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Between the rise of the Internet and a slump in the advertising market among print publications, newspapers across the U.S. are instituting drastic measures to reverse their ill fortunes. To reduce costs, many are shrinking the size of their pages and slashing their staffs.

All too often, the bloodletting only slowed the inevitable, and the newspaper company ended up for sale anyway.

Knight-Ridder

, one of the largest newspaper chains in the country, was swallowed up and spit out in pieces by a competitor.

Tribune

( TRB), another publishing giant, went on the auction block, and the private equity sharks are circling. Weakness at the

New York Times

(NYT) - Get Report

provoked a showdown with Wall Street over its corporate structure, and investors are eyeing some of its top properties.

For next year, the outlook remains grim. Cyclical conditions weighing on the industry are expected to get worse. Domestic auto dealerships, traditionally a large advertiser in local newspapers, are suffering from too many cars and too few dealers. Job growth and related employment advertising is slowing, and the once red-hot real estate market is expected to remain chilled.

That means newspapers will still struggle to find new ways to generate revenue streams and use the Internet to their advantage.

Some publishers will simply get out of the game. Tribune's largest shareholder, the Chandler family trust, has forced the conglomerate into cooperating with the whims of Wall Street, pushing the company to sell off its assets, which include

The Los Angeles Times

, the

Chicago Tribune

and a slew of other media properties.

The sale process has so far been disappointing, forcing Tribune to move its target date for a deal back to the first quarter of 2007.

New York Times, where the Ochs-Sulzbergers control corporate voting rights through a dual-share structure, is a different story. It has raised hackles on Wall Street for refusing to sell its worst-performing newspaper,

The Boston Globe

, to former

General Electric

(GE) - Get Report

CEO Jack Welch and for rebuffing a push to change its dual-class share structure to empower shareholders.

Strong real estate advertising provided some strength for New York Times in 2006, but Larry Haverty, portfolio manager of the Gabelli Global Multimedia Trust, says that trend will reverse.

"When the housing market weakens, real estate advertising increases, but after it's been weak for about a year, the brokers don't advertise anymore because there's no point," says Haverty. "New York Times is in three markets -- Boston, Florida and, to a lesser extent, New York -- where housing has weakened, so their real estate, which has been strong, will get weak."

Like other publishers, The Times is responding to its predicament by scrambling to realign its business toward Internet content, acquiring brands like About.com. It's slashing payrolls to cut costs, and it has plans to shrink the dimensions of its print pages by 11% in 2007.

Such a move also was adopted by

Dow Jones

( DJ), which will shrink the size of

The Wall Street Journal

in early 2007 and devote more of its space to analytical stories as opposed to breaking news that quickly goes stale in the digital age.

Dow Jones also is on the prowl to acquire more online properties to follow up on its 2005 purchase of

Marketwatch

, a financial news Web site. In October, it announced it was taking full control of Factiva, a digital information database, buying out

Reuters Group's

stake for about $160 million.

Gannett

(GCI) - Get Report

, the largest U.S. newspaper publisher, is touting a program aimed at growing its Internet business internally by transforming its newsrooms around the country into what it calls "information centers."

The effort strives to make breaking news available to local audiences throughout the day on a variety of technology platforms, including Web sites, mobile devices and Gannett's traditional print products. It also allows users to post their own comments and photos on local news sites in an effort to keep its audience engaged.

"Test sites have seen about a 50% increase year-over-year in online traffic from unique users, and time spent on the site has grown dramatically," says Jennifer Carrol, Gannett's vice president of new media.

Such innovations have allowed newspaper companies to show impressive growth rates in their digital ad revenue, but high growth numbers can be misleading because they still represent relatively small total amounts -- nowhere near enough to offset declines from print advertising.

McClatchy's

(MNI) - Get Report

digital ad revenue, while growing at a double-digit clip, makes up just 8% of its total ad revenue. Overall, its ad revenue is in decline, and the company's CEO, Gary Pruitt, said at a recent media conference in New York City that it will continue to decline for at least the first half of 2007.

Still, Pruitt points to the Internet as a growth engine for McClatchy. He said that, even while newspaper circulation trends are negative, McClatchy's audiences, when combined with its local Web sites, are growing.

"More people want what we're producing today than wanted it yesterday -- that's not the profile of a dying industry," Pruitt said. "Only by looking at total audience can advertisers really understand the value proposition of our local media business, and we are moving forcefully to make audience, not just circulation, the key metric in our markets."

Pruitt made the boldest bet of 2006 on the future of newspapers when he stepped up to buy Knight-Ridder in June for about $4.5 billion in cash and stock -- a move that Wall Street has frowned on. Shares of McClatchy shed about 28% in 2006, making it the worst-performing major newspaper stock of the year, but some long-term investors have seen this before.

Jack Liebau of Leibau Asset Management has owned shares of McClatchy since its initial public offering in 1988, and he remembers when the company acquired Cowles Media, publisher of the

Star Tribune

in Minnesota, in 1997. (Just this past week, the company

set plans to sell the paper.)

"Their stock has taken big hits whenever they've made big acquisitions," says Liebau. "They consummated the

Knight-Ridder merger in a very tough revenue environment, but I have full confidence in their management and I believe a few years from now the acquisition will be seen as yet another opportunistic and very attractive purchase by McClatchy."

Despite his optimism, Pruitt left the door open to a public-to-private transaction in McClatchy's future. Right now, he said, the company was saddled with too much debt and too many outstanding shares to consider it, but that might change.

"While it's an arrow in our quiver down the road, it's certainly not something here and now," he said. "There is enough to focus on, and enough to concentrate on, currently."