Early last month, San Jose Mercury News‘ executive editor Carole Leigh Hutton addressed the Silicon Valley daily paper’s 200 staffers to inform them that severe cuts would soon be coming. The newspaper’s difficulties were the result of what Hutton referred to as “the $6 million surprise”: the paper had revenue shortfall of $3 million and an accounting mistake overlooked $3 million in expenses. The Mercury News was already in dire straits, as Hutton was charged with fixing the poor circulation and disappointing advertising numbers the paper was experiencing. While the challenges facing it are really no different from just about every other newspaper today, a BusinessWeek feature looking back over the past 17 years finds that the paper was perhaps better positioned than any other daily for the rise of social media. If all had gone as planned, the BW piece shows in great detail how the paper could have been a leader; at the very least, it demonstrates how the paper could have avoided some of the pitfalls that now threaten its survival. The Memo: Robert D. Ingle was paper’s executive editor and on Jan. 19, 1990, four years before the first web browser was available to ordinary consumers, he wrote a memo to executives at Knight Ridder, at the time, the paper’s parent company. In a burst of almost amazing foresight, his memo envisioned the coming of online networks. Ingle, who retired seven years ago, presented a strategy Knight Ridder could adopt for its 28 papers and race ahead of the rest of the industry. The centerpiece of Ingle’s strategy was an emphasis on customizing the paper’s content to individuals. Additionally, he called for merging the print and online operations and creating new ad vehicles tied to both sides. -- The Beginning: Being in located in the center of the dotcom boom alone was a boon to the Mercury News. And Ingle’s initially efforts attracted a measure of support from Knight Ridder execs. But his plans were never able to take hold, due in part, BW says, to Ingle’s lack of leadership abilities. Primarily, the decentralized nature of Knight Ridder’s papers fostered a collective mindset that was averse to change, as long as ad revenues related to the tech boom kept flowing. -- The Downturn: Ingle was able to make some inroads, but no real change took place. Eventually, the dotcom bubble burst and then the terrorist attacks of Sept. 11 also hit the newspaper industry hard. Then, as the new media industry began its resurgence, chains like Knight Ridder were caught behind the curve. In March 2006, Knight Ridder sold its newspapers to company’s like McClatchy. A month after that, McClatchy ( NYSE: MNI ) sold several newspapers including the Mercury News to MediaNews Group. And it’s been struggling ever since. (This past week, Hearst bought a stake in MediaNews, giving it control of Mercury News and several other papers.) -- The Reinvention: Citizen journalism advocate and former Mercury News staffer Dan Gillmor tells BW that he doubts that colleagues at the paper gave much thought to the blog he started there in 1999. Things have certainly changed as the paper is racing to redefine itself to meet the social media zeitgeist. Staffers proposing ideas very similar to ones in Ingle’s 1990 memo. One suggestion includes letting readers customize the online site according to their particular interests. For example, someone who values environmental news most, the paper’s online site could serve as a portal serving up eco-centric news. Hutton promises that the best ideas will be quickly acted upon and tried out before consumers for a final verdict. But the BW article leaves an unanswered question: can the paper focus on solving its intractable financial difficulties all the while trying out new experiments on readers?