The Road Ahead for Media Hybrids: th Report of the Duke Nonprofit Media Conference, May 4-5 James T. Hamilton The Duke Nonprofit Media Conference was sponsored by the DeWitt Wallace Center for Media and Democracy, the Duke Center for Strategic Philanthropy and Civil Society, and the Duke Center for the Study of Philanthropy and Voluntarism The Duke Nonprofit Media Conference on May 4-5, 2009 brought together a working group of nearly forty leaders from foundations, nonprofits, commercial media, and academia to examine two questions: What are the hurdles to nonprofit or foundation ownership of media outlets? What are the hurdles to nonprofit or foundation subsidies for the creation of public affairs information? The conference began with the premise that greater support from the nonprofit sector is one of many avenues to explore for ways to support watchdog and accountability coverage. The conference did not focus on the broader question of new business models for news organizations. Topics such as the desirability of micropayments, behavioral targeting in advertising, and variation in the print frequency and prices of newspapers were left for another day. To focus attention squarely on the questions arising with nonprofit media, the conference organizers solicited six discussion papers that were distributed prior to the conference: Bad Public Relations or Is This a Real Crisis? YES by Lauren Rich Fine Financing the American Newspaper in the Twenty-first Century by Richard Schmalbeck A Nonprofit Model for The New York Times? by Penelope Muse Abernathy Subsidizing the Watchdog: What Would it Cost to Support Investigative Journalism at a Large Metropolitan Daily Newspaper? by James T. Hamilton The First Draft: Emerging Models of Regional and State Non-Profit Investigative Journalism Centers by Brant Houston A Donor Collaborative to Support Not-for-Profit Public Affairs Journalism by Joel Kramer and Jon Sawyer The best way to understand the issues raised at the conference is first to read the discussion papers, which are presented in Appendix 1. After you’ve read the background papers, this report will give you a sense of what the conference participants focused on in discussions prompted by the papers. Appendix 2 provides a short description of the conference participants and the conference agenda. This report focuses on four themes that frequently appeared in the discussions: why is there a problem with sustaining watchdog or accounting ability coverage; why may the nonprofit sector offer one way to support this type of public affairs reporting; what is the range of nonprofit media alternatives; and how specifically can foundations, nonprofits, and government foster greater experimentation in nonprofit media provision. Three centers at Duke came together to sponsor this conference: the DeWitt Center for Media and Democracy (James Hamilton, Director); the Duke Center for Strategic Philanthropy and Civil Society (Ed Skloot, Director); and the Duke Center for the Study of Philanthropy and Voluntarism (Charles Clotfelter, Director). The Centers’ faculty and staff would like to thank the conference participants for sharing so many insights into the how the nonprofit sector may play a larger role in sustaining the watchdog function of journalism. What is the market failure? Most financial indicators in the journalism industry currently point in discouraging directions. Lauren Rich Fine, in her aptly titled paper Bad Public Relations or Is This a Real Crisis?: Yes, recounts the challenges facing newspaper companies: print circulation is declining, classified ads have migrated to websites such as Craigslist, and retail ads are diminished by the great recession, consolidation in retail stores, and ability of firms to reach customers through many other outlets beside the local paper. This drop in revenues has brought a precipitous drop in media company stock prices, profit rates, and newspaper staffing levels. Though profits remain relatively high in some smaller markets, these papers are less likely to have strong traditions of accountability and watchdog coverage. While many large metropolitan papers with traditions of investigative journalism are still profitable, the large amount of debt owed by parent companies who made ill-advised acquisitions means even profitable papers are cutting staff to pay off these debts. Conference participants often pointed out that attention to the products of newspaper firms was at an all-time high, because of free access to stories provided on the web. They noted that the crisis in journalism was essentially a crisis of business models, with the unanswered question being what will replace the once steady stream of classified and retail ads generated by print audiences. If newspapers were like goods sold in perfectly functioning competitive markets, changes wrought by technology and business cycles could simply be viewed as a painful process of creative destruction. Firings and closings would occur, but eventually the level of information valued by customers would be provided in new formats through new business models. By this reasoning, the public’s interest would define the public interest. Much of the discussion at the conference centered on the threats to watchdog coverage at the local level precisely because participants believed the market would not adequately sustain this type of journalism. The economic reasoning behind this worry is straightforward. Newspapers provide information that meets many different types of demands. As producers, people want information that helps them at their jobs. As consumers, they want to know what products offer the best value at what prices. As people in search of entertainment, they want to know stories and facts that are simply enjoyable to read and follow. The markets for these three types of demands—producer, consumer, and 2 entertainment – work fairly well. If you don’t seek out and consume the information, you don’t get the benefit. So most people will look to the media to find information that helps them do their jobs, buy products, and stay entertained. Coverage of the school board, city council, or state capitol serves a different information demand, that of a voter. A rational voter may realize that investing the time to read what’s going on in local or state government does not pay, in a strictly cost-benefit sense. If you’re about to buy a car, time on Edmunds.com can help you get a better car. If you’re thinking about casting a vote in a local election, however, the time you spend in learning about issues or candidates does not change the winner of the race. The low probability you will be the decisive voter means that the cost of becoming informed outweighs the benefits from becoming informed. Even if you care about an issue a great deal, the probability your political actions will make a difference in its resolution means the expected value of becoming informed is negative. Most people choose, in the words of economist Anthony Downs, to remain rationally ignorant about the details of politics. There is a market for political coverage. Some people believe they have a duty to vote, which translates into a duty to keep informed about politics. For some people CSPAN is like ESPN, with the details of policies being inherently interesting. Some people will pay attention to political coverage if you make it about human interest, e.g., politics as a horse race or a scandal. Yet even if you add these three demands for information together, this will not translate into the optimal demand for public affairs reporting. Many people who benefit from the changes in public policy that come from accountability coverage will still have the incentive to appreciate that the stories are there, but skip the chance to read or pay for these articles. This sets up a gap between what people need to know as citizens and what they want to know as readers. Newspapers cannot fully capture the value of the positive spillovers on society from their watchdog or accountability coverage. When individuals or families owned media companies, some were willing to provide more than the profit-maximizing amount of public affairs coverage. This gave them the warm glow of altruism and the satisfaction of providing a public good. Even within publicly traded stock companies, when profits were high managers could afford to do well and do good at the same time by indulging a preference for stories read by a few but valued by many because of their policy impacts. In the Internet era, however, the decline of profits means that media firms are less willing or able to subsidize the provision of news about government. Accountability journalism, in the form of watchdog beat reporting or investigative projects, can be highly expensive. In a world where a story’s value is measured by eyeballs attracted (and monetized through subscriptions or advertising), this type of public affairs coverage is at risk. While most conference participants expressed concern about the levels of watchdog coverage likely to survive in the currently turbulent media markets, the question quickly emerged about why nonprofits might offer a solution to this problem. 3 Why would nonprofit support help remedy the market failure involved in watchdog coverage? Economists call the positive spillovers which some goods have on society positive externalities. As the term implies, the benefits created are outside of the revenues that flow to the firm creating the good. Goods producing positive externalities will be underproduced because the firm cannot capture through the pricing system the full value of what it is creating. In some cases, the nonprofit organizational structure offers a way to increase the provision of the underprovided good. Watchdog coverage is a classic case of a product with positive externalities. A newspaper company can gain subscriptions and advertising revenues from selling the attention of people reading accountability stories. The benefits to society arising from changes in public policy, such as the increase in education levels or rise in public safety arising from stories about schools or probation systems, are not reflected in a paper’s bottom line. If a news organization were operated as a nonprofit, this organizational structure could increase support for watchdog coverage for the following reasons: 1. The tax deductibility of donations to a nonprofit media outlet would lower the cost to readers and listeners of supporting coverage of public affairs. This would reduce the flow of tax revenues to the government but allow individuals to direct these resources to media outlets they valued. Given the concerns about the First Amendment and government influence in involved in direct government sponsorship of media outlets, the tax deduction allows individuals who believe in nonprofit media to contribute to the version of the public good they value (e.g., the type of public affairs coverage they believe should be produced). 2. If a news organization’s revenues exceed its costs, the nonprofit status means that part of the excess would not flow back to the government in the form of business taxes. The excess funds could be reinvested in the quantity and quality of coverage provided by the news organization. 3. The nonprofit status serves as a signal to potential donors about what the funds will be spent on and the incentives of the firm’s managers. In ideal for-profit structures, managers will have the incentive to maximize profits. If accountability or watchdog coverage of public affairs is not profit-maximizing, then a person contributing to the operation of a for-profit organization might worry about how the funds would be used. Managers might have an incentive to cut costs of coverage, especially if this led to higher bonuses. Managers might also have the incentive to vary the mix of stories provided in a way that maximized advertising revenues but reduced the policy impact of the coverage. The nonprofit status of an organization lets donors 4 know that the managers and journalists hired are more likely to be the type to focus on maximizing impact and import rather than maximizing financial returns. 4. The nonprofit status allows a diverse set of people to pay different prices for the creation of a good they jointly value. Consider that when a single family owns a paper, the members of that family pay the price for providing amounts or types of public affairs coverage that go beyond profit-maximization. If a newspaper is run as a nonprofit, that family and others within the community can share the cost of contributing to public affairs coverage. The amounts they contribute will vary, and the incentive provided by the tax deductibility will vary too. Those making large donations will get larger deductions. The nonprofit status in effect is a way to transfer the burden of supporting extensive levels of accountability coverage from a particular family (e.g., the Sulzbergers, Grahams, or Blethens) to a larger set of people who value and benefit from the positive spillovers generated by the reporting. The Range of Media Hybrids Much of the discussion at the conference focused on the different ways to generate support for accountability or watchdog coverage at the local and state levels. Four distinct types of media hybrids emerged in the discussions: media organizations run as nonprofits; media companies organized as low- profit limited liability corporations, denoted in conversation by the acronym L3Cs; for-profit media outlets with “affiliated” nonprofit investigative funds; and for-profit media firms who accepted funds from foundations and nonprofits to support particular areas of coverage. The participants referred to these different structures as media hybrids because each combined some elements of private market support (e.g., advertising revenues) with some elements of philanthropic support (e.g., tax-deductible donations from individuals, or grants made by foundations). With the papers in Appendix 1 offering granular details on these different hybrids, the conference discussions explored the relative advantages and disadvantages of these models. Nonprofit Media Outlets Stand- Alone Startups: Joel Kramer of MinnPost and Margaret Freivogel of St Louis Beacon each described how their news organizations as web only startups focus on local public affairs coverage. According to Kramer and Sawyer’s paper A Donor Collaborative to Support Not-for-Profit Public Affairs Journalism, MinnPost has an annual budget of $1.2 million and more than a dozen staff members and St. Louis Beacon has a $1 million dollar budget and a staff of 17. Each is run as a nonprofit (501(c)(3)) that provides local coverage not available in the daily 5 metropolitan newspaper in the city. To demonstrate the feasibility of a nonprofit local news site, Kramer has raised foundation grants. News products are experience goods, in that it is hard to know what they contain unless you consume part of them (e.g., experience them). Foundations like to fund demonstrations projects, whose success can show the feasibility of an idea or approach that can then be replicated elsewhere. Kramer sees the national foundation support as transitory. He hopes to eventually have a sustainable business model for MinnPost that involves covering the costs of operations through memberships (from both small and large individual contributors), advertising, fundraising events, sponsorships, and possibly other earned revenue streams such as syndication. Once the site was covering operations costs through these revenue streams, foundation grants might only be sought for new experiments or special one-time projects. These stand-alone sites supplement, rather than substitute for, metro newspaper coverage. Their advantages include an ability to focus on public affairs beats that have been slighted by for-profit media , freedom from the debt burdens forcing staff reductions at many newspapers, and ability to hire experienced reporters recently laid off from metro dailies. As nonprofits they do not have the ability to endorse political candidates. Joel Kramer points out, however, that MinnPost does provide space for many different opinions to be aired about public affairs so that readers can find news plus distinct perspectives on local politics at the site. Stephen Engelberg, the managing editor of ProPublica, spoke at the conference about how this nonprofit site measures success. Funded with an initial promise of $30 million of support over three years by the Sandler Foundation, and supported by additional funding from foundations such as Atlantic Philanthropies and the MacArthur Foundation, ProPublica now has a staff of 32 journalists focused on national investigative stories. The site does not have an editorial or opinion section. It partners with for-profit media outlets to gain greater circulation for its stories, which are also posted on the website www.propublica.org. Engelberg encourages reporters to aim for stories with impact, encouraging them to think about what letter to a public official a reader might write after being reading a ProPublica investigation. The current annual budget of $10 million is designed to yield about 50 deep-dive stories a year. He indicates that the organization is already starting to plan about how to develop a sustainable model, which could involve building an individual donor base similar to public media and expanding the set of foundations and high net worth donors beyond the initial set of backers. Investigative Reporting Units at Universities: In his paper The First Draft: Emerging Models for Regional and State Non-Profit Investigative Journalism Centers, Brant Houston describes the growth at universities of investigative reporting units focused on regional and state issues. He cites two recent examples as the Wisconsin Center for Investigative Journalism at the University of Wisconsin and the New England Center for Investigative Reporting at Boston University. Also frequently mentioned at the conference were the Investigative Reporting Workshop at American University, 6 Schuster Institute at Brandeis, and the Stabile Investigative Journalism Center at Columbia University. Investigative centers at universities are often either situated in the journalism department or operated as stand-alone nonprofit entities. The journalists involved may teach classes at the university, act as mentors to students and interns, and help produce projects with students that gain wide circulation through partnerships with local commercial media. The schools gain by training students, and by contributing to community affairs through the development of the investigative reports. One potential problem involves libel liability, which may rest with the commercial publisher, or the stand- alone reporting nonprofit, or the university depending on how the report is produced and released. Traditional newspaper transitioning to a nonprofit: The declining staff, diminishing page counts, and dwindling (and in some cases disappearing) profit rates at metro dailies have increased discussion of the possibility of transforming some daily papers into nonprofit entities. The St Petersburg Times, a for profit newspaper owned by the Poynter Institute (a nonprofit journalism education entity), is often discussed as one example of nonprofit ownership. Yet the origins of this arrangement, Nelson Poynter’s willingness to give away his ownership interest in the paper to create a nonprofit, may make it difficult to replicate. In his paper Financing the American Newspaper in the Twenty-First Century, Richard Schmalbeck points out that the positive educational spillovers generated by newspaper coverage of public affairs should qualify publishing a newspaper as a charitable purpose. To date the IRS decisions relating to this question appear relatively discouraging. The bill recently introduced by Senator Cardin to amend the IRS code to allow certain newspapers to operate as 501(c)(3) nonprofits has sparked debate about the best way for the government to permit the operation of papers as nonprofits. Drawbacks of the Cardin bill discussed at the conference included its requirement that a paper contain local, national, and international news and its apparent requirement that the news product be published in print as a general circulation newspaper. Lawyers at the conference specializing in nonprofit operations believed that legislation might not be required in this area, if the IRS were willing to provide clarity on newspapers or other news enterprises operating as nonprofits by issuing a guidance ruling. Public Media: The growing audience size for NPR is evidence of the interest people have in public affairs coverage provided by public broadcasting. Andrew Haeg, one of the founders of the Public Insight Journalism network developed by American Public Media and Minnesota Public Radio, discussed at the conference how public radio stations were using information provided by listeners to crowd source stories. Conference participants noted that 7 traditionally local public radio stations were not known for doing local watchdog or investigative pieces. Yet some of the nonprofit stand-alone operations doing investigative work view public radio as a natural partner for their work, since this wider platform offers a way to reach a bigger audience. Stephen Engelberg noted that ProPublica and WNYC had collaborated to produce a site, www.shovelwatch.org, devoted to tracking how stimulus funds are actually spent and how stimulus projects play out at the local level. Nonprofits Providing Media Inputs: Conference participants noted that nonprofits working on public affairs issues are increasingly providing their own data, research, reports, and even stories to fill the void created by reductions in traditional media coverage. Human Rights Watch issues reports that become the basis of stories by journalists who lack the resources to do their own investigations in many countries. Surveys and research sponsored by the Pew Charitable Trusts on media, global warming, and state policies regularly become the basis of reporters’ articles. The Kaiser Family Foundation has taken this process one step further by creating Kaiser Health News. The Foundation has hired journalists and free-lancers to write about health care in the US, including the development of health care policy in Washington. The stories are available on www. Kaisernetwork.org and are made freely available to news organizations. With commercial media reducing the number of reporters covering many policy beats, information provided by nonprofits involved in policy formation may provide some coverage of issues once reported by professional journalists working in media organizations. Low-Profit Limited Liability Company (L3C) The L3C organizational structure appears tailor-made for a news organization, though the relatively recent vintage of this innovative structure means that to date no media company has organized as a L3C. As Richard Schmalbeck details in his paper (see Appendix 1), Vermont became in 2008 the first state to pass legislation allowing the creation of a new type of business called the L3C, the low-profit limited liability company. Essentially, the L3C is designed for a firm that serves educational or charitable purposes. In the language of economics, an L3C would be a firm that generates significant positive externalities and could have trouble attracting capital because of its low profit rate. Consider how a metro daily might make the case for L3C status. The newspaper is really a portfolio of stories serving many information demands: producer, consumer, entertainment, and voter. Current structural trends (e.g., demise of classified ads, drop in circulation) and cyclical trends (e.g., drop in retail advertising) mean low or negative returns for papers in some markets. This puts pressure on papers to cut accountability or watchdog coverage, in part because of its great expense and in part because the benefits it generates for society do not transfer readily into subscription or advertising revenue. Yet if the paper 8