The Crisis Facing American Newspapers: Through enlightened public policy print journalism will evolve, survive

Many American cities will soon lose a critical producer of local news and information -- the daily newspaper -- unless the government grants publishers some urgent and long overdue regulatory relief. In our work advising the American newspaper industry, we are seeing widespread financial distress. By the middle of this year, as many as a third of the daily newspapers in America may be under the protection of a bankruptcy judge; dozens more could be shuttered with thousands of jobs lost.

The industry has self-inflicted problems, but one of the most destructive factors has been the change in how consumers search for information. By the time the average American gets to work each morning, he or she has seen, read or heard news by way of radio, television, Internet, PDA and cell phone. Although a great deal of that content comes from daily newspapers, which pay journalists to report, write, edit and provide photographs and even video, many of the re-users of the newspapers' content essentially pay pennies or nothing at all. Imagine if this were so for the writers of Frank Sinatra's ballads or the producers of the latest James Bond film -- you write it, and everyone else uses it for free.

Some publishers drowning in red ink are already reducing the number of days they print the local paper. Others are concluding that it is better simply to shut down. In the quarter that ended on Sept. 30, 2008, the average daily newspaper in the nation's top markets saw declines in year-over-year revenue approaching 20 percent; several lost more than 25 percent. In a business with a largely fixed cost structure, such revenue erosion can be lethal. By the end of this year, some of America's biggest dailies may well be run by their lenders. There is little evidence that banks would serve us well as the chroniclers of the nation's news.

The government, however, can do something about all this without costing the taxpayer a dime. The Justice Department, the Federal Communications Commission and even the U.S. Senate have all, for decades, held that combining local dailies or owning papers along with other local media is anti-competitive. This is nonsense. Antiquated antitrust laws have been extended to apply not just to the local concentration of economic power but also to how many "voices" there may be in a defined market. Yet somehow voices refer only to print. Regulators fail to consider the Internet or even cable TV as local competition. The regulators' insistence on a narrow product market definition is particularly inconsistent given their recent willingness to define the market more broadly in other contexts, such as in the merger of XM and Sirius. It is as if regulators went to sleep during the Eisenhower administration and woke up staring blankly at an iPhone.

These regulations evolved decades ago when there were, in any given market, one morning and one evening paper, two or three local TV stations and three or four radio stations. Media concentration may have been a concern then, but how could it be now? Today, the average American city has a daily paper, several "national" papers with plenty of local advertising, maybe a tabloid, several free papers and "shoppers" and weekly suburban papers -- all of them competing for classified dollars -- as well as periodical city magazines. And that's just print media. Add to that six TV stations plus 200 or more cable and DBS networks, plus between five and 50 radio stations, and the Internet with an almost endless number of "local" or "hyper-local" URLs that distribute information and news. We didn't mention Google, Yahoo or MSN, all of which are ad-driven enterprises and in every market. For advertisers, to say nothing of citizens, the voices abound.

Newspapers are the most trusted, credible source of local news. They serve as a bedrock of information and a critical monitor of a functioning democracy, and their imminent demise isn't just some abstraction of destructive capitalism. Here are four steps Justice and the FCC under the new administration should take to create a fairer landscape for the evolution and survival of the newspaper business. No TARP money please; just enlightened policy:

1. Redefine the "market" truthfully -- all local media. The historical reluctance to approve geographically adjacent mergers or combinations is based on a fallacious definition of "market." This must be changed. Adjacent suburbs are part of the core market for any major daily paper. Constraining publishers by erroneous market definitions has slowed combinations, led to massive over-capacity and inefficient fragmentation, which will now give way to business failures. Combinations of geographically adjacent papers is one logical path to create efficiency.

2. Grant the industry a short-term anti-trust exemption. Newspapers should be granted a finite (36-month) anti-trust law exemption to permit deployment of an industry-wide system to track and charge for re-use of their content. Whether that is accomplished through a "rights society" as with music publishers, or through the use of electronic watermarks, which could facilitate digitized tracking and usage charges, publishers cannot continue the practice of paying for the editorial staffs to source the news and then have it used for free by competing Web aggregators. There are numerous organizations that already have infrastructure in place to serve this purpose. The Associated Press already has existing license fee and "pay-per-click" payment structures.

3. Eliminate local media cross-ownership restrictions. The subject of so much discussion at the FCC that it has been the mantel (or undoing) of five successive chairmen, the cross-ownership rule prohibiting common ownership of newspapers and TV stations should be jettisoned immediately. The rules fashioned over 35 years ago still prohibit local media from competing effectively in rapidly evolving digital media markets. Without this change, television stations may well be the next endangered species.

4. Allow in-market mergers. Because of age-old restrictions against mergers of local newspapers, the Los Angeles Daily News would probably have a better chance of merging with The New York Times than with the Orange County Register. The possibility of two "local" papers combining somehow strikes terror in the hearts of regulators who fear anti-competitive pricing leverage over local businesses. Chrysler and GM are in merger discussions, but somehow the Minneapolis Star-Tribune and the St. Paul Pioneer Press must sign a consent decree agreeing to not combine. Is it really plausible that local car dealers and merchants will suffer anti-competitive pricing if two marginally profitable papers merge? Should we fear pricing leverage created by a merger of newspapers or the more profound impact of having no newspaper? The industry's effort through the Newspaper Preservation Act to preserve two "voices" in a single market has also outlived its usefulness. If two papers in a market need a special exemption to set unified pricing, the market probably isn't big enough for two papers.

Democracy is safer when the news is gathered, written, edited and filtered by professionals who are dedicated to the craft. Without newspapers, who will provide the in-depth accurate reporting on the workings of government, the wars, the hurricanes, and the acts of heroism? Is this to be provided by bloggers or the staffs at the eco-cool campuses of the Web portals?

The executive branch of government, led by the president, has the power to override the bureaucracy when the government's position has no valid purpose. This is precisely the case with the American newspaper industry.

Letting newspapers fail under the weight of bad, antiquated policy would be a catastrophic mistake.

■ John Chachas is a managing director of Lazard Fréres & Co., a New York investment-banking firm, and the co-head of the firm's practice advising media companies.