In the debate between growth and value investors, it’s usually a contest between high growth and higher valuations and low growth and very low valuations. But what should investors do with a company that is seeing revenue and cash flow actually shrink? It’s been a longstanding question dogging the newspaper industry.

In a worst-case scenario, cash flow turns outright negative and bankruptcy has been the only option. For the New York Times Co. (NYSE: NYT) and Gannett (NYSE: GCI), things have not been quite that dire, and bankruptcy is quite unlikely. But is there any reason to search for value in these industry survivors? The short answer: a qualified yes.

In this piece, I’ll focus squarely on the New York Times, although many of the conclusions may apply to Gannett as well. There’s no need to re-hash all of the twists and turns at the Times, but it’s helpful to pit the positives against the negatives.

The positives:

• Rising national market share as regional rivals sharply re-trench and cede important national coverage to The New York Times and a few other outlets
• A strong and growing web presence thanks to nytimes.com and about.com
• Sharply falling newsprint prices, thanks to falling demand
• Activist investors barking at the door
• Perceived trophy status, thanks to a still-strong brand

The negatives:

• A virtual implosion on the classified ad market that is unlikely to ever rebound
• A website that is so good that it is cannibalizing circulation sales, especially since it is 100% cheaper than the print version
• Far lower online ad rates when compared to print ad rates
• A decision by advertisers to move toward online and broadcast outlets
• Still high-fixed costs, thanks to an extensive and well-compensated newsroom
• A continuing drop in media buyout values, as evidenced by the fact that Washington Post Co. (NYSE: WPO) recently sold Newsweek for pocket change.

Investors chose to focus on the investment positives in 2009, as shares rose from a low of $4 to $14. But the long-term concerns again rule the roost, and shares have lost nearly half of their value in the past eight months. Where shares go from here hinges on a bold experiment that will get underway in January. That’s when The New York Times will throw up a wall and start charging for full access to its website.

It has become conventional wisdom that online versions of newspapers must be free. But as News Corp.’s The Wall Street Journal has proven, you can have it both ways. Online readers of the WSJ get a discounted rate for the print version, largely to reflect the savings associated with printing and distribution. Recall that Rupert Murdoch floated plans to make the online version of the WSJ free to boost traffic and ad rates, but that never happened. Murdoch soon realized that online advertising can never match circulation revenue.

Of course, the Times already tried to charge for content once by putting its editorial page writers behind a wall. That half-hearted attempt was a mistake and led readers to only consume the remaining 85% of daily content that was still open to the public.

In a world where The New York Times remains a must-read for New Yorkers and an increasingly important source of news for those outside the New York area as well, the paper will find that it remains indispensable. For that matter, according to Alexa.com, 35% of all NYT online readers come from outside the U.S., where physical delivery isn’t even an option.

Let’s do the math. The New York Times has roughly 12 to 15 million unique visitors to its site in any given month. As the paper will allow partial free access to casual surfers, traffic and ad revenue can remain at reasonable levels. Let’s assume that only 500,000 readers are willing to pay $100 a year for full online access (which is the same price as the online WSJ). That works out to be $50 million in incremental revenue. The math is similar if the NYT charges $50/year and gets one million subscribers. These numbers are simply a guess at this point. And that $50 million may not cut it in light of lost revenue on the print side.

Maybe these estimates are too conservative. How many of us will be willing to pay? I know I will, as I cannot survive without my daily fix of what is still arguably the best news media organization in the world. But the analogy to The Wall Street Journal‘s WSJ.com may not apply. That publication is a must-read in the business community and subscriptions are often covered by employers. That won’t be the case with nytimes.com.

We’ll soon find out what kind of demand exists for a paid online subscription. In a best-case scenario, subscriptions exceed what are now fairly low expectations and the nytimes.com becomes quite profitable (especially when you consider that it has no printing and delivery costs). Indeed, the initiative would have to be so profitable that it more than offsets the lost revenue from print subscriptions that are cannibalized. And that’s no sure thing.

In a worst-case scenario, response is tepid and subscription levels are below forecasts even as traffic to the site plummets, killing online ad revenue. Right now, analysts are modeling for a modest fall in profits next year, largely due to rebounding newsprint prices. Few expect to see a return to the last few years, when sales fell -3%, -8% and -17% in 2007, 2008 and 2009, but it’s not clear that assumptions of flat revenue for the next few years are reasonable. That’s why shares have sold off and trade for less than four times projected 2011 EBITDA. It is very rare that a company with such a strong brand and market share to trade that cheaply. Then again, being the best house in a very bad neighborhood is nothing to brag about.

Action to Take –> Despite these obvious negatives, investors need to closely watch this coming experiment. It will likely be a number of months before we can draw firm conclusions, but the New York Times Co. is one of the few media companies that can possibly effectively monetize its content online.

If shares fall further, closer to the $5 mark, then shares would be extremely tempting considering that this newspaper publisher still throws off more than $100 million in annual free cash flow. At that price, the drumbeat of activist investors and deal-makers would grow larger.