business

Tony Ridder, like a lot of newspaper kingpins, embraced the Internet as the future in 1998.

He even spent millions to relocate the throne of his Knight Ridder publishing empire from old-economy Miami to high-tech San Jose in California's then-booming Silicon Valley.

"There is no doubt that new technology and the emerging power of the Internet will greatly affect how people will get their news and information," Ridder said in 1998.

Ridder was right. A decade after the commercial birth of the Internet, the boom in online information and advertising outlets has resulted in more competition and less profit for traditional newspaper publishers.

The entire newspaper industry has been under siege, with drops in paid circulation at bastions like the New York Times and the Washington Post. Publishers are scrambling to increase advertising and profits at their Internet-based newspapers, which largely are available for free on the Web.

Paid circulation at Knight Ridder's flagship San Jose Mercury News declined 13 percent over the past five years and operating profits were eroded -- an outgrowth of the digital economy bust in Silicon Valley.

Ridder's 1998 decision to relocate headquarters to San Jose was a bold embrace of the digital economy. But by 2001, the tech bubble had burst and Knight Ridder's flagship had sprung a leak that he and his managers scrambled to plug with across-the-board cost cuts.

With 32 newspapers in markets around the country, including Philadelphia, St. Paul, Dallas and Kansas City, Knight Ridder's woes surely spring from more sources than just San Jose.

But four Knight Ridder dailies -- in San Jose, St. Paul and the two in Philadelphia -- have pretax profit margins below 12 percent, according to securities analysts.

The Mercury News suffered from a huge loss of related help-wanted ads after 2000, part of it due to the tech meltdown and part to competition from the Internet.

At its peak of profitability, in 1999-2000, the Mercury News made more than $100 million, compared with an operating profit of about $20 million on revenue of $235 million last year, according to Morgan Stanley.

In Philadelphia, the Inquirer and the Daily News have unions and high labor costs in a city with a still-lagging business climate. And they face strong competition from a ring of healthy suburban papers. In St. Paul, the Pioneer Press has trouble competing against the larger Star Tribune.

Overall, Knight Ridder had a 13 percent pretax profit margin from continuing operations in 2005, according to documents filed this month with the SEC. That's down from 2004.

When anxious shareholders forced his hand, Ridder finally agreed this month to sell his empire -- including three California properties -- to the much-smaller McClatchy Co. (owner of the Star Tribune). And when McClatchy announced it was keeping the Miami Herald but selling the Mercury News along with 11 other dailies, Ridder reportedly was stunned.

Maybe he should have taken a closer look at the numbers. According to Bloomberg News, the largest public companies in California have delivered a total return to shareholders of about 18 percent since 2000. A similar index for Philadelphia-area companies rose just 10 percent.

Florida-based companies, meanwhile, have delivered a 50 percent return and Minnesota companies about 73 percent.

Growing companies in healthy markets can buy a lot of advertising. Shrinking companies in struggling markets? Not so much.

Knight Ridder's online business is booming. But online readers, with rare exceptions, get their newspapers for free. And online business still accounts for less than 10 percent of newspaper revenue at Knight Ridder and McClatchy.