San Francisco Chronicle Struggles as Internet Siphons Readers, Ads

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Times Staff Writer

When Jeffrey Zalles needed a new cashier for his coin laundry in the South of Market district, his help-wanted ad in the San Francisco Chronicle brought just four responses.

So Zalles posted a notice on Craigslist, a San Francisco-based network of websites that specialize in classified advertising. His cyber-ad drew 400 applicants.

Zalles found his cashier and hasn’t relied on the Chronicle since, advertising instead on the Internet and the city’s array of free papers.


The venerable Chronicle is struggling, and defections by Zalles and other advertisers are a big reason. Classified ads are a big source of income for the Chronicle and the newspaper business as a whole, making up 27% of the industry’s revenue, with 53% from other ads and 20% from people buying the paper.

What’s more, the Chronicle’s circulation is plunging. The paper reported last month that sales fell 16% during the six-month period ended in September -- by far the biggest drop among the nation’s 20 largest newspapers. Chronicle executives said much of the decline was caused by their decision to stop offering steep subscription discounts.

The Chronicle’s woes are being closely watched around the country as the newspaper finds itself on the front lines of the battle between old and new media. As more consumers get their news from electronic sources and advertising follows them, analysts warn that newspapers elsewhere -- already losing an average of more than 2% of their subscribers yearly -- might join the Chronicle in a steepening fall.

“It’s a disturbing harbinger of what may happen with other newspapers as attention turns to the Net,” said industry analyst John Morton of Morton Research Inc. in Silver Spring, Md.

The Chronicle’s challenges are particularly formidable because San Francisco and nearby Silicon Valley have the most tech-savvy audience in the nation. More than half of the city’s homes have had broadband Internet access for more than two years, the highest such concentration in the country.

About 57% of area residents use the Internet for news, compared with 50% nationwide, according to a study by Scarborough Research. Locals seeking jobs or companions are more likely than people elsewhere to use Craigslist and other free ad sites.


During the last 10 years, consumers have flocked to websites created by San Francisco journalists and entrepreneurs -- as varied as the tech-industry news site CNet and the online magazine Salon. The region is at the forefront of a rapidly increasing number of experiments with organized blogging and “citizen journalism.”

John Battelle, the former publisher of the tech-centric Industry Standard magazine, is selling ads and providing other services as a self-described “band manager” for popular blogs including BoingBoing and Metafilter.

Craigslist founder and local geek hero Craig Newmark is funding a project by blogger Jeff Jarvis to develop technology for identifying versions of key news stories that readers agree are trustworthy.

“This is a very sophisticated audience,” said Chronicle Editor Phil Bronstein. “They are obviously as wired electronically and as into the Web as any region in the country.”

During a recent visit to Zalles’ laundry, only one of 10 customers was reading the Chronicle, and he wasn’t a subscriber. Four were reading from laptops, and all said the Internet was their preferred source for news.

Brian Shire, a 24-year-old computer programmer, said the Internet made more sense for him because he didn’t have time for a paper every day and because the sites he visited posted stories that other readers recommended. “I don’t go to the Chronicle’s website unless something floats to the surface,” Shire said. “Maybe if I had more time.”


Katy Kavanaugh, a 42-year-old filmmaker, said she checked the Chronicle’s website, along with those of the New York Times and the Washington Post, but didn’t subscribe.

The Chronicle’s decline can’t be blamed solely on the Internet. Other factors include tough competition from other Bay Area papers and a cosmopolitan audience that reads national publications such as the New York Times.

But even in an industry plagued by sliding circulation and stagnant ad sales, the Chronicle’s $62.5-million loss last year raised eyebrows, given that papers as a whole are three times as profitable as the average company in the Standard & Poor’s 500. The Chronicle is owned by closely held Hearst Corp., which won’t detail its finances. The loss figure emerged when the company negotiated with the union to reduce staffing levels. An auditor for the union found no grounds to challenge the claim.

Outsiders attribute a large part of the loss to the decline in classified advertising. “Newspaper finances are a three-legged stool: classifieds, display advertising and circulation,” said Scott Rosenberg, a former writer at San Francisco’s Examiner, who left a decade ago to co-found Salon. “The classified leg has been kicked out, so the stool falls.”

A study last year said Craigslist alone had by then cost Bay Area papers as much as $65 million in help-wanted ads.

As for the drop in circulation, Chronicle Publisher Frank Vega said that nearly all of it was deliberate, as the company curtailed deeply discounted copies and other money-losing efforts.


Like other papers, the Chronicle is cutting circulation gimmicks such as “sponsored copies,” in which a supermarket or other big advertiser underwrites freebies in a given neighborhood so that every home receives its ads. Such tricks gave the paper more readers, allowing it to charge other advertisers more, but prompted readers and advertisers to question the value of what they were getting.

“If you keep offering something at half-price, that’s what people will think it’s worth,” Vega said.

But full-price sales of weekday papers also fell 5% or more, according to Vega’s figures. The overall weekday circulation of 392,000 is a far cry from the 1990 peak of 566,020, and that cumulative 31% drop is more than double the roughly 15% decline industrywide.

For the first hundred years after its 1865 founding by brothers Charles and M.H. de Young, the Chronicle was a scrappy civic institution. Back then, the paper used the city’s telegraph office to get the local scoop on Lincoln’s assassination, and it ran stories by Bret Harte and Mark Twain, who contributed theater reviews. Neither got a byline.

When it took on City Hall, it really took on City Hall. After an expose on a mayoral candidate prompted the official to question the virtue of the De Youngs’ mother, Charles shot and wounded him. After the candidate won, his son avenged the new mayor, killing Charles de Young in 1880.

The paper survived the 1906 earthquake without missing a day of publication. It battled for circulation with larger papers, including the Examiner, which a young William Randolph Hearst was using as the flagship of a burgeoning media empire.


In the 1950s and early ‘60s, an influx of talent that included Dear Abby columnist Abigail Van Buren and the return from the Examiner of colorful columnist Herb Caen helped the Chronicle overtake Hearst’s paper.

But the paper also earned a reputation for quirkiness. The most-cited example was 1963’s multi-part series documenting the poor state of the city’s coffee.

The Chronicle was the butt of a joke in the movie “All the President’s Men” about its supposed willingness to print forecasts of the previous day’s weather for those who missed it.

“People like to pick on the Chronicle. It’s their familiar pal -- you can kick it around, but you still turn to it for your news,” said 13-year reporter Kevin Fagan, who covers the homeless.

There have been some notable journalistic achievements. The Chronicle assigned the country’s first full-time AIDS reporter in 1983 and won a Pulitzer Prize for architectural criticism in 1990, a special Pulitzer for Herb Caen in 1996 and a Pulitzer for photography this year.

The Chronicle and the Examiner were yoked together for 35 years in a joint operating agreement that split profit. The Examiner moved to afternoon publication, and it suffered from the same shifts in subscriber habits that undermined afternoon papers nationally. The Chronicle had little incentive to invest or improve because the smaller Examiner would take half of any new profit.


Amid squabbling among the De Young heirs, Hearst Corp. bought the Chronicle for $660 million in 2000 and sold the Examiner (now owned by Denver billionaire Phil Anschutz and distributed as a free tabloid).

By then, readers already were moving to the Internet, and the Chronicle had missed its best shot at dominating the suburbs and Silicon Valley, where dailies such as the San Jose Mercury News had already won over many readers.

“Instead of covering the heck out of the outlying areas, it allowed the competitors to do that,” said John McManus, director of the GradeTheNews project at San Jose State University.

The 1997 death of Caen, whose staccato observations graced the paper as often as six days a week, was also a blow.

“No one could miss that column and still be in the know,” said former city Supervisor Angela Alioto, the daughter of a San Francisco mayor.

Now comes the assault from the still-evolving news alternatives on the Web.

The Chronicle and its peers elsewhere are fighting back by beefing up their own websites.

Bronstein, who ran the Examiner for Hearst before becoming Chronicle editor five years ago, plans online experiments such as running commentary or other reports from private citizens on his paper’s website.


“It’s the cutting edge,” said Bronstein, recently divorced from actress Sharon Stone. “If it goes over a cliff or it takes off, the opportunity is here.”

SFGate drew 3.9 million users in October, according to Nielsen/NetRatings, about even with the site of the twice-as-large Los Angeles Times and trailing only the New York Times, USA Today and Washington Post among newspaper websites.

Monthly readership at newspaper sites overall is up 11% in the last year to 39 million.

As a result, newspapers are seeing a rapid rise in online advertising revenue, to a projected $2 billion this year from $655 million in 2002, according to media consulting firm Borrell Associates Inc. That’s a respectable chunk of all Internet advertising, which is climbing 28% annually and will surpass $12 billion this year, according to Citigroup Investment Research.

But print advertising is stuck at the same $48-billion level as it was in 2000, and the bump in online ads can’t fix that, said Borrell’s Gordon Borrell: “It’s like a helium balloon trying to lift an aircraft carrier out of the water.”

Chronicle Publisher Vega, installed this year after leading the combined operations of two Detroit papers, said he wanted to increase SFGate’s revenue by charging readers for whatever they value most. “What’s our franchise? I’ve got to figure what that is,” Vega said.

Many papers have tried similar experiments but retreated after readers defected. The Los Angeles Times tried charging nonsubscribers for entertainment features from August 2003 to May 2005. The New York Times recently began charging nonsubscribers for access to its archives and columnists, and a better-than-expected 135,000 of them have signed up.


Vega still sees the website as a way to induce more people to buy the paper, even as he cuts the newsroom staff to a projected 400 from 570 five years ago.

Newspaper executives are rooting for him, but Vega is battling against a generational shift that not even he thinks will stop.

“I hate to read the obits because half of those people are our subscribers,” Vega said. “But I think newspapers, if they’re run properly, still have a lot of legs.”