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With so much free news out there on the Web and in give-away newspapers, traditional newspaper companies are finding it increasingly difficult to get their customers to pay full price for their product.

A Newspaper Association of America analysis of the latest figures from the Audit Bureau of Circulation calculated that newspapers' total average daily circulation dropped 1.9%, to 47,374,033, and that overall Sunday circulation fell 2.5%, to 51,073,104. The report covers the six-month period ending March 31.

But those raw numbers alone, while worse than recent industry performance, don't capture the full picture. More telling is the signal that longtime industry star performer Tribune Co.-already reeling from significant circulation overstatements at its Newsday and Hoy-sent to the press and analysts in advance of the Audit Bureau report, warning of steep declines at key dailies. (Its Los Angeles Times saw its daily circulation tumble 6.5% to 907,997, and its Chicago Tribune fell 6.5% to 574,754.)


Further digging into industry numbers reveal the acceleration of a disturbing trend upon which some Wall Street analysts have seized. Among fifty top newspapers, reads a section of a note to investors put out last week by Prudential Equity Group analyst Steven Barlow, "the category which we term `Discounted Copies,' where newspapers are sold at 50% to 75% off the cover price, increased 16.6%, though it accounts for a small part of overall circulation." Mr. Barlow's report found that "other paid circulation," which is discounted third-party circulation such as copies provided to hotel guests, rose 10% in this period (See chart, P. 78).

"If you were to compute average revenue per copy across U.S. newspapers, I imagine you would see it's been declining over time. And clearly, with a bunch of free content available, that shouldn't surprise anybody," said Vince Casanova, Tribune Co.'s VP-Circulation.

A confluence of factors is suddenly swarming newspaper circulation, which threatens to tamp down ad revenue even while the industry struggles to make a full recovery from this decade's downturn. Four major dailies-including the Dallas Morning News and Chicago Sun-Times-were caught significantly overstating circulation, which resulted in the unlikely outcome of making the arcane dealings of newspaper circulation a hot business-news story.

This happened just as media buyers began paying newly intensified attention to audience measurement in general-and as changes to Audit Bureau circulation reports began breaking out, in great detail, newspapers' use of discounted subscriptions. And, as newspaper publishers discovered, consumers are much more price-sensitive than they once were.


The circulation declines "will ultimately have an impact on advertising, because some of this is really bigger than the industry itself," said Lauren Fine, a Cleveland-based analyst with Merrill Lynch. "It's the big lifestyle changes going on among readers, the alternative ways they can get news. The challenge of each manager is figuring the angle of the slope of decline."

Circulation declines are "pretty much irreversible," agreed Seb Maitra, senior VP-group media director, Interpublic Group of Cos.' Hill Holliday Connors Cosmopolous, Boston.

One upside: Media buyers and analysts agree that a significant chunk of the average newspaper's bread and butter advertising-retail-won't be badly affected. They are less sanguine, though, about national advertising. In a relatively stagnant revenue environment, it has been the fastest-growing segment of newspaper advertising, and one upon which many big-city newspapers pinned hopes for growth. In 2003, for instance, national advertising rose 8.1% to $7.8 billion, while retail advertising rose 1.7% to $21.3 billion.


Newspaper executives lay blame for the circulation decline on a variety of factors. Federal do-not-call legislation significantly blunted telemarketing efforts, they say, and, in the wake of the circulation scandals, publishers have spoken publicly about taking a stricter approach to counting circulation.

"This was basically publishers' decision to change retention and recruitment" of subscribers, said John Sturm, president-CEO, the Newspaper Association of America. These were, he continued, "strategies caused by things like do-not-call, and by a more conservative-in their view-approach to [Audit Bureau] requirements."

"There is an elephant in the living room that no one is talking about," said David Cole, longtime publisher of industry trade publications NewsInc and The Cole Papers. "The reason there is this big decline is that now we are counting the way we should be counting."

But Mr. Cole, too, conceded competition posed a threat. "The bottom line is: Twenty years ago, starting a daily newspaper required intensive amounts of capital, so intensive that nobody would do it. Starting a daily newspaper now is signing a deal with [the Associated Press] and signing a deal with a printer. And you, too, can be in the newspaper business."

Dailies have been expanding into suites of new products-ranging from free dailies and niche products to well-established Web sites-and they cite the industry's misfortune that current audience metrics don't yet account for such offshoots.


"There is a missed angle to this story," said Jason Klein, CEO of the Newspaper National Network, which aggregates newspaper buys for national advertisers. "Yes, the Internet is taking away print readers. But a good portion are reading newspaper Web sites." He cited third-party research that he said showed Web sites increased newspapers' audience footprint by up to 35%.

"What's so disturbing about these reports," said Peter Gardiner, chief media officer at Interpublic's Deutsch, is that "you get the big bad version of, `Oh my gosh, newspaper circulation is down."' What doesn't come up, he added, is "the other side"-that is, readers' migration from the print product to newspaper Web sites.

Still, he conceded, "how that translates into ad success is another issue. ... What you are seeing is a loss of vitality in the medium. Clearly, the Internet is swallowing a lot of what makes newspapers great."

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According to Prudential Equity Group, discounted copies--sold at 50% to 75% off cover price--increased 16.6%

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