The Knoxville Experiment: A Footnote to Nonprofit Journalism

Attempting to launch a newspaper in the 21st century must be an awful lot like what entrepreneurs experienced starting up steam-powered-car companies^[1] in the 20th—the product may still work, and even offer a few nice advantages, but it’s not what most customers want anymore. So, being at odds with consumer trends (and, ultimately, the course of history), you’re most likely doomed to failure. Why, then, did a small group of editors defy all logic with their 2015 launch of the Knoxville Mercury?

Well, not unlike those belated pioneers, we had a lot of passion for a crazy idea: Let’s publish a newspaper owned by a 501(c)(3) nonprofit—that way, it would earn revenue with traditional advertising, but could also potentially benefit from tax-deductible donations to its parent organization. With two distinct revenue streams, we might just be able to pull off the anachronistic act of printing a weekly paper in the smartphone era.

Why even bother, you ask? That requires a little background: When the E.W. Scripps Company planned its merger^[2] with Journal Communications in 2014 (creating the Journal Media Group, a publisher of newspapers that would in turn be sold off to Gannett^[3] two years later), it decided against including one of its smaller, meagerly profitable properties: Knoxville, Tenn.’s Metro Pulse. Acquired by Scripps in 2007, the previously independent alt weekly had a steady client base of local businesses, particularly in arts, entertainment, and dining (not to mention multiple national awards for its stories and design). But Scripps’ accountants did not deem the publication worth all the trouble of continuing under the new corporate scheme, so after 23 years Metro Pulse, along with its employees, suddenly got the ax.

Yet the paper’s readers still existed, and they wanted it back. Furthermore, some of them were willing to pay to see a new publication launched—including a few large donors who specifically wanted it in print. So, the funds to start a newspaper were available—but how to sustain it once it was up and running? Everyone knows that print advertising is in a death spiral.^[4] Meanwhile, the nonprofit models for journalism consist mostly of news-only websites—but our readers also wanted us to continue the alt-weekly staples of arts and entertainment coverage, plus opinion and comics and puzzles. Neither direction alone would appear likely to generate enough income to keep a weekly newspaper in business. But what if we combined them?

Thus, three of us former Metro Pulse editors decided to take a crack at devising a hybrid nonprofit model:^[5] a taxable, not-for-profit publication owned by a local 501(c)(3) educational nonprofit called the Knoxville History Project.^[6] (Not having to report to a disinterested, out-of-state corporate manager would be an added bonus.)

While unusual, this is not a completely unheard-of arrangement. Smithsonian magazine, for example, is part of Smithsonian Enterprises, which is a nonprofit division of the Smithsonian Institution. The nonprofit Poynter Institute, a journalism school, owns the Tampa Bay Times in Florida. However, those are both longstanding nonprofits that later started or acquired those subsidiaries; we were starting both entities at the same time, a more complicated process. Nevertheless, armed with an experienced tax lawyer and lots of paperwork, we were able to win the approval of the Internal Revenue Service.

We began our endeavor with a Kickstarter campaign^[7] in December 2014 that raised over $60,000 for the paper’s launch. Combined with larger private donations and other fundraisers, the paper began publishing in March 2015—and our plan for the future initially hinged on those two main revenue streams.

• Traditional ad sales: Nonprofit media can’t sell advertising with calls to action (live performances, happy hours, retail sales, etc.), which is the bread and butter of most alt-weekly papers. But by registering as a taxable not-for-profit with the state of Tennessee, we would be able to sell regular ads rather than just “sponsorships,” such as those you hear on public radio. (And, of course, we’d pay tax on the income from those ads.)
• Tax-deductible donations: The educational nonprofit Knoxville History Project was established by former Metro Pulse columnist Jack Neely with a mission to research and promote the history of Knoxville. Its primary vehicle to fulfill that mission would be the Knoxville Mercury, which would often print columns and articles about Knoxville’s history. KHP would launch the paper and help support it financially by taking out full-page educational ads that also presented Knoxville history.

So, the idea was this: We’d sell print and digital ads like any other newspaper, but we’d also make appeals to large donors who wanted to support independent journalism in Knoxville. These may be foundations or individuals who prefer their donations to be tax deductible—in which case, they could make them to the KHP, whose board would in turn decide how to best allocate the funds to the paper. And here’s where we came to the tricky parts, a series of catch-22s that made continuing our existence even more difficult than we had expected.

First, the KHP’s lawyer determined that only 25 percent of whatever it raised in funding could go to the paper, lest it appear to the IRS that the nonprofit was acting as a “front” for a for-profit business. One solution to that would be to raise a huge amount of money, enough that one-fourth of it would be sufficient to help fund the paper. This did not occur. So, instead, the KHP bought services from the Mercury: advertisements.

Second, explaining this ownership arrangement to potential donors was rather complicated: “A 501(c)(3) owns your newspaper?” “Yes, so if you want to make a tax-deductible donation to support the paper, it will have to go through the KHP first, and then its board of directors will decide what to do with it—most probably buying an ad contract with the paper.” “Hmmmm….” And trying to describe this relationship in print was even more awkward—we couldn’t simply say, “Support the paper with a tax-deductible donation to the KHP” because then it might appear that the nonprofit was just a conduit to the newspaper.

Third, avoiding those nonprofit hoops by asking readers for direct (non-tax-deductible) donations also became complicated. While we were able to spark the passion of readers to start the paper, it became much more difficult to constantly reignite that excitement year after year to continue the paper. Each fundraiser we held collected less money than the one before it. Unlike donating to public radio or TV, giving money to a newspaper is still a new, odd concept for most people, and we never figured out a good way to “normalize” it. (We really needed the services of a professional fundraiser, for which we had no budget; we were editors and designers and ad reps, not development directors.)

Fourth, paying your staff and your freelance contributors reasonable rates will require a good-sized budget if you’re attempting to produce a professional, credible news source. (Unfortunately, many of our once-loyal advertisers from Metro Pulse opted out of supporting the Mercury—more than we expected.) While dropping the paper edition and going all-digital may sound like the easiest way to cut expenses, our printing and distribution bill was actually far less than our payroll. (We had six full-time employees and two part-timers.) And, in our experience, online ads for a niche website in a small market would not come close to paying for much of anything, let alone our payroll.

For two years,^[8] we produced an excellent, award-winning local paper—just the sort that every commenter says we need to keep communities engaged in our democratic society. Unfortunately, there were not enough people who wanted to help pay for it. As a hybrid, we were neither fish nor fowl—not exactly a business that would interest investors (since all the profits would go to the KHP), and not exactly a nonprofit that would qualify for most national or regional journalism grants (since we were still a business rather than a nonprofit ourselves).

What’s the solution for the industry? News as a for-profit business is becoming more and more difficult,^[9] and most nonprofit models are still working themselves out. However, Philadelphia’s newspapers have set themselves on a promising direction forward^[10]—but it’s predicated on finding a very wealthy person with a strong interest in local reporting to fund a multi-million-dollar endowment.

Know any rich people?^[11]