Jay Rosen observes that a dramatic change in the newspaper culture occurred only in late 2004, when newspaper people finally grasped that, as he says, “the tools of content production had been distributed to people formerly known as the audience.” For a decade, Rosen adds, most publishers and editors had misunderstood the Web, seeing it mainly as a new way of delivering print content. By no small coincidence, 2004 marked the beginning of the current financial downturn in newspaper profitability and share prices, and a mood of crisis and even desperation stimulated a new openness and creativity. “Once you let go emotionally, you realize that as journalism, online is infinitely superior to print,” says Tom Rosenstiel of The Project for Excellence in Journalism, “in its ability to offer links to other material, original documents, full texts of interviews, video, and as much statistical backup as the reader can stand.”

If newspapers are now finding their digital footing faster than observers feared, will Wall Street allow this promising transition to maximize its potential? In 2006, supposedly a disastrous year for newspapers, the average profit margins for the newspaper divisions of publicly traded publishing companies was 17.8 percent, according to the Merrill Lynch media analyst Lauren Rich Fine. That’s well above the average for all industries. Yet newspaper stocks lagged the S&P 500 last year by 21 percent, after another disastrously down year in 2005. Is there something fatally wrong with newspapers that their profit margins conceal? Or is there something amiss with the way Wall Street values newspapers?

As recently as 2002, newspapers and their mostly institutional shareholders were enjoying profit margins in excess of 22 percent, margins that beat even the fabulously lucrative pharmaceutical industry. Newspapers had been local monopolies, and they got used to charging monopoly prices for their most reliable moneymaker, the classifieds. Given Craigslist and Cars.com and Monster.com, those days are never coming back.

Analyst Fine says some newspapers should just level with investors about the need to plow money back into the Internet: “Just put up a sign, work in progress, come back and see us in two years,” she advises. “You’re going to have to judge us differently.” But, as Fine quickly adds, that’s not the way Wall Street works. Further depressions in stock prices invite hostile takeovers and shareholder demands of the sort that killed Knight Ridder. The media analyst John Morton says, “I worry that some publishers will look on their Internet operations as found money, without appreciating that the print is what supports the journalism that attracts the traffic. I worry that they won’t sufficiently invest in people to do it well.”

Even if newspaper publishers do everything right, however, in the Internet age they will have a smaller share of the total advertising pie than they enjoyed in the print era. Newspapers’ share of the $424 billion spent globally last year on advertising, according to ZenithOptimedia, was still a considerable 29.1 percent—but shrinking. The Internet share was just 5.8 percent—but growing. And most Web dollars will not go to newspapers. The Internet competition to monetize traffic is fierce, with most sites designed as pure revenue plays unencumbered by news or civic mission. For example, Barry Diller’s iac/Interactive Corp. is thriving with Web service businesses, such as Match.com, Ask.com, the invitation service Evite, and local city search sites. As newspapers complement their traditional news content with local consumer services and ingenious interactive features, they face competitors who enjoyed earlier market entry and who have high brand awareness. Angie’s List would have been a terrific service to build newspaper Web traffic, except Angie got there first.

Robert Kuttner is co-editor of The American Prospect.