Newspapers that cut budgets in response to shrinking profits risk triggering a "suicide spiral," according to a study published in the April 2007 issue of the Journal of Marketing.

"The media industry's recent impulse to slash jobs to cut costs is not only ineffective, it can lead to more red ink," said Prasad Naik, a study author and professor of marketing at the UC Davis Graduate School of Management.

Economic theory holds that companies do best when they operate at an optimal balance of investment and revenue known as the profit "sweet spot." If investment in quality is too low, quality and profits suffer. But beyond a certain point, quality enhancements erode profits.

In their study, Naik and his colleagues analyzed data collected by the Des Plaines, Ill.-based Inland Press Association from 1998 through 2001 from hundreds of daily newspaper firms. The researchers concluded that contrary to common wisdom, most newspapers are investing too little in quality.

"This can initiate a suicide spiral, in which disinvesting in newspapers leads to circulation declines, which lead to revenue declines, which lead to more disinvestments, more circulation declines and finally more revenue loss," Naik said.

He and his co-authors propose a mathematical "diagnostic tool" to help newspaper companies determine how close they are to the "sweet spot" of news quality. The tool is intended to guide wise investment decisions.

Naik conducted the research with Murali Mantrala, Shrihari Sridhar and Esther Thorson of the University of Missouri-Columbia. A pre-publication copy of the study is available at: http://faculty.gsm.ucdavis.edu/~prasad/Abstracts/jm06.pdf