29 Dec 07    How newspapers got into such a fix, and where they go from here, WSJ, Paul E.Steiger
27 Nov 06   The Big Apple's glory days have passed, Financial Times,  JOHN GAPPER
25 Nov 06   Down on the Street, The Economist
25 Nov 06   What's wrong with Wall Street, The Economist, Editorial

    NOT since the 1980s, when the nation was in a spin about the coming of the Japanese, has there been such anxiety in America over foreign competition. The familiar concern that China is going to steal the country's remaining manufacturing jobs has been compounded by a newer fear: that Wall Street is losing its grip on the world's money. Bankers and politicians worry that business will drain away from America's capital markets to financial centres overseas, particularly London and Hong Kong. Several committees are sweating away on reports, the most important of which is to be published next week, on how to stop the rot. America's treasury secretary, Hank Paulson, made it clear in a speech on November 20th that he shares their concerns.
    Although it is still the world's biggest market for capital, America's lead is shrinking fast in almost every area (see pages 77-80). In some it has been overtaken. The most spectacular collapse has come in the market for initial public offerings (IPOs) of shares, where the New York exchanges, miles ahead a few years ago, now trail behind London and Hong Kong. American stockmarkets are actually shrinking as domestic firms go private or buy back their shares; and it isn't helping that foreign firms choose to list elsewhere.
    This raises two questions. How has America's status as the world's sole financial superpower been eroded? And what, if anything, can it do to turn this around?

Onward, capitalist soldiers
    The bad news for America is in part the resuit of good news elsewhere. Thanks to financial liberalisation (which America encouraged), New York faces a lot more competition than it used to. Developing countries are getting richer, and their companies and financial markets better governed. Firms that might once have rushed to American exchanges to privatise themselves are instead doing so at home, or at least nearby. London is se en as a natural home for companies from Russia. Chinese firms are turning more to Hong Kong, which is gaining a reputation for capital-raising as well as trading: witness the gargantuan offering by ICBC, a bank, last month. As Asian markets mature, more of the capital there will surely never leave the region: there is little point in Asian companies going to New York to raise cash from Asian savers. Other markets are growing up, making Wall Street less exceptional.
    But America is also responsible for its financial markets' decline by tangling them up in red tape. Nowhere is this clearer than the Sarbanes-Oxley act, an overhaul of corporate governance passed in 2002 in the wake of the Enron scandal. It's not all bad: parts of the law have successfully increased accountability to shareholders, and have been copied by regulators elsewhere. What's more, there is evidence that such rules lead to higher stock valuations because they suggest a commitment by managers not to abuse shareholders. But Sarbanes-Oxley went too far. The notorious section 404 on internal controls greatly increased the reporting burden on companies. Smaller firms, in particular, suffer.
    With regulators soon expected to announce rule changes that will lighten the burden, thé battle against Sarbanes-Oxley's excesses looks well on the way to being won. This should mean efforts can be directed elsewhere.

More economists, please
    Towards shareholders, to start with. On the one hand, they have too few rights in their dealings with company boards; they have less power than their British equivalents when it cornes to electing directors, for instance. On the other, American shareholders (or rather the lawyers who purport to represent them) wield too much power in securities litigation. Lawsuits brought because of falling share priees make a mockery of both the principle of caveat emptor and the honourable New York tradition of never giving a sucker an even break. Sadly, this is tied up in thé much broader tort-law problem that bedevils American capitalism.
    Regulators could also do with an overhaul. Here there are two problems, both serious. First, the Securities and Exchange Commission (SEC) is good at the tough stuff, bringing plenty of "enforcement actions". But in its zeal to keep pace with crusading state attorneys, who exploit high-profile campaigns to win votes, it has lost sight of its other supposed goal - ensuring that markets run smoothly and efficiently. One way to address this imbalance would be to replace some of the SEC's vast army of lawyers with economists. That would also lead to better cost-benefit analysis of new regulations - an area where the SEC trails behind Britain's Financial Services Authority.
    Second, the regulatory structure is too atomised. Too many agencies monitorthe markets. There are four separate banking regulators. State and federal regulators tread on each other's toes. The SEC's duties overlap with those of the Federal Reserve, the Commodity Futures Trading Commission (CTFC) and others. Since it no longer makes sense for the increasingly entwined cash and derivatives markets to be policed by separate regulators, a sensible first step towards streamlining would be to merge the CTFC and the SEC.
    Will America sort out its problems before the rot goes too far? The review of Sarbanes-Oxley shows the world's largest economy is aware of its shortcomings, and responding to them. Both parties recognise that reform is needed; though there is a danger that rising anti-business feeling (see page 49) may persuade the lawyer-friendly Democrats otherwise.
    Still, even if reform fails and America falls behind, there will be compensations. Diversification has provided big financial institutions with a hedge against national decline, and it continues apace. The New York Stock Exchange is buying Euronext, a big European exchange, and sounding out the Tokyo bourse. NASDAQ, meanwhile, has launched a hostile bid for the London Stock Exchange (see page 83). And New York's investment banks are minting money overseas, not least from all those IPOs that have gone elsewhere. To many American capitalists, geography has never seemed less important - though that should not stop them untangling Wall Street. •

    DAVID CHAVERN has been looking at a photograph of hirsute twenty-some-things and fretting. The snap, from the late 19703, shows a mop-topped Bill Gâtes and colleagues at what would become the world's biggest software company. Mr Chavern, a capital-markets expert at the US Chamber of Commerce, is concerned that America may no longer be very good at nurturing nascent Microsofts. "You can't help wondering about the hairy people you'll never hear of," he muses.
    He is not alone. There has been much hand-wringing over the state of America's capital markets and their ability to help businesses grow. The main worry is that despite being big, they are no longer competitive compared with the leading financial  centres of Europe  and Asia. This month Michael Bloomberg, New York's mayor, and Charles Schumer, a senator, showed their concern in an article dramatically titled: "To save New York, learn from London." But some think it is already too late for Wall Street. "The days of financial hegemony are over," says one senior American officiai gloomily.
    As arrogance gives way to angst, America is exploring what to do. The Chamber of Commerce has held a series of "town hall meetings" and will publish a report next spring. New York has hired consultants from McKinsey to develop a new strategy. But thé initiative attracting most attention is the Committee on Capital Markets Régulation (CCMR). This group of bankers, bosses, academies and investors, headed by Hal Scott, a Harvard Law School professer, is due to release its first set of recommen dations on November 30th. These are likely to include scrapping or revising various regulations seen to be holding back American business.
    Although thé government insists it is not involved, the treasury secretary, Hank Paulson - a former head of Goldman Sachs - has offered encouragement. This week he said that the 2002 Sarbanes-Oxley act, which toughened up corporate regulation following Enron's collapse, is "being implemented in a way that may be ... introducing new risks to our economy", and forcing companies to spend more on accountants than research.
    This might seem an odd time for such anxiety. After all, America's firms and banks, many of them world-class, are making record profits; Wall Street bonuses could be almost a third higher than last year's payout, itself a record; the Dow Jones Industrial Average recently hit a new high; the merger of two Chicago exchanges has cemented that city's dominance in derivatives-trading, while the New York Stock Exchange and Nasdaq are trying to buy their European rivais (see page 83).

At the right price
    Are the fears misplaced? As capital becomes more mobile, investors worry less about where their trades take place, so long as thé price is right. America's big investment banks can win business whereverin the world deals are made. And budding Microsofts can always list abroad if their local market cannot provide the financial support they need.
    Yet it is not quite as simple as that. Although capital flows more easily, there are additional costs in raising money overseas. And successful fmancial markets create a "cluster" effect of businesses servicing them. Hence it is in America's interest to encourage a vibrant domestic capital market. And if it raises its game, other centres will have to do the same, which would benefit companies everywhere.
    The advocates of reform see plenty of scope for improvement. The problem is not only Sarbanes-Oxley, they argue. Aggressive investigations by Eliot Spitzer forced the financial industry into settlements that curbed innovation as well as sharp practice. Federal regulators, desperate tokeep up with the New York attorney-general (and now governor-elect), ran amok. Class-action lawyers have been allowed to wield too much power, and shareholders too little.
    Whatever the causes, the numbers bear out America's slippage. It is still well ahead of Europe in hedge-fund and mutual-fund assets, securitisation, syndicated loans, and turnover in equities and exchange-traded derivatives. In all but one of these, however, the gap narrowed in 2005. Europe's corporate-debt market overtook America's last year (see chart 1), although America still leads in high-yield "junk" bonds, a distinction less dubious than it once was.
    The loudest sucking Sound has been in thé market for initial public offerings, a crucial barometer of financial wellbeing. America's share (measured by proceeds) has collapsed since the late 19905 (see chart 2). Five years ago the New York Stock Exchange dwarfed London and Hong Kong. This year it is being beaten by both. Luigi Zingales, an economist who sits on the CCMR, says the figures suggest something fundamental has changed. He thinks the best guide to the competitiveness of America's markets is the behaviour of overseas firms that choose to list their shares at home and abroad. Even after stripping out factors that might skew thé resuit, America's share of thèse "cross-list-ings" has fallen substantially in thé past five years. Yet of thé growing number of firms which are no longer cross-listing in America, more than 90% still choose to market their shares to investors in the United States under a rule known as 144A. This gives them access to the American market, but without the full registration and compliance costs.
    Domestic firms are also fleeing the glare of public markets. According to Dealogic, more of corporate America was taken out of public ownership by private-equity firms (spending $178 billion) in the first ten months of this year than in the previous five years combined. Some cite Sarbanes-Oxley and other post-Enron costs as a reason, although, to be fair, private-equity is booming in the rest of the world, too. Wall Street's rivais are fighting harder for business. London is now the world leader in the trading of foreign-exchange and over-the-counter (off-exchange) derivatives. It is seen as the natural home for firms from emerging markets: big Russian companies prefer to list there. Goldman Sachs is beefing up its London office, adding functions that it currently has only in New York. Hong Kong has benefited from the emergence of China and become an intra-Asian centre for capital-raising as well as trading. There is also fierce competition to lead regional financial-markets, especially with a flashy bid from Dubai to dominate thé Middle East and its oil money.

Open outcry
    Technological innovation has made it easier for capital and those that need it to go where the best deals are available. As Messrs Bloomberg and Schumer see it, this has upset the "almost exquisite balance between regulation and entrepreneurial vigour" that helped America thrive in the last quarter of the 20th century. But Wall Street's moneymen must take some of the blame: they were slower to embrace electronic trading than those in London.
    Problems were compounded with tougher immigration controls after thé 2001 terrorist attacks. With work visas harder to obtain, it can be extremely difficult for the managers of a global firm to gather in New York or Chicago at short notice. Meeting in London is much easier.
    Aside from the visa question, which is hard to sort because it bumps up against security issues, there are four fundamental problems underlying America's declining competitiveness:
    • Section 404. This is the most contentious part of Sarbanes-Oxley. It requires an annual "internal control report", which must be certified by auditors and personally signed off by two executives. It has concentrated minds, but raised costs considerably. Some say this is because it is being implemented too zealously.
    Auditing expenses ballooned soon afler the law was introduced. These have since fallen, but can still top several million dollars a year for a firm with a market capitalisation of $1 billion.
    Because many of the costs of compliance are fixed, big companies find them easier to swallow. Some small firms cite this as a reason for listing on London's AIM market for young stocks; 50 American firms have done so, most of them since 2004. Hundreds of others are said to be considering it. Another spur has been the decline in coverage of smaller stocks since banks were forced by Mr Spitzer to tighten up their research procedures.
    But Sarbanes-Oxley is not just about costs. In theory, a higher standard of corporate-governance should resuit in a higher valuation, since listing in a well-regulated market shows a commitment from a company that it will not abuse investors. If this premium is high enough, it will off-set the costs of compliance. One study, conducted post-Sarbanes-Oxley, found that the premium placed on the value of an emerging-market firm listing in New York can reach 37%; preliminary research suggests the value of a London listing is not as high. Mr Zingales's calculerions suggest that the New York premium outweighs costs for companies with a market value of more than $23om.
    For the most part, reformers insist they are not out to gut Saibanes-Oxley, but to make it more "risk-based". This means keeping the goals largely the same but giving firms and their auditors more leeway in achieving them. That battle may already be won: the Securities and Exchange Commission (SEC), America's chief market-regulator, and the Public Company Accounting Oversight Board, which was created by Sarbanes-Oxley, have both announced reviews of Section 404, hinting strongly that the burden will be eased, especially for smaller firms. On November 16th Christopher Cox, the SEC'S chairman, promised "significant changes" in coming weeks.
    A more radical recommendation, unlikely to be among the changes, would be to limit prosecutions to individuals rather than companies. This would avoid a repeat of the Arthur Andersen debacle, in which the accounting firm was driven out of business after being convicted of obstructing justice in the Enron case, only for the ruling to be overturned last year by the Supreme Court.
    Some believe a wide-ranging rethink is needed on accounting standards. America continues to believe thaï its accounting rules are better than internationally accepted standards, even though studies suggest there is not a lot to choose between them. Foreign firms would be keener to list their shares in New York if they did not hâve to reconcile their accounts.
    • Litigation. Many businessmen regard America's légal System, with its punitive jail terms and class-action lotteries, even less favourably than they view Sarbanes-Oxley."For foreign companies we're a jungle," says a senior regulator. Asian firms, for instance, are still reluctant to risk being sued three years after China Life, an insurer, listed in New York and within days fell victim to a shareholder lawsuit. Most firms involved in mergers in America have to factor possible legal troubles into the costs of the deal, says Dick Langan of Nixon Peabody, a law firm.
    By some measures, the worstmay have passed - though nobody is betting on it. The tide of post-Enron cases is ebbing. Cornerstone Research reckons there will be some 120 class-action filings this year, down from 179 last year (see chart 3). Aggressive law firms hâve also corne under scrutiny. However, damages have continued to rise, from $1.1 billion in 1999 to $3.5 billion last year (excluding the $6 billion-plus WorldCom settlement).
    Doesn't this merely show the legal system is doing its job in a country in which big rewards mean big incentives to cheat? Sensitive to such doubts - and painfully aware of the large political contributions of trial lawyers, predominantly to the resurgent Democrats - those pushing for change are, for now, eschewing a radical approach. The boldest suggestion is that damages should be agreed through arbitration, rather than awarded by juries.
    • Shareholder rights. America may be thé land of thé free float, but its shareholders lack certain basic rights. For instance, they have only a limited say in electing company boards, unlike investors in Britain, and they have to contend with staggered boards (where only a fraction of the directors stands for re-election in a given year, making it impossible for a majority of shareholders to sack the board in one go). Add to that a proliferation of poison-pill takeover defences and the fact that it is boards, not shareholders, who vote on executive pay (again, unlike Britain).
    • Regulation. There are three main areas of concern: how financial supervisors interact with theprivate sector; how they arrive at their decisions; and the fragmented nature of the rules. At the centre of all three sits the SEC. Once accused of being too slow to act, these days its perceived pro-blemishy peractivity, caused by what a senior regulator caustically calls the "Spitzerisation" of the agency.
    This tough-guy approach is not entirely misplaced. The SEC has unparalleled numbers of retail investors to protect and it does not want to be outflanked by aggressive state prosecutors. But in striving to be tough, it may be losing sight of the need for markets to be efficient as well as clean.
    Among the SEC's most vocal critics is Harvey Pitt, a former chairman. Most of its employees, he said recently, see it as an enforcement agency with regulatory powers, rather than the other way round. This shows up in salaries: the pay of its enforcement lawyers has shot up relative to other departments; by one estimate, over 700 of them now earn more than their chairman.
    Part of the problem, says Peter Wallison of the American Enterprise Institute, is that the hard line sometimes takes on a life of its own. When wrong doing is suspected or alleged, for instance, the SEC will open a so-called "matter under inquiry". If this is not actively terminated within 60 days, it automatically becomes an informai investigation. Sometimes, says Mr Wallison, investigations open, and the companies involved suffer negative publicity, simply because nobody bothered to close the file.
    Some would like to see the SEC become more like Britain's super-regulator, the Financial Services Authority. The FSA has won plaudits for an approach based more on principles than hard rules. It prefers to nudge rather than bully. Moreover, it is widely considered to be better at analysing the potential costs and benefits of proposed regulatory changes. That may be because it employs a higher proportion of economists to lawyers.
    The SEC, however, operates in a regulatory regime that is much more fragmented than in Europe. The nurnber of federal and state bodies scrutinising a particular bit of the financial markets in America can lead to duplication and then to turf wars.
Rick Ketchum, head of regulation at the New York Stock Exchange, (and a former president of Nasdaq) says America's various regulatory bodies are now better at worldng with each other. But in some cases, he thinks, they might want to merge. A merger of the SEC and thé Commodity Futures Trading Commission, for instance, would provide one agency to regulate the cash and derivatives markets, where boundaries are already becoming blurred.

All eyes on Capitol Hill
    Whether these concerns are acted upon will depend largely, as ever, on politicians in Washington, DC. The Democrats, who retook control of Congress in the recent elections, are less likely to want to loosen financial-market laws than Republicans, and slightly more inclined to toughen up hedge-fund regulation.
    That said, leading Democrats portray Sarbanes-Oxley as the other party's doing (even though it was a bipartisan bill) and may be prepared to see it tweaked. Barney Frank, a Democrat in line to run the House Financial Services Committee in the new Congress, has said he does not want to rewrite the law but would be willing to see regulatory agencies adjust their rules so that it is not applied so stringently. The CCMR also favours this milder type of non-léeislative reform, because it would not require congressional approval.
    But reformers must be careful not to appear to be pushing changes through the back door. Even before the CCMR'S report is out, it has been denounced by some on the left as a self-interested attempt by big business and its Republican supporters to claw back lost ground now that the big post-Enron trials are largely over. Some in Washington refer to it as "the 7% committee"—a reference to the underwriting fees charged on Wall Street. Mr Scott, the committee's leader, denies any such bias.
    Even if the angst is overdone, the competitive threat to America is real - as the Big Apple's hoarier financiers know only too well. They still sigh when recalling restrictions introduced in the 1960s that drove lenders and borrowers to London, where the Eurobond market promptly took off. The American government loosened the rules a decade later, but by then it was too late and London ran off with the business. This time they hope it will be différent. •

    I had the privilege last week of.sitting close to Hank Paulson, the US Treasury secretary, as he told Wall Street's great and good how he intended to restore New York to its former dominance.
    Mr Paulson started his speech to a lunch of. the Economic Club of' New York, as is customary, with a joke: "It's good to be in New York City, the financial.capital of the world."
    Hoho. Very dry. As his nervous audience knew,New York is not the world's financial capital any more than the US baseball championship deserves the title of World Series because the Toronto Blue Jays have a chance of qualifying. One of the world's leading financial centres, certainly, but not the only one.
    Were Wall Street confident of its pre-eminence, Mr Paulson would not have been at the podium discussing the irritations of the Sarbanes-Oxley Act and corporate law suits. But the rush of companies to the Alternative Investment Market in London and the fact that London and Hong Kong now host many of the world's initial public offerings has dampened spirits.
    As Mr Paulson spoke, big-wigs such as Tim Geithner, president of the New York Federal Reserve, and John Thain, chief executive of the New York Stock Exchange, were arrayed alongside him on a dais. From below, they resembled the disciples gazing at their Saviour in Leonardo da Vinci's "The Last Supper".
    Wall Street has one of its own as Treasury secretary in Mr Paulson, the former chairman and chief executive of Goldman Sachs. After the eccentric Paul O'Neill and the ineffectuai John Snow, his clarity and authority is a relief. He grasps the issues and their importance to New York and the US. He also has a sensible approach to making things better.
    But I do not think Mr Paulson will be Wall Street's saviour. This is not simply because aiding millionaires and billionaires is now a low priority in Washington. Nor is it because his suggestions, such as culling regulators and switching from rules-based to principles-based accounting, are hard to implement, although they are.
    Even if he could achieve them all, there are two reasons why the old order would not return.
First, the biggest foreign companies used to corne to Wall Street because that was where the money was. They could tap into the US institutional and retail savings pool, and gain the attention of many New York-based hedge fonds, only by obtaining a listing on the NYSE or Nasdaq.
    This is no longer true. More money is managed in other financial centres, particularly London. In a report for the London Stock Exchange, the consultancy Oxera estimated tbat London had $7,600bn (€5,804bn) in equity assets under management last year, compared with $8,200bn in the four top US centres combined, mcluding $3,100bn in New York.
    Meanwhile, US money has flowed to companies abroad, rather than the other way around. The weaker dollar and the expansion in investment opportunities abroad led to Americans holding $3,100bn in foreign equities last year, compared with $700bn in 1995. Industrial & Commercial Bank of China did not need to list in New York to raise $19bn in its recent IPO; Hong Kong had the capacity.
    Second, the expansion of US investment banks over the past two decades has exported Wall Street know-how to the world. I remember the awe and suspicion with which US techniques such as bookbuilding were greeted in the City of London in the mid-1990s. Even the term IPO was alien. Yet London is now at least equal to New York in innovation, particularly in derivatives. London has been able to pick the best aspects of US practice and discard others. Underwriting fees for international IPOs remain much lower in London: they average 3.5 per cent on the LSE, compared with 7 per cent on Nasdaq and 5.6 per cent on the NYSE, according to Oxera.
    These changes have amounted to a financial Marshall Plan, bringing US capital and expertise to the rest of the world. The US has been inept at exporting democracy, but it has done a fine job of spreading capitalism. "Sarbanes-Oxley has simply amplified a much broader trend," says Michael Tory, a senior investment banker at Lehman Brothers in London.
    This has allowed companies in Asia to follow their inclination and list in Hong Kong, rather than having to trek across the world. Those from eastern Europe, Russia and the former Soviet Union, such as Kazakhmys, the Kazakh copper mining group, have been drawn to London, while big continental European companies have listed in Paris and Frankfurt.
    The US government and regulators can do things to make Wall Street a more welcoming place for foreign companies. Among them are ameliorating the worst aspects of how-Sarbanes-Oxley was implemented, and simplifying oversight. The NYSE and Nasdaq might also hold investment banks to account for charging far more at home than abroad.
    None of this will alter the fact that the world is rebalancing. Last year is often cited as a particularly bad one for Wall Street: only one of the top 25 IPOs by value took place in New York. Yet Ernst & Young's global map of total IPO activity was not obviously distorted: 27 per cent by value took place in the US, 42 per cent in Europe, the Middle East and Africa, and 31 per cent in Asia.
    Mr Paulson has the right idea about how to reform US financial markets and regulation, hard though that will be. Wall Street must do something tougher: become accustomed to its diminished place in the world.
john.gapper@ft.com

It was the fall of 1999, and the newspaper I edited, The Wall Street Journal, was awash in money. Thanks to the dot-com boom and the lush advertising it  generated, we were running the presses at full tilt nearly every day, yet had to turn away ads for lack of space.

Even as the good times rolled, two non-newspaper names kept coming up. I recall being stunned to learn that the main place where our own readers checked  stock prices was the finance section of Yahoo. A couple of kids from Stanford had launched a search engine called Google. Already, many of my colleagues were  using it.

Less than six months later, the tech bubble began to deflate. Hundreds of dot-coms died, taking with them their ad budgets. But the Web industry pushed  forward, and within a few years it shredded newspaper business models that had held sway for decades.

That high-tech jolt to my industry wasn't something I could have imagined on the July day in 1966 when I walked into a factory-like building in San Francisco  to start work as a 23-year-old reporter for the Journal. Vintage Linotype machines spat out hot-metal versions of stories a line at a time. An industry of  family-owned newspapers was setting off on a momentous period of growing power and profit.

On Thursday I'll pack my last box and take leave of a place where I've spent 26 of my 41 years in journalism, including 16 as managing editor of the Journal.  (The other 15 years, 1968 to 1983, I was a reporter and then business editor at the Los Angeles Times.) Today, all around me is an industry in upheaval, with  slumping revenues and stocks, layoffs, and takeovers of publishers that a decade ago seemed impregnable. Just this month, Rupert Murdoch's News Corp.  completed its acquisition of Dow Jones & Co., the Journal's publisher, and real-estate magnate Sam Zell gained effective control of Tribune Co.

The Journal's editors have asked me to retrace my experiences of the past four decades in search of insights into how all this has happened, what may happen  next and the implications of all this change for readers, the nation and society at large.

For readers, the implications are clear: a stark contrast of feast and famine.

The cornucopia of national, international and business news, sports, and especially opinion available free on the Web is rich beyond historical parallel.  Anyone with a fact, a comment, a snapshot or a video clip can self-publish and instantly compete with the professionals.

At the same time, the vast array of investigative reporting and foreign correspondence assembled at American newspapers over the past several decades is  being cut back at all but a few publications, as papers succumb to the pressure to cut costs.

Many journalists and academics see in these cutbacks a threat to the democratic ideal of a well-informed public. Some urge turning to philanthropy or an  expansion of public television as a way to fill the gap. Others have begun to argue for a government subsidy for newspapers -- an unlikely prospect for now.

Less clear is how the industry will ultimately be transformed.

Many papers are seeking to leap ahead in adapting to the movement of readers and advertisers to the Internet. This means tightly holding down costs of print  publications while leveraging metro papers' principal unique assets: local reporting staffs and local ad-sales teams.

Cash from newspapers' own Web offerings has grown fast but needs to grow faster, because at current rates it will be years before it makes up for the  slumping inflow from the still-much-larger print side. As Google, Yahoo and similar Internet enterprises suck away ad dollars, many newspaper companies hope  to gain new revenue by forming once-unthinkable partnerships with each other and some of these same rivals, particularly Yahoo.

In some ways, what's happening to the newspaper industry is a return to its past. Less than 50 years ago, American newspapers were in the main relatively  small, narrowly profitable, family-owned, locally focused and hotly competitive.

As a kid reporter in California in the '60s, I heard tales from newsmen and photographers about how, just a few years earlier, they had sat in cars, engines  running and radios tuned to police bands, trying to get an edge in covering the next murder. The national and international news would be handled by the wire  services. Lurid local photographs on page one were what sold newspapers in that era.

A certain fast-and-loose, devil-may-care attitude often prevailed. I remember walking past a photographer's open car trunk and noticing that he carried a  well-preserved but very dead bird among his cameras and lenses. The bird, he explained, was for feature shots on holidays like Memorial Day. He'd perch it on  a gravestone or tree limb in a veterans' cemetery to get the right mood. Nowadays such a trick would get him fired, but in the 1950s, this guy said, there  was no time to wait for a live bird to flutter into the frame.

Then, beginning in the 1960s, the industry morphed into a series of mini-monopolies. First, mounting costs forced a shakeout -- mergers and newspaper  closings that typically left one city paper preeminent in the morning market and another in the evening.

For a while, the evening franchise had a slight edge: People had more time to read then. In a twinkling, that advantage disappeared, crushed by a phenomenon  that can be summed up in two words: Walter Cronkite. More and more families gathered in front of the tube at the dinner hour.

The morning papers then got a boost, a surge in women readers. As baby boomers reached school age, their mothers could sit back for a moment with a second  cup of coffee and read sections aimed squarely at them.

Soon, in city after city, the leading morning newspaper came to dominate and often eliminate its rivals, reaping comfortable margins in the process. Before  long, these were linking up in multibillion-dollar, multi-city chains, building publicly traded companies with rising profits and stocks. Some acquired TV  stations as well.

Many of these information behemoths invested heavily in quality, expanding their reporting locally, nationally and internationally. This was good business as  well as a boon to readers, because it raised barriers to entry for would-be competitors.

The result was a golden age of American journalism. In New York, Washington, Chicago and Los Angeles, of course, yet also in Boston, Philadelphia, Miami,  Milwaukee, Atlanta, St. Louis, Des Moines, Louisville, St. Petersburg and more, daily papers were willing to send reporters far afield in pursuit of stories  exposing corruption or explaining the world. Newspapers opened or expanded Washington bureaus and added reporters abroad. Some stationed them not just in  London, Moscow and Tokyo but in places like Sydney and São Paulo.

As their financial strength and staff size increased, they became fearless in pursuing corruption. A 1964 Supreme Court decision, New York Times v. Sullivan,  protected publishers from libel judgments by public officials even if what was published was inaccurate, so long as the paper didn't know the article was  inaccurate and wasn't reckless about what it published.

The news operations of the three main television networks in those days followed a similar pattern. As profits grew, they added to staff and launched foreign  bureaus and investigative projects. The Sunday-night magazine program CBS launched in 1968, "60 Minutes," set a new standard for expensively produced and  deeply reported video journalism.

The public seemed to approve. Intrepid journalists proliferated in films like "All the President's Men," depicting Washington Post reporters' exposure of  Watergate. Enrollments in journalism schools surged, as well as applications for reporting jobs.
 
They were heady times indeed. When the L.A. Times investigated suspected gasoline hoarding during fuel shortages in 1979, one reporter got the idea of flying  over refineries and tank fields to look for evidence. As the editor running the coverage, I asked my bosses for approval to hire helicopters or small planes  for a story. The answer: Go right ahead.

In the end, we didn't. Our reporting showed that most of the hoarding was by people like our own readers, who'd taken to driving with their gas tanks always  full. But the lesson was clear: When it came to getting an important story, don't worry about the cost.

I don't remember exactly when cracks began to appear in this halcyon life. At most big papers, circulation, revenue and profits grew through the 1970s and  1980s and into the 1990s, with recessionary pauses that weren't excessively fretted over.

Around the time of the 1980 slump, L.A. Times editors were told they needed to impose modest spending restraints. I figured out I could meet my target just  by eliminating first-class travel on my group's reporting trips, then allowed on flights of more than three hours or so. I was quite proud of myself until  the next day, when the top editor of the entire paper, who only occasionally visited our floor, strode straight to my desk. "I like flying first class," he  said with a grin. "You're setting a bad example." I found another way to reach my goal.

In the mid-1980s, when I was a deputy managing editor at the Journal, the Dow Jones CEO almost apologetically imposed limits on our then-ample spending, in  the face of cyclical advertising cutbacks by financial firms. As the CEO quipped, referring to then-managing-editor Norman Pearlstine, "We gave Norm an  unlimited budget, and he exceeded it."

In those days, we worried quite a bit about television. Survey after survey showed that, with each year, more Americans were getting their news there. While  that made circulation growth tougher to achieve, ad revenue continued to rise, as newspaper readers generally had better incomes.

Cable TV added a new worry, because here was a medium that could target smaller, exclusive audiences and thus pose a greater challenge to print. Even so,  newspaper revenue continued its growth.

Then in the 1990s came the digital networks and the Internet, unleashing forces that would ultimately undermine newspaper business models that had been so  supportive of journalism. First came dial-up, then a few years later the Internet, and by 1995, dozens of newspapers, including the Journal, had online  editions.

Early leaders of the Journal's online edition privately referred to it as "the paper killer," to the great annoyance of print colleagues when they found out.  But the phrase was apt: The Web could deliver words and numbers at nearly the speed of light without the cost of printing, paper or delivery trucks, all  searchable and archivable.

In response, newspapers sought to do three things: cut costs, diversify and, above all, embrace the new technology and dominate it. After all, in the 1940s  and 1950s, the leading radio networks had become the leading television networks. Why couldn't newspapers copy that model?

They certainly tried.

Cost-cutting first followed a path set in the 1970s, of using computers to eliminate jobs downstream from the newsroom. Today, nothing but electrons stands  between the minds and hands of the journalists and the photographic image used to produce a printing plate. But those cuts often weren't enough, and  publisher after publisher turned to hiring freezes, buyouts and ultimately layoffs. The reductions have fallen particularly heavily on foreign and  investigative or "project" reporting, which are among the most expensive categories to produce.

Diversification typically took the route of investments in television stations, cable systems, satellite, book publishing and other domains at least  notionally related to newspapers. Some were successful, some not.

Publishers' Internet ventures almost always had limited success, at least at the outset. Part of the problem was that those in charge of print advertising  and circulation were suspicious of their counterparts on the online side, and vice versa. At the Journal, I saw it often.

At one point, the print folks suggested that online subscriptions be awarded free to print subscribers. It was an idea, the online folk retorted, that  relegated their site to "toaster status," as in savings banks giving away cheap gifts for opening an account.

In turn, the online people wanted renewal mailings to print customers to include a line soliciting a paid subscription to the Journal's Web edition. The  print side resisted mightily, fearing that adding any new option to the form would cause some customers to delay responding long enough to trigger a costly  follow-up mailing.

A bigger problem was that newspapers often sought to copy fairly closely on the Web what they did in print, rather than offer new products taking full  advantage of digitization. The most creative new products came mainly from enterprises with little connection to newspapers. And soon, if you named almost  any bit of data you used to rely on papers for -- sports scores, weather, stocks, movie times -- there were Web sites offering more information faster, and  free.

The decisive blow may have been Google's, with its powerful search engine that would either give you a quick answer to a question you had or steer you to  sites that could. The irony, of course, was that some of the most useful of those sites were newspapers'.

Papers remained quite profitable, for the most part. But as the future began to look increasingly troubled, one publisher's stock after another got hammered,  starting around the turn of the century.

Especially hard hit were publishers of prestigious newspapers. Dow Jones stock was at less than half its high before News Corp. made its successful bid for  the Wall Street Journal publisher last spring. Times-Mirror fell more than 50% before being acquired by Tribune Co., which in turn has fallen around 45% from  its high. Knight Ridder fell 20% from its high before its acquisition by McClatchy, which now trades at around 80% below its peak. New York Times Co. is near  an 11-year low. Washington Post Co. is about 20% below its top.

Some publishers with less-prestigious papers have done better. Scripps and Cox have diversified successfully into cable networks and cable systems,  respectively. Thomson sold all its newspapers and became a financial-market, legal and medical data company before reaching a merger agreement with Reuters  this year. News Corp. leveraged its Australian newspaper business to acquire not only newspapers but also a movie studio, television, cable, satellite TV and  Web interests around the world. It picked up the prestigious Times of London along the way, and the Journal after its transition to a global media company.

Why this divide? It could be that operators of high-prestige newspapers were more reluctant to risk the franchise, even under a level of financial duress  that would provoke many managements to bet the farm in pursuit of a radical opportunity.

What happens next? Change, rapid and largely unpredictable. Nearly every company in the industry needs major new revenue, big cost reductions or a healthy  dollop of each. The people and entities to watch most closely are:

-- The entrepreneurs, Mr. Murdoch and Mr. Zell. Mr. Murdoch has vast experience in media generally and newspapers in particular, controls major financial  resources and has big plans to expand the Journal -- in print and online, domestically and overseas. Mr. Zell used financial engineering to control Tribune  Co. with minimal investment of his own, has little media experience and isn't likely to spend much on his new properties. Both are decisive investors and  operators. They aren't always successful, but it's unwise to bet against them.

-- New York Times Co. Mr. Murdoch has said he'll use the Journal to steal a portion of the general-news and cultural-news franchises of Times Co.'s eponymous  flagship newspaper. But entities fight hardest defending their home turf, and the Times has both a strong, growing Web site and a Sunday edition that remains  an advertising monster. It will be under pressure to follow some of the cost cutting its sister Boston Globe has done. Pure conjecture: Assuming that New  York Mayor and Bloomberg LP owner Mike Bloomberg isn't U.S. president-elect a year from now, would he and Times Chairman Arthur Sulzberger Jr. consider  putting their two enterprises together?

-- Hearst Corp. After the inheritors of William Randolph Hearst's empire lost their bet on evening papers in the 1960s, they bulked up their revenue from  magazines like Cosmopolitan, diversified smartly in TV (including a 20% stake in ESPN, now worth roughly $6 billion), and stayed in newspapers but with a  close eye on profit. With four metro papers, like the Houston Chronicle and San Francisco Chronicle, and eight smaller ones, Hearst is in the vanguard of  figuring out ways to exploit newspapers' local-reporting strengths, both in print and online.

Hearst has helped forge a partnership involving a consortium of newspaper companies and sometime-nemesis Yahoo. The idea is that together they can offer  advertisers total coverage of various metropolitan areas, and feed readers back and forth. Question: Are these going to be best friends forever or a cobra  and a mongoose?

Final word: Next week I move over to a nonprofit called Pro Publica as president and editor-in-chief. When fully staffed, we will be a team of 24 journalists  dedicated to reporting on abuses of power by anyone with power: government, business, unions, universities, school systems, doctors, hospitals, lawyers,  courts, nonprofits, media. We'll publish through our Web site and also possibly through newspapers, magazines or TV programs, offering our material free if  they provide wide distribution.

Pro Publica is the brainchild of San Francisco entrepreneurs-turned-philanthropists Herbert and Marion Sandler, who along with some other donors are  providing $10 million a year in funding.

The idea is that we, along with others of similar bent, can in some modest way make up for some of the loss in investigative-reporting resources that results  from the collapse of metro newspapers' business model.

Write to Paul E. Steiger at paul-e.steiger@wsj.com