Before Sam Zell bought the Tribune Company last year, he said he was "skeptical" of using staff reductions to increase profit. He famously told the Los Angeles Times, "I promise you I did not come here to be the captain of the Titanic."

Since then, however, the newspaper industry's woes have intensified—and Zell has made numerous staff reductions at Tribune's newspapers, which in addition to the L.A. Times also include the Chicago Tribune and the Baltimore Sun. The outspoken Zell, who made his fortune investing in real estate, has dubbed the Tribune purchase "the deal from hell."

On November 12, Zell spoke with Condé Nast Portfolio editor in chief Joanne Lipman at Quadrangle Group's Foursquare media conference, where, true to form, he came out swinging against journalistic icons. He declared the worthlessness of Pulitzer Prizes ("I haven't figured out how to cash in a Pulitzer Prize"), said the newspaper business model is "unequivocally...a failure," and challenged New York Times publisher Arthur Sulzberger, saying "If you want to be a charitable trust, be a charitable trust. If you don't want to be a charitable trust, then you've got to focus on producing a return for investors' capital, and it's just that simple."

Zell also talked about running spadias (ads that wrap around an entire newspaper section) and said that comparing Tribune's advertising declines to that of other newspaper companies is "comparing leprosy to cancer."

The Foursquare conference was an off-the-record event; Sam Zell and event organizers agreed to put this transcript on the record.

EMCEE: Thank you, gentlemen. And now Sam Zell will be in a conversation with Joanne Lipman.

JOANNE LIPMAN: All right. Welcome, Sam Zell. It's great to have you here. Thanks very much. You barely need introducing, but a quick recap. Sam, of course, made his reputation buying up distressed real estate, earning himself the nickname, "The Grave Dancer." In his more recent incarnation as a media mogul, that nickname might be more apt than ever. Last year, Sam, of course, bought the Tribune Company, which owns newspapers and local television stations, for $13 billion. Since then, the newspaper industry, as we all know, has been in a free fall, and Tribune properties, which include the L.A. Times, the Chicago Tribune, the Baltimore Sun, and the Orlando Sentinel, have also been in a free fall, along with the rest of the industry. And so it's apropos that we talk with Sam today. And everybody here wants to know the same thing, which is: If you knew then what you know now, would you have made this deal?

SAM ZELL: Well, obviously, the newspaper business and advertising, generally, has gone off a cliff. And it didn't go off a cliff in October or September. It went off the cliff in January. When we looked at the historical numbers, we saw an average erosion of about 3 percent. At the time we underwrote the transaction, we used a 6 percent erosion.  And the last time I checked, 19 percent erosion is bigger than 6.

JOANNE: Yeah.

SAM: And so it's just a whole new ballgame. Just like if you asked the guy would you have stepped on the tracks if you'd known the train was coming, the answer is no. But once the train is here, you've got to deal with it.

JOANNE: Right. Would you actually have gone into the newspaper industry, or would you simply have wanted to adjust the price accordingly?

SAM: I don't think that I ever woke up in the morning and said, "I want to own a newspaper." I think that the attraction to the Tribune deal was the ability to put the deal together, to apply a business patina to what has historically been a nonbusiness business, and ultimately test the thesis as to whether or not there is a place for the newspaper in the 21st century.

JOANNE: And the answer to that question would be what? Is there a place for the newspaper?

SAM: I think the answer is certainly, but the answer to whether the conventional approach to the newspaper business that has been the model since the beginning of time, I could tell you unequivocally that model is a failure, or that model has passed its time of relevance. The newspaper business basically grew up as a monopoly, and like every other monopoly, it built processes and approaches that reflected its monopoly status. One example was the rate card you give to an advertiser in order for that person to determine how he would like to participate. You needed a Ph.D. in order to understand the rate card. In the days where the customer had no options, you could give him the rate card and say, "Take it or leave it." But today, that doesn't work.

I think the newspaper industry truly still doesn't understand that it is in a business with customers, and the business must reflect the needs and demands of the customer. And to the extent that we don't do that, we will disappear.

JOANNE: So what is the new model? Have you figured that out yet, or are you cutting your way to…?

SAM: I think the answer is we are testing and testing and changing. We've reformatted all eight newspapers. Among other things, we shrunk the size of the newspapers by an inch. And then we responded to our customers. Our customers have an enormous interest in our newspaper on Sunday; have almost no interest on Monday, Tuesday, Wednesday; Thursday and Friday, they're more interested; and Saturday might as well be in the desert. So we did something that was really extraordinary. It kind of came out of Econ 101. We looked at demand and we said, "Gee, we ought to reduce supply when demand is weak"—a very shocking concept, particularly for the newspaper industry. So, we've now done that across all of our newspapers.

We did not have a single salesperson on commission. In other words, every single newspaper had a cadre of salaried salesman. Now, you know, I'm just a businessman, but I've never seen any kind of a sales force that was effective if, in fact, they had no incentives. Now, part of the reason is that historically, because it was a monopoly, newspapers heavily depended, and still do, on national advertising, where the salesman is an order taker. When the guy from Macy's calls and says, "We want six pages," you don't say to him, "Well, how about nine." You just say, "Yes, sir. Send me the check and we're on." But, among other things, what that led to was a massive abdication of potential advertisers within the local markets using zones, so that, in effect, the zone belongs to the salesman. Nobody else can go in there. Even if nobody has bought anything in that zone for 20 years, it's still his territory.

I mean, this is nutty stuff. And, in effect, what we're trying to do is address the newspaper business like a business.

As you and I talked about earlier, somebody has to address the home-delivery question. Right now, if you go across the street and you buy a newspaper from a vendor, you will pay 50 cents. But if you get it home-delivered, which costs the company 10 times as much, you pay 30 cents. I don't understand. Okay? I mean, you try and make those numbers work, and it don't make any sense.

JOANNE: So, all the things you're talking about are somewhat around the periphery. They're all working within the structure of the conventional newspaper, and if you really need to blow up the business model and start from scratch, what might that model be? We saw the Christian Science Monitor just said they're doing away with the print edition and only going to the Web. Do you see something that radical, or is there some other way of looking at this?

SAM: Well, if you want to play futuristic—and I don't know how big an f on the word futuristic—you can make a case that the world in the future is all Kindles, and you'll send out an email to everybody to their Kindle, and that's how they're going to get their newspaper every morning. That's a real possibility at sometime in the future.

But most importantly I think the newspaper has to acknowledge the reality of the world we're in. When I grew up—and I hate to tell you I'm that old—but when I grew up, the definition of "breaking news" was your front door. So you run…you go up in the morning, you open up the front door, you see what happened. Okay? Well, that's not the case anymore. Now, you hit your homepage, now you turn on CNN, or some other news-TV program, and that's how you find out what the latest news is.

So then the question becomes: Is there a role for newspapers? And I think the answer is yes, there's a role for newspapers, providing the newspapers understand what that role is and are able to adjust to it. So, for example, most of my newspapers do not have a comparative advantage on international news. I'm not going to compete with Bloomberg or Reuters to, in effect, secure the latest international news. On the other hand, I've got staff and people and knowledge locally that nobody else has. So…and when you do focus groups with people and you ask them, "What do you want from your newspaper?" they tell you, "local, local, local." And they say it over and over again, "I want to know what's going on locally because that's the only thing I can't find from 10 other sources."

JOANNE: So you raise a couple of questions there. I mean, one is simply the staffing issue. And it's interesting, when you came in a year ago, the L.A. Times, you went to the L.A. Times and said, "I have no intention of being the captain of the Titanic," and you also said that you didn't believe in kind of cutting your way to success. You, more than the other of your competitive set, have really made very, very deep cuts and particularly among the journalists. So how does that gel with providing the reader more and building on the papers to create a model of success?

SAM: Like everything else, we're dealing with process, we're dealing with changing methodologies of the way things were done before. If this gentleman over here is a reporter and he calls in and says, "I've got a story and you want to put it up on the Web," he talks to one copywriter, they put it all together, it's on the Web in 10 minutes. But if that same story with the same facts is going in the newspaper, then it goes to the copywriter, the section editor, the page editor, I mean, it goes to everybody. Okay? And you wonder why the newspapers can't financially compete.

JOANNE: But the newspaper is supposed to be giving you something more than the instant news that you get on the Web. Would you argue that your newspapers—after the year of cutting and attempting to fix the model—would you argue that the journalism is improved from when you purchased your newspapers?

SAM: Interestingly enough, my customers say yes. My customers say yes.

JOANNE: By what measure is that?

SAM: I've reformatted all eight newspapers—they're much louder; they've got more pictures; they have more color; they have easier navigation. I mean, simple things. I ride my motorcycle to work every morning…

JOANNE: Good for you.

SAM: I say goodbye to my wife as I walk out the door, and I used to ask her, "What's the temperature?" Because if it's bitter cold, there's a problem. And then I would see her go, "Argh!" as she tried to find where the weather is in the newspapers. And in the reformatted Chicago Tribune in the bottom left-hand corner it says, "64 today, 75 tomorrow, 83 the next day," in one quarter of an inch in the lower left-hand corner. Isn't that information that everybody wants?

JOANNE: But that customer…there's a couple of customers that you have. You're talking reader service. Another customer, obviously, is the advertiser, and your advertising has declined at a more rapid clip than some of your competitors, more so than he Times and USA Today…

SAM: Well, I think that's comparing leprosy to cancer. I mean, I beg to disagree with you, and I think Arthur Sulzberger is out here someplace, and I'm sure he would vie that his has gone down more than mine. [Editors note: In the third quarter of 2008, New York Times Co. ad revenue fell 14.4 percent, while Tribune Co. ad revenue fell 19 percent.] But the answer is everybody's advertising is dramatically down. We've seen literally the destruction of classified advertising. You know, not just in our paper, but in all the papers. There's somebody here, Mr. Craig, from Craigslist, who is responsible for that.

I think the answer is that we have to come up with a product that our customers want. In Chicago, we launched a product called RedEye. RedEye, which is delivered to the train stations and the bus stations every afternoon, is aimed to the 25-to-40-year-old. It's given away free. It has a higher circulation than the Tribune, and makes a profit. We launched a new paper in Chicago called Mash. It's delivered to 50,000 high schools free once a week, underwritten by Verizon and Nike, to reach perhaps the hardest demographic there is to reach. So these are paper products. They are successful.

JOANNE: And a lot of the products that you're talking about come as a result of focus grouping, and you've talked a lot about how you've done a lot of focus groups, and readers tell you they want short stories, and they want graphics, and they want big pictures. I find it curious that you are embracing focus groups because…and maybe this word has been tarnished now, but you've always been a maverick. Right? I mean, if you ran your business according to how focus groups told you you should run your business, you wouldn't be up here today.

SAM: Yeah, but the answer is you are acting like a journalist—okay?—because you grabbed the word focus group and, in effect, turned it from one element that's relevant in a hundred elements to somehow or another we're going to take one focus group and implement everything that they said, which is silly. One of the benefits of focus groups is you get a chance to listen to your customer. And all I'm saying is that there isn't a successful business out there that doesn't listen to their customer.

JOANNE: And the kind of journalism that…as you know, you've become a popular topic of conversation among journalists.

SAM: Really? No shit.

JOANNE: Maybe you read some of the blogs about yourself.

SAM: No, never.

JOANNE: But I think the question really is, journalists believe that there is a reader service and a public service, that there's a public good…

SAM: And journalists are more than willing to tell you what they think you need to know. And to some extent, that's a valid position, but I certainly don't think it is the answer. And to the extent that you have journalists who are unwilling to listen and only want to talk, they really should give up journalism and become college professors.

JOANNE: It takes a lot of resources to pour into investigative reporting…and this is not just "How much did Sarah Palin spend on her wardrobe?" but serious investigative reporting that takes…could take months at a time that could take you down some dark alleyways that are not going to pay off. Is there a place for that? Is there a way to fund that, or are newspapers not the place for funding that any longer?

SAM: Well, you know, you were just talking to me a minute ago about the precipitous decline in advertising revenue. So the answer is that every piece of a newspaper has to be economically evaluated, because, in the end, we're not an eleemosynary institution, even though most of the newspapers have been run as one. I mean, how would I not challenge every cost, every decision, and basically look at the cost benefit, just like our government is supposed to do when it raises our taxes? I got to look at the cost benefit and say, "What's the benefit? What's the cost? Does this make sense?"

JOANNE: So at the L.A. Times, for example, which under a previous editor before you owned it won quite a few Pulitzer Prizes and really put a lot of effort into pieces that may or may not pay off, does that no longer make sense in the business model that we're talking about?

SAM: I haven't figured out how to cash in a Pulitzer Prize. There was a day when a newspaper put "Winner of Pulitzer Prize" on the front page, and people flocked to read the Pulitzer Prize story. Unfortunately, I'm not sure that that's the case today But I also think that there are scale issues. In other words, I think that if the goal is a Pulitzer, it's in the wrong place. In other words, we're not in the business of, in effect, underwriting writers for the future. We're a business that, in effect, has a bottom line. So as far as we're concerned, I think Pulitzers are terrific, but Pulitzers should be the cream on the top of the coffee. They shouldn't be the grounds. And I think there are a lot of scenarios in the newspaper industry where the entire focus is on Pulitzers. The entire focus is on becoming an international correspondent. I mean, I know that because our newspaper sent somebody to Kabul to cover the "Afghan Idol Show." Now, I know Idol is the No. 1 TV program in the world, but do my readers really want a firsthand report on what this broad looked like who won the "Afghan Idol" Show"? Is that news?

JOANNE: The "Afghan Idol Show"…I'd like to know what the broad looked like.

SAM: I'll send you a picture, okay? I mean, really, it's not a problem.

JOANNE: But you're talking about two different things here, though.

SAM: Why am I talking about two different…?

JOANNE: Because I think the essential question, what the Pulitzers get at, would be that…the way that newspapers had seen themselves, and I spent many years on a newspaper, was as a public trust. And, you're right, their finances were not put first. So I guess you're saying that that age is over and we need to be…

SAM: My question is real simple. As of last night, the entire market cap of the New York Times [Co.] was $1.2 billion. And my question to Arthur, who I think is out here someplace, is if you want to be a charitable trust, be a charitable trust. If you don't want to be a charitable trust, then you've got to focus on producing a return for investors' capital, and it's just that simple. It worked in the old days because you could be a public trust and you could do well for your shareholders because you had a monopoly, and monopolies are wonderful. I mean, I think competition is terrific, particularly for all those guys out there. Me? I like monopolies. I'm just sorry I waited 60 years to get into the newspaper industry because the 40 I missed were great.

JOANNE: I think the audience is going to have some good ones for you. Just broadly, if you could speak to the industry as a whole…first of all, are we in a recession or are we in a depression?

SAM: I think we're in a recession. I think that government action, both past and future, will more than likely make it a recession and nothing worse. In my opinion, the comparables to the '30s are not comparable. It's just almost 180 degrees different. I mean, we had a recession in 1930 that government policy turned into a depression. I don't think we're going to see that happen at this point.

JOANNE: So…and the second question would be in terms of advertising, the advertising industry. We've seen it fall off a cliff, as you said. When does it bottom out, and where do you think it bottoms out? Would it be in…next year, 2009, or is it going to go beyond 2009?

SAM: I'd answer your question by saying that I think advertising will return as the economy returns. I think the question for the media industry really revolves around are we in the middle of a, quote, economic reduction in advertising, or are we seeing structural change? Are we seeing advertisers challenging the assumptions as to what works for them and what doesn't work for them. So I think to some extent part of the advertising reduction is very much connected to the advertisers trying to see if there's a different blueprint that produces higher bang for the buck.

JOANNE: So are you betting on secular versus cyclical changes?

SAM: Well, I mean, the question is what's the percentage? In other words, there's no question in my mind that there's been a secular change. The question is what's the percentage, and what can we as media companies and newspapers, in particular, do to respond to it and to find different avenues? Our high-school newspaper is a perfect example of finding a different methodology to, in effect, attract advertising dollars and serve the public at the same time.

JOANNE: But a year from now when the Tribune earnings come out, will we still be seeing declining numbers in advertising revenue, or will those numbers start to shift?

SAM: I, of course, don't know, but if I were guessing, I would think that we will start coming out of the current recession in the third quarter of next year.

JOANNE: All right.

SAM: And I think it will be a slow recovery, much more an "L" than a "V." The No. 1 issue for everybody is going to be inflation, because you can't stimulate at the level of which we've stimulated and not have that risk. And so, in effect, it's going to be a redo of where Greenspan was in 2001 and 2002. Bernanke is going to have to deal with the question of "When do I take the punch bowl away?"

JOANNE: Got it. All right, we've got a couple of minutes for questions from the audience. Right over here?

QUESTION FROM THE AUDIENCE: Hi, Jeff Jarvis. Mr. Zell, first, I may speak for others here when I say I wish you would do this more often and talk publicly more often. It's great fun. I'm a journalist, and I got attacked in Salon this morning…or Slate this morning—I get them confused—for holding journalists responsible for the fate of journalists. Is it possible, do you think, to change the culture of journalism? What's the major changes that need to be made? Are you making any progress in changing that culture, and, if so, how?

SAM: I'm on the record as saying that, you know, I think that part of the problems with the newspaper industry revolve around the fact that the newsrooms have basically never recovered from Watergate, and everybody wants to be Woodward and Bernstein, and that's the definition of success. Obviously, the newspaper business must be a great deal more than that. So I think we are making progress. I think we are changing the paradigms, many of which were just unwritten rules that we don't put ads on the front page. "Why not?" "Well, because we've never put ads on the front page." "Well, that's a good reason not to." You know, "Well, what do you mean you want to put a spadia on the newspaper?" 'Well, somebody is willing to pay us $100,000 for one day for a spadia on the newspaper." "I know, but it will destroy the integrity of the front page." I said, "For $100,000, you know, who's kidding who? What business are we in?"

I remember one of the first things that I noticed when I took over the Tribune was that, in effect, ChicagoTribune.com, which was our website, was in gray lettering, with the hope, maybe, that nobody would notice it. I scratched my head and I said, "This is supposed to be the future. It needs to be on the front page of the newspaper in bright-red letters because you want everybody in the world to connect to the concept of it and go from there."

And the last thing I'd say to you, which is a much bigger question—86 percent of the cost of the newspaper business is print, paper, distribution, and promotion. That's untenable long-term and…short-term. And I think when it's all said and done, the future must attack this inherent problem, which, among other things, if you attack the problem and solve it, you then make newspapers a much more economic advertising venue. Right now, that infrastructure sets the floor. That makes newspapers uncompetitive.

JOANNE: I think we have time for one more question…in the back there.

QUESTION FROM THE AUDIENCE: Richard Bilotti, GSO Capital. I would submit that today the Tribune is truly a television company that happens to sell newspapers. Your television assets probably significantly…in any environment will be significantly worth more than your newspaper assets for the next couple of years. What are the essential changes that you need to make to the television business that you own, if any, given that we're in the beginnings of a very severe downturn in advertising there, as well?

SAM: Well, in the case of the Tribune, you're right that we have 23 TV stations and one superstation and one radio station. Whenever you talk about TV as it relates to the Tribune you have to start with the superstation. We have one of two superstations. Our superstation earns $80 million a year. The other superstation earns $480 million a year. We hit 75 million homes. I think they hit 90. So, obviously, this is a dormant asset that needs desperately to be addressed, which is, frankly, the first place we went to work.

We also basically doubled the amount of news that all of our TV stations do, because that news is 100 percent owned by the local station, is an enormously successful revenue producer, and is very local targeted. So that's two.

And then, of course, we also put all the salesmen on commission and did other irrational things like that.

But net-net, we're very, very aware of the TV role, and we're very aware of what we need to make it better, and we've brought in a lot of extraordinary people, who are beginning to make a measurable difference.

JOANNE: That's all we have time for. I want to thank Sam Zell.

SAM: Thank you. Glad to.