The Detroit Newspaper Joint Operating Agreement (1988)

CASE 1 Partial Consolidation: The Detroit Newspaper Joint Operating Agreement (1988) Kenneth C. Baseman INTRODUCTION In 1986, the Detroit News, acquired that year by Gannett, and the Detroit Free Press, owned by Knight-Ridder, reached an agreement for joint operations. The joint operating agreement (JOA) effectively ended a price war in Detroit that had resulted in a significant period of operating losses for both papers. The JOA allows the newspapers jointly to set (monopo- lize) advertising and circulation prices. Editorial functions remain inde- pendently controlled by the two parties to the JOA. While it was hardly surprising that another metropolitan area had come to be served by a monopoly newspaper organization—a strong trend since World War II—the Detroit situation was unique in that, while the News held leads over the Free Press in circulation, advertising, and profitability, those leads were diminishing, and the papers’ positions were very close to equal. Certainly, there was not the kind of sharp and growing dif- ferences in size and profitability of the two papers that had characterized JOAs in other cities1 or had characterized cities where the weaker paper simply failed. Moreover, the two papers were both very large papers, being the seventh- and eighth-largest daily papers in the United States. Kenneth Baseman consulted for and testified on behalf of the staff of the Justice Department’s Antitrust Division in the Detroit newspaper case. He gratefully acknowledges the insights and comments of Robert Reynolds. All errors are the author’s responsibility. 1In the press release announcing the JOA, the parties stated that, “Over a period of more than a quarter century since this became a two-newspaper city, the Free Press and the News have fought to a virtual draw.” 25 THE ANTITRUST REVOLUTION The nearly equal positions of the Free Press and the News, and the fact that both were very large papers, raised the issue of whether the losses suffered by the Free Press and the News were the unavoidable result of the underlying economics of the newspaper industry, as the JOA applicants argued, or whether the losses were the result of behavior that would change if the prospect of a JOA were removed, as the JOA opponents argued. The antitrust review of the JOA was conducted under the terms of the Newspaper Preservation Act of 1970. This statute provides a unique procedure for the antitrust review of newspaper joint ventures. The intent of the statute is to allow preservation of two independent editorial voices in cir- cumstances where two fully independent papers cannot remain viable under conditions of ordinary commercial competition. Applicants for a JOA are required to establish that, absent the JOA, one of the papers would probably soon fail.2 The Attorney General is specifically required to make the final enforcement decisions, unlike other industries where the enforcement decision is usually made by the Assistant Attorney General for Antitrust. The Antitrust Division is required to review applications for joint operating agreements. After an initial review, it makes a recommendation to the Attor- ney General. It can recommend immediate denial, immediate approval, or a fact-finding procedure under an administrative law judge. In Detroit, the Antitrust Division recommended, and the Attorney General approved, a hearing before an administrative law judge. At the close of the hearing, the administrative law judge recommended against the JOA, largely accepting the arguments put forth by the Antitrust Division and rejecting the arguments of the JOA applicants. Attorney General Meese disagreed, and approved the JOA. Meese’s decision was upheld on appeal, and the JOA was finally implemented in November 1989, about three and one-half years after the two companies had agreed to apply for a JOA. Background on the Newspaper Industry Since the end of World War II, the structure of local newspaper markets in the United States has changed dramatically. At the beginning of the period, most cities were served by competing, general-interest, daily newspapers. During the period, many newspapers failed, and by the 1980s, almost all cities were served by only one daily, general readership, metropolitan newspaper.3 By the mid-1980s, head-to-head competition between daily, general-interest newspapers remained in only about two dozen cities. 2In Detroit, the parties, apparently after some disagreement as to which paper to claim was failing, filed a JOA application listing the Free Press as the near failing paper. 3In many cities, suburban papers have emerged to provide local news coverage. But these papers do not compete very directly with metropolitan dailies. They are usually published on less than a daily basis, provide very limited coverage of national or international news, are sometimes free rather than paid circulation, and do not distribute throughout the metropolitan area. While these papers certainly compete with the metropolitan dailies, at least for some advertising and in local news coverage, the competition is far less direct than where two general-interest, daily newspapers compete head-to-head. 26 Case 1: The Detroit Newspaper Joint Operating Agreement (1988) The decline in the number of daily newspapers is commonly attrib- uted to a variety of factors, including economies of scale, demand-side complementarities, the growth of other media, and the growing homoge- nization of the American population over the period. Economies of Scale Economies of scale in newspaper operations are commonly thought to occur in two principal areas: first-copy costs and distribution. First-copy costs are the various editorial and news-gathering costs that must be in- curred before a paper is ready to print. For a given level of quality, these fixed costs are the same regardless of the number of papers printed. Thus, if quality is held constant, this cost component will contribute to a decline in average costs with volume. Economies of scale are also thought to exist in local distribution operations. With larger volumes, delivery equipment and personnel spend less “dead time” between actual deliveries, thereby leading to lower average costs per delivery. Whether economies of scale in these two areas imply a cost disadvantage for a smaller newspaper in a particular circumstance will depend on the cost-scale relationship for other compo- nents of costs and management quality. However, it is safe to say that the overall newspaper cost function must show a strong general tendency to- ward economies of scale, at least over some range of output. Otherwise it is difficult to explain the sharp decline in the number of cities with more than one paper. If newspapers were a constant-cost industry over all output ranges, there would be no reason for the demand-side changes (discussed below) to result in a sharp reduction in the number of newspapers. Changes in Demand Given economies of scale (over some generally relevant output range), why were there so many multiple-paper cities in the first half of this century? The standard answer is that demand heterogeneity (demand for product differentiation) historically was sufficient to support a monopolistically competi- tive equilibrium, but that changes in the nature of newspaper demand after World War II rendered such competition financially infeasible in many cities. First, the growth of other media, in particular television, reduced the demand for newspapers. People increasingly got their news from television. Second, the demand for product differentiation fell as earlier generations of immigrants, and their children, became assimilated. Either of these factors, or both, could make monopolistic competition unsustainable. Demand-Side Complementarities and the “Downward Spiral” Newspapers sell to two different customer groups: advertisers and readers. The demands of these customers are interdependent. Advertisers are will- 27 THE ANTITRUST REVOLUTION ing to pay more for advertisements in a paper with larger circulation, and readers are more likely to want to read and be willing to pay for a paper with more local advertising, especially classified advertising. As a newspaper begins to decline, these demand interdependencies give rise to a phenomenon referred to as the “downward spiral.” A decline in circulation reduces the demand of advertisers. The reduction in advertising reduces the attractiveness of the paper to readers, which all else equal leads to a further reduction in circulation. In JOAs before the Detroit application that were approved under the Newspaper Preservation Act, applicants pointed to evidence that the failing paper was clearly in such a downward spiral. The Advantage of the Morning Paper In most cases where a city is served by a monopoly paper, it is the morning paper that has survived the interpaper competition to become the monopo- list. There are good reasons for this. First, the emergence of alternative media has adversely affected the afternoon papers much more than the morning papers. Evening news on television has tended to displace the afternoon paper as the source of current news, because afternoon papers— which go to press in the morning—will not contain coverage of any news that occurred during the day. This is much less of a problem for morning papers—which go to press during the night—because, at least for national and regional news, very little tends to happen at night. Second, a morning paper is cheaper to distribute than an evening paper because the deliveries of a morning paper do not have to contend with daytime traffic. THE GREAT NEWSPAPER WAR IN DETROIT Trends in Advertising and Circulation The JOA in Detroit terminated over twenty-five years of competition between the News, the afternoon paper, and the Free Press, the morning paper. This head-to-head competition began in 1960 when the News’s par- ent, the Evening News Association (ENA), bought the Detroit Times from Hearst.

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