Late one Friday night almost 40 years ago, I was standing on the footpath in a seedy part of Melbourne’s CBD, waiting to buy one of the first copies of the marquee Saturday edition of The Age as it rolled off the giant Goss presses that lined the bowels of the paper’s building. I had just written my first by-lined story on the front page of the newspaper then regarded as the best in Australia, and as an ambitious young reporter I was too impatient to wait until the next morning to see it in print.

In those days, every Friday around midnight, the streets outside the Age building overflowed with people who came to buy an early copy of the paper with its thousands of classified ads for jobs, cars and properties. To see them pick up their newspapers that night, keeping the classified ads and dumping the rest into rubbish bins placed along the street by Age staff, was a dose of reality for an idealistic journalist. I now realise I was seeing evidence for a prediction made a decade earlier by media savant Marshall McLuhan. “The classified ads (and stock-market quotations) are the bedrock of the press,” he observed. “Should an alternative source of easy access to such diverse daily information be found, the press will fold.”

The incongruity in that business model – profits from ads for jobs, houses and cars bankrolling the journalism that is vital to a functioning democracy – took several decades to play out. The “newspaper business model”, as it’s now derisively known, has imploded. People no longer line the streets outside newspaper presses at night to be the first to see the ads. The internet has poached most of Australia’s newspaper classified advertising. The money that financed quality journalism for a century is disappearing, with no likely replacement.

The story of how Australian quality journalism fell victim to a commercial market failure has been known to insiders for years, but it has largely been withheld from consumers of Australian journalism because the mainstream media has conspired to censor and spin the truth. Australia’s newspapers of record have deliberately ignored the story of their own decline, and its impact on their own readers and the health of society, instead of covering it as they would the decline of any other important industry or profession. They have shown a deep reluctance to disclose or explain that large-scale commercial journalism has become unviable, and no one has yet found a formula to subsidise “public trust” journalism in the way newspaper advertising did.

For Australia, the story is more significant than just the demise of an industry business model. In a small robust democracy with relatively little commercial quality journalism, it has the makings of a civic catastrophe. That’s because the serious journalism of influence in Australia, apart from the government-funded ABC, resides mainly in four newspapers – the Sydney Morning Herald, the Age, the Australian Financial Review and the Australian. Between them, these four mastheads provide most of Australia’s coverage of politics, justice, economics, business, science, health, welfare, public policy, international affairs, arts, culture and ideas. Until recently, these four employed around 1500 journalists. Today that number is closer to 1000. Within two years it could be as few as 500.

For most of their existence these papers have been pillars of the Australian democratic infrastructure, sitting alongside the parliament, the bureaucracy and the courts as the enforcement agencies of public accountability and scrutiny. They are the ones who have done the shoe-leather reporting, invested in thoughtful analysis, exposed corruption and maladministration, campaigned on issues they believed in and undertaken the expensive and risky investigative reporting that has held power to account.

Yet the owners and managers of those newspapers knew (but didn’t disclose) something important about their public interest journalism: it always lost money. It was (and is) expensive to produce, appealed to relatively small audiences and so attracted little advertising revenue of its own. Over the past century, media owners prepared to cross-subsidise this higher form of journalism were rewarded with power and prestige, and it was all funded by the vast tracts of classifieds that generated profit-to-revenue margins of close to 90%. (Just do the calculation: in their heyday, less than ten years ago, the SMH and Age were selling hundreds of classified pages every Saturday at around $40,000 each, with few costs other than newsprint and ink.) Now that source of funding is rapidly drying up and the editorial bill – an estimated $150 million a year across the four newspapers – is an expense that shareholders can no longer afford.

Those four newspapers are rapidly going broke. For every dollar they lose in newspaper advertising they gain less than 10 cents in online advertising. In the US last year, daily newspapers lost $1.50 in print advertising for every 10 cents they gained online, according to the latest State of the Media report from the Pew Research Centre. The internet is at once the greatest and the most destructive commercial invention in media history, as newspaper owners have discovered.

As advertising revenue disappears, so do readers. The SMH and the Age have lost close to a third of their circulation in the past three years. The SMH sells 186,000 weekday copies in a state with a population of over 7 million; the Age 157,000 copies in a population of 5.6 million. Roughly seven of every hundred Australians buy a metropolitan daily newspaper; in 1947 it was 38.

Even when confronted with such data, the custodians of Australian journalism seem unable, or embarrassed, to acknowledge the threat to the source of their editorial funding. Instead, they paint a glowing picture of the future of journalism. “There is much to be positive about,” said News Limited CEO Kim Williams in his AN Smith journalism lecture at Melbourne University late last year. “Robust continuing and truly great journalism; sustainable business models for print and shiny new business models in digital media; and a heightened and voracious appetite from consumers for diverse news and information across their spectrum of passions and interests.” A year earlier, on the same platform, Fairfax CEO Greg Hywood declared that “the future of journalism has never looked stronger”. He said this was because of the internet, not despite it. “Our readers want our journalism in a variety of formats. Tracking and fussing about print circulation is an outdated and nearing irrelevant form of measurement in the world media companies now inhabit.”

But is the transition from newsprint to online journalism, as the newspapermen assert, just a platform change from one train to the next? Will the $150 million that our four leading newspapers spend annually on public interest journalism move seamlessly from print to digital when those papers fade away?

A fact-checker would quickly confirm that there are no digital media models capable of funding anything like that $150 million. Even though big savings are made by not printing and distributing newsprint, online advertising and subscription revenues are tiny compared to the barrowloads of money that rolled into newspapers during their glory days. No stand-alone news website in the world can support even a fraction of the journalistic resources that currently reside in any one of these four newspapers. Without subsidy or charity, there is no safe crossing.

Newspaper executives also try to deflect discussion of their print problems by boasting about the vast size of their online audiences compared to newspaper readerships. Again, they are being disingenuous. The reason the SMH and the Age have four or five times as many readers online as in print is that the overwhelming majority of those website visitors come to consume commoditised free information like weather, property listings, transactions, sharemarket prices, dating opportunities, recipes and a constant stream of “clickbait” celebrity, lifestyle and oddball stories. Few are there for the “quality” journalism.

The very idea of a large-scale digital newspaper that replicates the ethos and economics of its newsprint predecessors is nonsense. The internet is at heart a niche medium. Even large websites, including social media sites, are built around small communities of interest and individual preferences. This is the antithesis of the newspaper “bundle”, a brilliant concept when it was created 400 years ago after the invention of movable type and the printing press, and then refined over the past century into a grand money-making, power-generating machine. The bundle combined and curated content across a range of reader interests, from politics to sport and everything in between, at a time in history when the public had no way of doing that themselves. The cost of creating this daily mass-market multi-layered package of newsprint was so high that it created a formidable barrier to entry; the resulting scarcity in turn made newspaper proprietors rich and powerful.

The internet has changed all that. It is the first mass medium in history with almost no barriers to entry and practically unlimited content-carrying capacity. These two factors have converged to create millions of websites and blogs, and billions of web pages, resulting in the collapse of online advertising rates for all but highly specialist or unique websites. And that has created another dilemma you won’t read about in the press – the commodification of news. There’s news everywhere on the internet, most of it free, so why would readers pay for an old-style, all-purpose newspaper “bundle” on a website when they can access content that is often deeper and richer on niche sites?

The online world provides a wonderful new platform for journalism, bringing the reader inside the tent and, to the dismay of old-school media barons, removing the power of the gatekeepers to use (and abuse) their media to influence society. Kim Williams is right when he talks about the shiny new business models in digital media, but what he fails to explain is that these are shiny new yachts compared with the ocean liners that the world’s great newspapers once were.

When he talks about “sustainable” business models for print media, he is surely only referring to his own and his competitors’ current model of relentless cost-cutting in a race to match the rapid decline in readership and revenues. The SMH and the Age have been converted from broadsheet to tabloid this year so they can be printed on smaller presses to save money. Hundreds of their journalists, including many of the best, have been pushed out the door in recent years. Investment bank Goldman Sachs predicts that those two papers will incur heavy losses next year and will close their print editions in 2015. Fairfax CEO Greg Hywood acknowledges as much. “We know that at some time in the future, we will be predominantly digital or digital-only in our metropolitan markets,” he recently told the International News Media Association World Congress. “We can’t say whether it’s three, five or ten years. That depends upon print revenue trajectories, but it will happen.”

Over at the Australian, which loses an estimated $20–30 million annually, there is another kind of business model. Under the KRM (Keith Rupert Murdoch) model (like the Kerry Packer model before it, which used to sustain the Bulletin) the proprietor cross-subsidises loss-making newspapers like the Australian, the Times of London and the New York Post with the hefty profits from News Corp’s other businesses. This strategy underpins Rupert Murdoch’s political and social power in three countries, and also buys time in case a new financially sustainable business model for journalism does emerge.

As Clay Shirky, an American media theorist, wrote in a seminal essay called ‘Newspapers and Thinking the Unthinkable’ a few years ago:

Society doesn’t need newspapers. What we need is journalism. For a century, the imperatives to strengthen journalism and to strengthen newspapers have been so tightly wound as to be indistinguishable. That’s been a fine accident to have, but when that accident stops, as it is stopping before our eyes, we’re going to need lots of other ways to strengthen journalism instead. When we shift our attention from “save newspapers” to “save society”, the imperative changes from “preserve the current institutions” to “do whatever works”. And what works today isn’t the same as what used to work. For the next few decades, journalism will be made up of overlapping special cases. Many of these models will rely on amateurs as researchers and writers. Many of these models will rely on sponsorship or grants or endowments instead of revenues. Many of these models will rely on excitable 14-year-olds distributing the results. Many of these models will fail. No one experiment is going to replace what we are now losing with the demise of news on paper, but over time, the collection of new experiments that do work might give us the journalism we need.

Of all the world’s newspaper companies fighting for survival, few are as vulnerable as Australia’s 172-year-old Fairfax Media, publisher of the Age, the SMH and the AFR. No other major global newspapers depended as much on profits from classified advertising as the SMH and the Age when the internet arrived. Ten years ago its flagship newspapers were generating 56% of their revenues from classified ads, compared with 18% at the New York Times and London Daily Telegraph, and 25% at the Chicago Tribune and Los Angeles Times.

As recently as a few years ago, the two Fairfax flagship newspapers earnt combined profits of around $200 million. Today they barely make a cent. A decade ago they each carried around 200 pages of classified advertising a week; that’s now down to some 50 pages, and still falling. The company’s market capitalisation is billions less than it was a few years ago. The giant Sydney and Melbourne printing plants are in the process of being closed down.

At the centre of this tragedy is the Fairfax board of directors. In the absence of either a proprietor or a majority shareholder – the common ingredients of most successful media companies throughout history – Fairfax has been run by a board with one distinguishing feature: lack of industry knowledge or expertise. The board has never understood the scale of the challenge posed by the internet. It never saw the size of the looming crisis and never made plans for a worst-case scenario. If it had, the mindset of the whole company, from chairman to copy kid, might have been radically different. The company would have tried new and different strategies to adapt. Some would have failed and some succeeded, but simply acknowledging the dilemma would have made a huge difference to the outcome.

Over the past decade, the most challenging of its history, Fairfax has been led by three chairmen – a soft drink executive, a property developer and a supermarket boss, respectively – with literally no media industry or journalism experience. The last of these, Roger Corbett, now leads the company through its denouement. A conservative businessman in his early 70s, Corbett was CEO of Woolworths for 16 years after a successful 40-year retail career. Then he retired as a grocer and became a newspaper director.

On the day he was appointed chairman of Fairfax in 2009, Corbett gave an upbeat assessment of his new empire. “This is a company with real importance to our national culture and democracy and I am honoured by the opportunity,” he said. “Fairfax, like most companies, has challenges ahead, but the decisions taken in the last few years by management and the board have, I believe, put Fairfax in a position which is envied by media companies around the world.”

Fairfax shares closed that day at $1.73, having fallen from above $5 a few years earlier. Now the share price sits at around 60 cents. Under Corbett’s chairmanship the company has lost almost two thirds of its value, and by the 2012 annual report his main focus was laying off 1900 staff (“every job matters and your Board and management wish these redundancies were avoidable”), slashing costs (“we will achieve annual cost savings of $235 million by June 2015”) and asset write-downs of more than $2 billion (“this is a non-cash decision and does not affect the company on a day-to-day basis”).

I last saw Roger Corbett almost nine years ago, inside the Fairfax boardroom. As a former SMH editor who had just sold my publishing business to Fairfax, I had been asked by the board to develop a report about the company’s business model and future. I spent an hour or so presenting my thoughts to the board, starting with a hypothetical “catastrophe scenario”, which I suggested could result from a large migration of classified advertising to the internet. (This subsequently occurred, to a much greater degree than I had predicted.) My key argument was that if the board rated the risk of such a scenario at any more than 10%, it should take decisive action as an insurance policy. I explained to the directors that the financial success of Fairfax “directly subsidises the health and effectiveness of the most important quality journalism in this country”, and that I believed the board should act quickly because “there is now a realistic possibility of the ‘catastrophe scenario’ occurring over the next two to four years”.

After I finished, Corbett walked to the head of the board table and picked up a copy of one of Fairfax’s hefty Saturday broadsheets, bulging with classified ads, from a nearby pile. He didn’t want anyone coming into that boardroom again saying that people will buy houses or cars or look for jobs without “this”, he told his fellow directors. He then dropped the paper onto the table with a thud.

When it comes to the question of who will pay for “accountability journalism”, the light at the end of tunnel appears to be an oncoming train. Maybe someone will conjure up a workable configuration to pay for the thousand-plus journalists who cover the beats that underpin Australia’s civil society. Maybe the ABC will fill the missing gaps with more funding from governments who understand the importance of investing in well-resourced journalism to protect the democratic system. Maybe universities (as with online-only The Conversation) or philanthropists (the Guardian) will become the next Murdochs and Fairfaxes.

Or perhaps what looks like an impending train wreck is actually more like the other great media revolution in history, the period of uncertainty in Europe around 1500 at the juncture before and immediately after the invention of the printing press, when even the revolutionaries couldn’t predict what would happen next.

The outcome of that media revolution was a golden age. The arc from Gutenberg to Google, extending over five centuries, saw the invention, refinement and institutionalisation of journalism, supported by an unconventional funding mechanism, that secured its central place in civilised society for a long time.

What happens next will profoundly affect journalism and society. As Shirky notes, “You’re gonna miss us when we’re gone!” has never been much of a business model.