket donors start dictating content to the pubs they're propping up? Does all this become a major distraction from the primary business of these foundations?

[jgstovall]

Despite these efforts, the model of cutting down trees and using gasoline to deliver a product with information that 12 hours old -- when I can get that information on my iPhone or Blackberry -- does not seem to be one with a great future.

Will daily newspapers survive?

That’s not the question because they probably won’t — at least, not in most places. They’ll likely go the Detroit route and become weekly or weekend publications.

The real question is: What comes next?

My answer is: better journalism.

Once news organizations throw off the shackles of print, journalism will improve. We’ll have more reporters in more places telling stories in more and better ways. I develop that argument more fully here:

http://jprof.blogspot.com/2009/02/demise-of-newspapers-means-better.html

So, stop trying to figure out how the organizations that have suppressed innovation and creativity in journalism can survive. Look forward to a better journalism.

Speed the day.

Jim Stovall

[Sally Duros]

Thanks for your comments, Jim. I too am looking forward to better journalism. We’ll have it when newsgathering organizations can work toward their highest mission of encouraging civic and community engagement. And that will happen when the organizations that employ them are being driven by mission and passion rather than by shareholders and dollars — whether information is delivered by print or digitally. You won’t find me arguing against digital journalism. In some ways, I’m an early adaptor. But here in the Chicago metropolitan area, there are millions of people who don’t get their news via Blackberry. Shall we encourage a two-tiered system of information haves and have-nots where the wealthy get second-by-second ticker updates while every one else is cut out of the news stream? Those who gather the news are keenly interested in finding sustainable models for doing what we do whether it’s distributed online or from a corner news box. Indeed, one could argue that our current economic mess could have been averted had newspapers and newsgathering organizations been adequately staffed and funded to play a much-needed watchdog and consumer advocacy role.

[jgstovall]

Hi, Sally.

Thanks for the response.

It's difficult for me to picture "millions of people" whose only access to non-television news is through the newspaper that they can pay for. I don't think we're in any danger of creating the two-tiered system that you describe. Yes, there are people who can't afford Internet connections. There are even be people who can't afford to have a cell phone (although I can't find too many of them). There always have been people can't or won't pay for the news. But keeping newspapers alive is not going to solve that.

So, with great respect, I have to say that the picture you paint of the Wealthy With News and the Poor Without News is not one I can bring into focus.

But, yes, I do agree that better journalism might have provided some signaling that we were headed down the garden path to this current recession.

All the best,

Jim

[richchaplin]

This is a great idea. In previous comments on blogs about the End of (Newspapers') Days, I've advocated using the equivalent of the National Endowment for the Arts to fund some newsgathering operations, but mostly for big regional papers (like the Trib or the LAT or the Arizona Republic). But this L3C could not only be used for those papers (and make them more employee friendly and more journalistically hungry), but could be used for smaller papers focusing on local news in smaller cities and counties.

It probably would not erase the vast majority of the layoffs and hiring freezes that have taken place in the past two years. So people like me (with 20 years of experience, but who have been unemployed as journalists for the past three years) shouldn't have any delusions about getting back into the profession we love. Even if L3C works, it will probably be 10 years before newspapers hire anyone.

[Sally Duros - Huffpost Blogger]

Thanks for your comment, Rich. Many scenarios are possible. I am optimistic that our evolving newsrooms will need experienced journalists who understand beats and the importance of original sources. Long-time journalists are essential to the news-gathering ecosystem but our flexibility will determine how and where we fit in.

[MarkRubin]

It will be fascinating to see how the Illinois legislation evolves, whether it will be broad enough to encompasses traditionally for-profit ventures such as newspapers, and whether those ventures will see sufficient benefit to convert into L3Cs. In any case, kudos to those leading the charge for developing incentives for socially conscious and committed businesses and their potential owners/inv­estors/fun­ders. Thanks to Ms. Duos for surfacing this particular possibility....and long live Tom Lehrer.

[Sally Duros - Huffpost Blogger]

Thanks for your comment. Mark. My understanding is that the L3C structure can be used for many types of business, but the "potential" rub for newspapers has to do with their "charitable" purpose. Here's an example of what that newspaper social purpose might look like from a draft document I was given.

"The newspaper means many different things to many different stakeholders. The key to the success of the newspaper as an L3C will be the drafting of an operating agreement that assures all the stakeholders that the paper will live up to their expectations and yet permits those in charge to be able to make the needed business decisions on a day to day basis without having to clear each and every decision with the various stakeholders.

"It is going to require new thinking to some extent on all sides.

"The advertisers, for example, will have to understand that they are investing to be sure of the success of a tool necessary to the marketing of their products. The management will have to understand that the employees are the most valuable asset, while the employees will have to make tough decisions sometimes that are important to the viability of the paper and think like the owners they will be. But once an operating agreement has been crafted a newspaper as a pillar of the community will finally be a reality."

[jimwitkin]

Hi Sally, great article. I also recently wrote about the L3C structure and have the same understanding. As long as the business has a social purpose as it's primary mission, it can qualify for the L3C form. The problem is the L3C concept has yet to be tested through the tax process. We'll find out what the IRS thinks this April.

Here's the article I wrote a few weeks ago on the same subject.

http://www.triplepundit.com/pages/the-l3c-a-more-creative-capitalism.php