Media inkblot of the moment: Knight Ridder (KRI ) and its angry shareholders. Those who dream of kinder, gentler newspaper ownership fantasize about deep-pocketed locals. (A certain mogul has reportedly inquired about the Los Angeles Times, so call this the "David Geffen scenario.") Those who live to ponder balance sheets envision slashed costs and the remaking of the U.S. newspaper industry. (A key Knight Ridder editor was literally sickened by the last round of staffing cuts, so call this the "Making the Editors Vomit scenario.")

Soon all may be clear: Deutsche Bank (DB ) analyst Paul Ginocchio sees a 75% chance that Knight Ridder, the second-largest U.S. newspaper company, will be sold within a year. (At press time no other institutional shareholders had joined the three major investors -- which together hold around 35% of the stock -- in public demands for a sale or strategic change.) The Street sees no obvious single buyer among its peers or private equity. But a reasonable scenario can be conjured wherein Knight Ridder's 32 daily papers are split among several parties, including privately held newspaper operator MediaNews Group and publicly traded Gannett (GCI ) -- these two teamed up to take the Detroit Free Press off Knight Ridder's hands in August -- and McClatchy (MNI ), with some spillover going to private equity.

This would mark a weird and ignominious end to Knight Ridder -- and the career of P. Anthony Ridder, the 65-year-old family scion who has been chairman and CEO for a decade. But during his tenure, through circumstance and choice, Knight Ridder solidified a portfolio that left them exposed to what could be called the curse of the cities and the stigma of the second tier. (A Knight Ridder spokesman declined to comment.)

In the mid- to late '90s, when national advertising was growing by double digits, big city dailies soaked up torrents of dollars. In 2005, though, national ad growth is down to droplets, and big city players are seeing plunging circulation and increased competition, largely from Craigslist and free dailies. Metro, Sweden's free-paper chain, first launched in the U.S. in Philadelphia and Boston. These cities' paid dailies have since become notoriously weak performers.

Knight Ridder owns dailies in many major metro markets -- including, alas, Philadelphia -- but its footprint is tentative. It has no dailies in the top three markets. In key metro centers Minneapolis and Dallas, it's in St. Paul and Fort Worth. (Ditto San Francisco, where it owns the San Jose Mercury News.) This doesn't help pry dollars from national ad accounts. Historically Knight Ridder's reputation was for quality papers, but years of severe cuts left them nowhere near The Washington Post or The New York Times, both of which boast quality halos that can drive future ancillary businesses and value. And despite recent ax-wielding, Knight Ridder hasn't matched industry peers in cost-slashing. Its margins still trail Gannett's and Tribune's (TRB ), according to Deutsche Bank. Hence Knight Ridder's twin curses: It's exposed to the downside of cities but not the upside, and it's short on quality yet shy of sufficient stinginess.

This might not be a problem if Knight Ridder had non-newspaper assets. It doesn't. It sold off its database unit, Dialog, in 1997. (Today such outfits are in vogue: Consumers pay top dollar for the content, and being ad-free cuts cyclicality.) Knight Ridder sold Dialog after betting bigger on large market dailies via its $1.7 billion deal in '97 to buy four papers from Walt Disney (DIS ).

Those decisions set today's table. Indeed, Knight Ridder has few options: Fire even more employees? Pay exorbitant multiples to diversify into radio or TV? Admit defeat by leveraging up to buy back stock? Few newspaper execs or even industry analysts have much bad to say about Tony Ridder's tenure. The stock held up well until recently, they say, and Ridder did as well as can be expected given the cards he was dealt. But Ridder and his team weren't just dealt these cards. In many cases they chose them. Now the cards are playing them.

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Corrections and Clarifications "Where Ridder went wrong" (Media Centric, Nov. 21) incorrectly stated that San Jose is a smaller city than San Francisco.

By Jon Fine

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