LAST MONTH, Arthur Ochs Sulzberger Jr, publisher of The New York Times, was spotted lunching with top lawyer Martin Lipton at the 21 Club, a former speakeasy that is now a favoured dining spot for Manhattan fatcats.

If you are a chief executive under siege, Lipton is the man to call. The co-founder of Wachtell, Lipton, Rosen & Katz is credited with the invention of the poison pill, a defence used by companies threatened by takeover. Name a shareholder revolt at a top company and you can bet Lipton was somewhere in the background, working for the boss’s team.

The lawyer and the publisher had plenty to talk about. The Sulzberger-Ochs family has controlled what is arguably America’s most influential newspaper since 1896. Next month outside investors will try to make the family loosen its grip. It is shaping up to be a spectacular battle.

Like the rest of the newspaper industry, The New York Times is in trouble. Readers are migrating online but advertising revenues are failing to keep up with the shift. Last month the company announced 100 layoffs at the 1,332-strong New York Times newsroom.

The group’s smaller papers - The Boston Globe and Worcester Telegram & Gazette - have been hit especially hard. The company paid $1.1 billion for The Globe in 1993, and in 2006 was forced to write off $814m on the paper’s diminished value.

Sulzberger has moved to beef up the company’s web business. The group owns About.com, a web-based information service that had revenue growth of 27% last year. But 97% of this still came from the news group, where, say analysts, the future is flat at best.

Dissident shareholders and other critics say Sulzberger is moving too slowly into the digital age and putting one of the world’s great news brands in jeopardy.

One former Times executive said: “The prevailing philosophy of the place is that we are the Times and as long as we carry on doing what we do, the money will come.”

It is a charge that the news group disputes. Catherine Mathis, a spokeswoman for the company, wrote in an e-mail: “We are the tenth-largest parent company on the internet. NYTimes.com is the No 1 newspaper website in America. We have seen strong growth in our digital business. Last year online revenues were up 22%. We have been investing in the development of key content areas, including entertainment, property and travel. We have been very financially disciplined. About.com is worth significantly more than we paid because of its strong performance.”

But it’s the speed, not the direction, of the change that concerns New York Times shareholders.

The man leading the charge for change is Scott Galloway, a 43-year-old former dotcom entrepreneur. Last week, Galloway’s Firebrand Partners and Harbinger Capital Partners increased their stake in the company to 19%.

A two-tiered share structure gives the Sulzberger family trusts control of nine board seats. Galloway has four candidates to fill the other positions and has put them up for shareholder approval at the company’s annual meeting in April. Neither Galloway nor Harbinger returned calls for comment.

Letters sent to the company have so far been cordial in their tone. Galloway said that his efforts would be pursued in a “spirit of cooperation”.

“There is nothing wrong with The New York Times Company that cannot be fixed with what is right with The New York Times,” wrote Galloway. “We believe a renewed focus on the core assets and the redeployment of capital to expedite the acquisition of digital assets affords the greatest shareholder appreciation and creates the appropriate platform to compete in today’s media landscape.”

The committee charged with vetting candidates for the board will meet nominees put forward by the dissident shareholders, but at the same time the company has written to shareholders asking them to reject Galloway’s proposals.

Herbert Denton, president of Provident Capital and an activist shareholder, said: “Maybe the board should seek some more independent directors for their slate, immediately.” Such a move could take the wind out of Galloway’s sails, he said.

So far the dissidents’ proposals have met with a mixed response from analysts. Lehman Brothers analyst Craig Huber has estimated that the Times could raise $1.7 billion after taxes if it sold its local papers, Manhattan headquarters and its stake in the Boston Red Sox baseball team. But it would be a shortsighted move that would dent income.

“What is the rush to sell the headquarters building? To get a one-day or one-week pop in the stock price?” he wrote in a report. “Who loses money on Manhattan real estate over a long period of time?”

Selling her baubles won’t get The Gray Lady out of trouble, said Jeff Jarvis, a former media executive turned internet guru. He said The New York Times was an extremely strong brand but the company had “danced around” the internet and needed to commit itself.

Nationally, it is now facing stiffer competition online from The Wall Street Journal (recently acquired by News Corporation, parent company of The Sunday Times) and internationally it competes with CNN, the BBC and British newspapers, including The Guardian, The Times and The Daily Telegraph, which are increasingly targeting readers abroad.

“The New York Times thinks it’s a temple - and in some senses it is. But it needs to radically rethink how it does business,” said Jarvis. He said Gannett, owner of USA Today and chains of local papers, had been more proactive in its online strategy.

“The old media model was that we own the content and flash ads at you for as long as you stay,” he said. “That is dying. The new model is closer to Google.” Jarvis said that in the future successful newspapers would be more open and offer greater access to readers.

American newspapers are used to enjoying what were once very lucrative local monopolies, but those days are gone. “Newspapers in America are going to be a smaller business,” said Jarvis.

That’s not a message anyone wants to hear at The New York Times. “That place is more like a government agency or a tenured university system than a business,” said one former employee. “Their opposition is the government, not other media companies.”

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