During an otherwise mundane story about Microsoft’s recent decision to offer a free, web-based version of its Office suite of products, I was struck by this sentence in an Associated Press story:

With Office 2010, Microsoft must decide how much software it can give away online without undermining its lucrative desktop software business. If it doesn’t make the right calculation, the software maker could find itself in the same position as newspapers that gave online content away and now are struggling to replace print revenue.

That second line is almost a throwaway, written with no attribution. That means that the notion has officially entered into conventional wisdom: Local newspapers screwed up by giving away for free the content everyone used to pay to consume.

Conventional wisdom, yes. And untrue.

Correcting this fundamental error is about more than just debating the past. Because this mistaken assumption is driving the debate about new business models for news.

I want to explain why I think this mistaken assumption is causing people to ask the wrong question about the future of local news. And what I think the right questions are. I want to try to reframe the discussion about business models to focus on where true opportunity and solutions might be found for journalism entrepreneurs to pursue.

First, let me address the first half of the assumption about “newspapers that gave away content.” This assumes that people once paid for journalism.

The Myth of Paying for Journalism

Let’s correct that right now: When it comes to local newspapers, people never paid for journalism.

Believing that they did represents a fundamental misunderstanding of what a local newspaper was, or is. Especially when it comes to the business of a local newspaper. And it’s a tragic misreading that I hear repeated on all sides of the paid content debate, whether they’re for or against charging for news online. (The equation is a bit different for national newspapers like the New York Times or USA Today. But I’ll leave that for another time.)

Let’s review the actual business of a local newspaper, at least as it used to be. Back in February, when I was attending a Knight Digital Media Center workshop at the University of California at Berkeley, we heard a presentation from Lauren Rich Fine, a former newspaper analyst for Merrill Lynch and a presenter at Kent State University.

Fine broke down the historic revenues of newspapers. Across the industry, the money people paid to subscribe accounted for, on average, about 20 percent of a newspaper’s revenue. Classifieds, on the other hand, typically brought in 50 percent of the revenue, and 70 percent of profits on average, according to Fine.

So let’s reflect on that: The consumer was only paying about one-fifth the cost of the product. But what were they getting for that money?

Again, the mistaken notion here is that the primary product of the newspaper is journalism. That’s the conceit of journalists, but it’s also the general misinterpretation by those seeking to re-invent news from the outside.

The Consumer View

Let’s look at a newspaper not from the newsroom-centric view, which assumes the whole value is the journalism. Let’s look at the newspaper from the eyes of the consumer.

From that view, a newspaper is a product that, at least at its peak, provided about 50 different services for people. It helped people figure out where to shop. It delivered a boatload of coupons every Sunday. It helped them plan their weekend. It entertained them with comics and puzzles. It let them know what was on the school lunch menu. And along the way, it also delivered journalism.

Anyone who has worked at a newspaper long enough will tell you that what provokes more outrage from readers than anything else is messing with the comics or puzzles.

Just this week, I was eating lunch with a chief executive who had been in Silicon Valley for 30 years. Toward the end of our lunch, he said he had read the print version of my newspaper for 30 years, and still does. But he was frustrated that we now run the puzzles on a different page every day. He’s not alone. About two years ago, when my newspaper all but eliminated the features section, the outpouring of emails from readers were primarily expressing outrage that the puzzles and comics were being moved.

You can shake your head, but that’s as important a part of the newspaper for many people as the journalism is. For their monthly bill, which only represented 20 percent of revenue, consumers were getting a product that did many things, only one of which was the journalism. Did journalism have a higher social value? Certainly. But it wasn’t the core of the business. For the reader, an ad telling them about a sale or a new store might be just as important in their lives.

Losing the Community Marketplace

So if journalism isn’t the business of a newspaper, what is?

Pull back the lens. At their peak, local newspapers did two things: They created community. And they provided the local marketplace for goods and services. These services were so profitable, that they subsidized the civic good of journalism.

The reason newspapers are in trouble today is because they have lost their dominant position on both of these fronts. Classifieds have evaporated, blowing a massive hole in newspaper revenue.

People know this, yet they somehow forget that this was a completely non-journalistic function.

When it came to community, the sum of news and information in a newspaper created a shared base of knowledge, set the conversations about civic life, and provided a bond that created a sense of place. Today, as newspapers have shrunk, and as the audience has splintered, the newspaper no longer serves as community hub.

Having lost all of these things, all that is left is the journalism. And on its own, we’re discovering this is not something people will pay for.

Getting Beyond Paid Content

So the solution that’s carrying the day is to start charging for content. I don’t favor this approach, but I think it’s too late to stop the train. If paid content succeeds, local newspapers wouldn’t be getting people to pay for journalism again. They’d be getting them to pay for the first time.

Once the paid content strategy comes and goes, it’ll be time to look for other solutions. I don’t believe, as some have written, that we’ve tried everything and should simply give up. In my view, there is still enormous opportunity to create business models that support local newsrooms if journalism entrepreneurs ask the right questions:

Let’s stop asking how to get people to pay for content, because they never did.

Let’s stop asking: How do we reinvent journalism? Opportunity abounds here. The new digital tools are allowing us to create deeper, richer journalism than ever. And more people than ever are reading my journalism. Journalism is doing fine.

Instead, newsrooms need to ask:

> How do we reinvent local community on the web?

> And how do we reinvent the local marketplace online?

By no means are these puzzles solved. I don’t believe that Craigslist represents the last, best way people in a community will buy and sell things. Yelp, while growing in traffic, continues to have reputation issues with local merchants.

The discussion over paid content and tweaking the advertising model is too limited. Solve those two bigger challenges of community and the local marketplace, and you’ll create a business that will support smart, multi-platform newsrooms. These newsrooms won’t be dominant, as they were in the past. They’ll exist as part of local news ecosystem.

But create community, help people succeed in business, and you’ll find a way back to re-igniting the passion for a local news organization.