Do newspapers still need The Associated Press? And does The Associated Press still need newspapers?  Until recently, these would have been ridiculous questions. But print circulation is tumbling. So is advertising revenue. Editors are slashing budgets and making do with less. Readers are moving online, where they get all the national and international news, sports scores and celebrity gossip they can read--for free, updated constantly, and often by AP.  And there's the rub. Long joined at the hip, AP and the member newspapers that own it are seeing their relationship tested like never before.  On the one hand, AP copy accounts for up to 40% or more of many a daily paper's news content. On the other, the not-for-profit collective is also part of an online news revolution that's killing the newspaper business. The growing battle raises questions about what the AP--and the industry itself--will look like in the 21st century.  Private industry grumbling went public in December and January. Editors at some dozen leading metropolitan newspapers, including The Boston Globe, The Philadelphia Inquirer and Cleveland's Plain Dealer, sent letters to AP criticizing it for failing to reduce the annual fees it charges its member newspapers at a time when newsroom budgets are in desperate need of relief. They also complained that the news agency hasn't done enough to meet their regional coverage needs when newspapers are being forced to cut staff.  Pittsburgh Post-Gazette Executive Editor David Shribman, who signed one of the letters, puts it bluntly: "AP is worried more about its future than the future of its members.''  "They're good people,'' says Ben Marrison, editor of The Columbus Dispatch in Ohio, of AP. "They mean well, but I don't think they fully comprehend what we're facing."  AP Board Chairman Dean Singleton counters that the dissident view of the news agency is shared by only a minority of its members. Singleton is also vice chairman and chief executive of MediaNews Group, publisher of the San Jose Mercury News, The Denver Post and other newspapers.  AP "has a responsibility to do good journalism for its members,'' Singleton says. "I think the overwhelming majority of customers of the AP agree that AP does an outstanding job with the small amount of money it charges newspapers."  For decades, the newspaper industry accounted for the lion's share of AP's revenue. But during the 1990s, the news agency branched out into lucrative new lines of business, including broadcast video and online initiatives, making it less reliant on revenue from print outlets.  It was a smart move that enabled the cooperative to compete better with rivals like Reuters, while also diversifying its income streams and providing some insulation from the ups and downs in the newspaper industry. Diversification was something that most newspapers probably should have done as well, but didn't.  For instance, AP has been pouring additional resources into coverage of financial news and the entertainment industry because of opportunities to generate new revenue online and overseas, according to Jim Kennedy, vice president of strategic planning.  Part of those efforts was the 2004 launch of an expanded "AP Financial News" service. Its first client? Yahoo! (nasdaq: YHOO - news - people )  Working with limited resources of its own, AP's efforts to keep its news product relevant and competitive are "really based around quality and elimination of waste and focus less on work that's not going to play in a newspaper or a Web site,'' Kennedy says.  But an inevitable byproduct of AP's diversification strategy is that its fate is increasingly diverging from that of its collective ownership, which is caught up in a maelstrom of falling circulation and rapidly eroding print advertising.  Last year, AP generated only about 30% of its revenue from U.S. newspapers. The rest came from global broadcast customers (37%), online ventures (15%) and other revenue sources, such as international clients and photography, (18%). Forbes.com is a customer of AP.  "There's no longer a direct tie between what the members pay and the news gathering we do,'' Kennedy says.  In 2006, the most recent year that financial data are available, AP posted net income of $13.3 million, down from $18.5 million in 2005, on revenue of $679.8 million, up from $654.2 million. For comparison's sake, back in 1990 before AP got into broadcast video or Internet ventures, the cooperative posted net income of $7.4 million on revenue of $311.9 million.  AP's ability to limit its exposure to the woes of the newspaper industry and to seek out higher-growth opportunities elsewhere has enabled it to keep its worldwide head count, which includes non-editorial staff, at roughly the same level since at least 2000.  But this rankles some of its beleaguered member newspapers, many of which have had to make deep cuts in newsroom staffing and other expenses. A planned restructuring of the annual fees in 2009, which AP says will result in lower rates for most papers, is being dismissed by some as insufficient.  Another sore spot: AP adjusts its annual fee to reflect circulation fluctuations, but will only do so once circulation reflects at least a 25% decline (or increase) since the last such adjustment. In addition, these adjustments are based on the paper's prior-year circulation to enable AP to plan ahead for its budgeting needs. That delays rate relief when circulation is on the decline. U.S. newspapers paid about $215 million in annual content fees to AP last year, even as they provided up to 30% of the reporting that composes AP's daily state news coverage. AP's fees currently average around $143,000 per paper, but the actual amount a newspaper pays per year varies greatly from paper to paper, with the largest dailies paying well in excess of $1 million a year.  Not all editors are up in arms. William "Skip" Hidlay, executive editor and vice president of Gannett's (nyse: GCI - news - people ) Asbury Park Press, in Asbury Park, N.J., says AP's annual fees have been reasonable given the revenue it needs to fund its sprawling news operations, particularly overseas, where AP is one of the few remaining U.S. news organizations to have an extensive reporting staff.  "The Associated Press is one of the most important news-gathering associations in the world,'' Hidlay says. "It really is a creature of us. It's incumbent on us to let the AP change and evolve."  AP board member Jay Smith, president of Cox Newspapers, points out that much of AP's recent investment has been in high-growth areas, such as the Internet, arguing that "it'd be foolhardy for the AP to choke off" that kind of growth. "If you really, truly want to punish the AP and have it suffer the same way you're suffering, that's the surest way to stifle the AP,'' Smith says.  But the rising pressure to cut newsroom budgets has become so severe that some newspapers have begun musing aloud about the possibility of dropping out of AP altogether, according to Toledo, Ohio, Blade Executive Editor Ron Royhab and other editors. "The old model is broken," Royhab says. "I think everything is open to discussion."  Other sources of national and international news are available, such as Reuters, Bloomberg, Agence France-Presse and the syndicated news services of The New York Times, The Washington Post and Tribune's (nyse: TRB - news - people ) Los Angeles Times.  Then there's the Internet itself. A daring paper might ape the success of The Week magazine, rounding up coverage from others and republishing it in a more digestible form. But any alternatives would have a hard time matching the breadth and timeliness of AP's daily news report, particularly on state news, breaking national news, photography and sports.  Still, that hasn't stopped editors from shopping around. For instance, sports news agency PA SportsTicker has experienced an uptick in inquiries from U.S. newspapers about its services, according to Sales Director Jay Imus.  Disney's (nyse: DIS - news - people ) ESPN sold SportsTicker in 2006 to the Press Association, Britain's counterpart to AP. On Wednesday, PA's parent company announced that it is reviewing strategic options for its sports information services.  While Imus acknowledges that SportsTicker can't match AP's coverage, he says the company can satisfy much of a daily newspaper's needs, including game previews and recaps for professional sports and leading collegiate conferences, real-time scores, league standings and other statistics.  Some newspaper editors are also peeved that AP has been scaling back its coverage of routine local and regional news, such as from state capitals, in favor of more ambitious "enterprise" reporting that often ends up competing with what newspapers are producing themselves.  AP officials acknowledge that the news agency has cut back on routine news items that few newspaper clients had much interest in anyway. But they stress that they have to be mindful of the needs of customers beyond just its member papers in a given area.  "Readers are not interested in reading about a quarter turn of a screw on a state legislative issue,'' AP's Kennedy says. "They are interested in bigger-picture news and interesting subjects. It's more about our approach to news. It's not that we're trying to compete with other people in the state."  David Ledford, executive editor and vice president of Gannett's News Journal in Wilmington, Del., and president of Associated Press Managing Editors, doesn't believe there will be an exodus of papers from AP.  "The unrest is real,'' Ledford says. "But I believe AP is taking it seriously. And for the sake of the cooperative built on the bedrock of newspapers, I hope a meaningful compromise can be achieved."  Maybe, maybe not. Earlier this month, the New York Daily News, the fifth-largest newspaper in the U.S., revealed that it intends to drop AP services in 2009 unless the two sides can reach a compromise on how much notice AP requires for termination of services.  Better To Invest In Online
The fates of The Associated Press and its member newspapers are diverging, but breaking up is hard to do.