As measured by the operating profits that the newspaper generates, The Tennessean is one of the five most profitable papers in the Gannett chain today, according to three senior Gannett Co. finance officials who spoke under the condition of anonymity,. But within Gannett, a media conglomerate with an extraordinary record of financial success, The Tennessean’s operating margins—a key indicator of the paper’s profitability—are nothing special.

The reason for this seeming disparity has to do with the difference in how operating margins and operating profits are measured. Both figures are common tools used in evaluating the overall performance of a company. In the case of newspapers, they’re based on the amount that a newspaper’s revenues—typically its subscriptions, newsrack sales, and advertising revenue—exceed expenses directly related to the operations of the paper—salaries, newsprint, and delivery costs. The operating profits are the actual dollar amount by which these revenues exceed costs; operating margins are the percentage figures that refer to the operating profit as a portion of total sales revenue.

In 1997, Gannett’s holdings included 87 newspaper properties. Twenty-eight of them posted better operating margins than The Tennessean’s impressive 35.2 percent, according to internal Gannett documents. But The Tennessean made more money than most Gannett papers with higher profit margins because it’s a far bigger operation with much larger sales revenues. (1997 is the last full year for which the Scene has obtained complete Gannett corporate records for individual newspapers’ operating margins.)

Combined, the various Gannett newspapers’ operating margins put the company “in the top 10 percent of businesses in the country at that time,” says Paul Chaney, who teaches financial analysis at Vanderbilt University’s Owen Graduate School of Management. The average operating margin among publicly traded companies in 1997 was 7.7 percent, according to Standard and Poor’s Compustat Services. The Gannett papers with the largest operating margins in 1997 were the Pacific Daily News in Guam (50.4 percent), Wisconsin’s Green Bay Press-Gazette (46.7 percent), and The Idaho Statesman in Boise (46.1 percent). At the end of 1997, 15 Gannett newspapers posted operating margins higher than 40 percent. (For a complete list of the operating margins at Gannett newspapers for 1994 through 1997, visit the Scene’s Web site at www.nashvillescene.com.)

These handsome margins come as no surprise to industry insiders. “Gannett is actually in the middle of the pack of publicly traded newspaper companies in terms of driving up margins and eroding the quality of the news product,” explains John Morton, president of the media consultant company Morton Research. “Gannett is pure corporate America, better than some, worse than others.”

Of course, these operating margin numbers are 4 years old. The obvious question is: What has happened to the operating margins and profits at Gannett papers since 1997? By and large, they have improved. In 1997, Gannett’s newspaper publishing operations had an overall operating margin of 26.6 percent. According to the publicly traded company’s annual reports, that margin has increased since then; it was 26.7 percent in 1998, 28.5 percent in 1999, and 28 percent last year. To put it in dollar terms, the company’s newspaper segment showed operating profits of $1.002 billion in 1997, $1.109 billion in 1998, $1.292 billion in 1999, and $1.52 billion last year.

Wall Street’s influence on the newspaper business has become a hot topic around the country. In March, the publisher of the Knight Ridder-owned San Jose Mercury News, Jay T. Harris, quit in public protest. At the time, he told his corporate bosses that the newspaper chain’s profit goals were “causing significant and lasting harm to the Mercury News as a journalistic enterprise.”

On April 6, in a memorable speech before the American Society of Newspaper Editors, Harris asked, “When the interests of readers and shareholders are at odds, which takes priority? When the interests of a community and shareholders are at odds, which takes priority? When the interests of the nation in an informed citizenry and the demands of shareholders for ever-increasing profits are at odds, which takes priority?” He got a standing ovation.

In a subsequent interview with the Scene, Harris, who was a Washington correspondent for the Gannett News Service in the mid-1980s, elaborated: “Depending on how an individual newspaper chooses to handle the pressure for higher margins, the effect on that newspaper can be relatively benign or very negative.”

Harris’ resignation has helped crystallize a nationwide debate on what many consider to be the tension between the search for profits and for editorial excellence. It caught the attention of Geneva Overholser, former editor of The Des Moines Register, a syndicated columnist who teaches in the University of Missouri School of Journalism’s Washington program. Earlier this month, she sent an e-mail to journalistic heavyweights around the country, writing, “In the wake of Jay’s resignation—I was just moved by it. My goal is that all of us think of different ways we can make this moment count.”

One newspaper executive who says he was not moved by Harris’ resignation is Tennessean publisher Craig Moon. “As for Jay Harris, I don’t know him and I only know what I have read about his departure,” Moon tells the Scene. “My take is if he really cared about the community, his newspaper, and his employees, and [he] believed Knight Ridder was wrong, why not stay and fight? His resignation took himself out of the San Jose game. Now he is standing on the sidelines and can no longer have an impact on his newspaper.”

Nonetheless, many journalists believe that the current level of profits demanded by Wall Street is not sustainable. Pulitzer Prize-winning author and former Tennessean reporter David Halberstam likens the current state of American daily newspapers to the U.S. car industry in the 1960s. Detroit got fat, arrogant, and very profitable, he says. “Every year, the auto companies tried to take more value out of the cars until it reached the point where they couldn’t get any more blood out of the stone. This worked for a while. Then the bean counters took over from the car guys, drove up margins, and eventually the cars were second-rate and the Japanese ate their lunch. Same with Gannett. They go into a city, buy out the competition, set up a monopoly, and drive up the margins.”

Walter Cronkite, the venerable former CBS anchorman, believes that the quest for ever higher margins in the newspaper business ultimately will do nothing less than weaken democracy. “These 30-percent and 40-percent profit margins are just too high,” Cronkite, now a CBS special correspondent, told the Scene. “In order to deliver those types of margins, you have to diminish the news product. But these public companies keep pushing for higher margins, and that’s ultimately bad for our country. Strong, independent newspapers form an important basis of our democracy.”

Halberstam is sympathetic to Cronkite’s assessment and has developed his own formula to gauge how much a newspaper’s quality suffers as margins rise. “When the operating margins go over 18 percent,” he explains, “the quality of the paper starts to suffer. At 22 percent, you hit the point where you stop caring about your readers and start paying attention to your stockholders. Over 30 percent, it’s horrendous.”

—Willy Stern