The New Math

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By: Mark Fitzgerald

For most big-city newspaper publishers, Oct. 30, 2006 may be remembered as Black Monday. For on that autumn morning, the Audit Bureau of Circulations (ABC) FAS-FAX showed the world that newspapers continue to hemorrhage circulation. At first glance, however, it seemed to have been a pretty good day for Lee Enterprises.

Lee, based in Davenport, Iowa, publishes mostly mid-sized papers that have been largely insulated from big circulation drops. The chain immediately sent out a press release noting that 37 of its 51 ABC-member papers gained daily or Sunday circ, and 18 had managed to grow both. And, in a happy coincidence, Lee’s only full-fledged metro paper, the St. Louis Post-Dispatch, managed to eke out a daily gain of 0.6% ? one of just three of the 25 biggest U.S. dailies to record a circulation increase.

Even Merrill Lynch analyst Lauren Rich Fine, in her trenchant analysis of the ABC results, called Lee “the best performer of the companies we track.”

The latest unflattering ABC portrait of newspaper circulation nationwide is the first that most thoroughly reflects the industry’s response to Wall Street demands for “quality”circulation. Stop larding your circulation numbers with third-party sales and continuous “sampling” and Newspaper In Education (NIE) copies, The Street told newspapers. Prudential Equity Research even created what it called a “quality circulation screener” ?not popular among circ directors ? that sets off red flags if, for instance, NIE circulation shoots up 20% or more in a year or amounts to 4% of total circ.

With this FAS-FAX, newspapers are almost entirely done scrubbing copies that some of the industry’s harsher critics dismiss as “junk circulation.” Some papers ? notably Gannett Co.’s USA Today, with its “Blue Chip” program aimed at business travelers, and its bulk sales to universities ? continue to run high third-party sales, arguing they reach audiences valued by advertisers. But Merrill Lynch’s Fine wrote that her team’s analysis suggests the industry’s efforts to wring out low-quality circ are paying off, as the other-paid category was down almost 10% daily and 17% on Sunday for the companies she tracks.

Behind the numbers

What’s left, though, isn’t necessarily delighting analysts. Drill a bit deeper into the numbers, as Fine and other industry experts did, and you see that Lee is not so different from other chains whose circulation problems made headlines. That’s because below the generally dismal top-line circulation numbers are numbers suggesting that things would be even worse if newspapers weren’t furiously discounting.

Consider Lee, regarded as the best of the bunch. Overall, its total circ actually fell, though by a far smaller amount than its peers. Total circulation for its 51 papers was down 0.2% daily and 0.5% on Sundays. But Merrill Lynch’s analysis finds that for selected Lee papers, the number of total copies sold at 50% or greater of the full price of the paper fell by 25,000, or 4.1%. The number of copies sold for between 25% and 50% of full price jumped 43.9%.

Lee was hardly alone in turning to discounting.

The brightest spot of the big-city circulation smackdown took place in New York City, where the warring Daily News and New York Post each reported gains. The Post gained just over 5% to 704,011 copies to take the weekday lead over the News, which increased 1% to 693,382.

But an E&P analysis of the numbers shows both tabs leaned heavily on discounting. Daily News copies sold at 50% or more of the full price declined 4.3% from last year’s period, while discounted copies sold between 25% and 50% jumped 30.7%. Other paid also soared, up 34%. That category, in fact, represented 13% of the Daily News’ total circ.

At the Post, it was essentially the same story. Higher-priced circulation actually did eke out a tiny increase of 0.3%, but discounted copies soared 127% ? and other paid zoomed 195%. And keep in mind the Post charges half as much as the Daily News to start with: 25 cents per copy.

Rhonda Novick, the Daily News’ senior vice president/circulation, says her paper sampled in all five city boroughs, and some high-growth parts of New Jersey. “The sampling program was sponsored by advertisers,” she says. “Day by day [it] varied, sometimes a one-day effort, sometimes five or six days.”

Among those efforts was the Grand Central edition program targeting commuters at the train and mass transit station. The Daily News created what it called “an enhanced version”of the paper that was sold in the afternoons for 25 cents, at half the price of the regular edition. Afternoon sales jumped 40% in the area, Novick says.

New York Post Editor Col Allan attributes his paper’s gain to simply producing a better paper every day. “What do you think, it’s magic? It’s hard work and care,” he adds.

Allan also dismisses Daily News arguments that the Post has grown by circulating far out of town, such as in Boston and Florida. “The vast majority of the 34,000 growth in this publisher’s statement is in New York City,” he says. “We just worked hard every day to produce a newspaper that isn’t boring. It’s what sets us apart from our competitors.”

Discounting: good, or bad?

Journal Register Co. didn’t grow circulation chain-wide, but its decline of 1.7% in daily circ clearly outperformed many other companies. But its overall gains cannot hide some individual examples of marginal circulation, the Merrill Lynch analysis finds. The New Haven (Conn.) Register, for instance, was down 5.1% Mondays through Friday ? despite other-paid circulation that comprises fully 19% of total circ.

Many papers were like The Arizona Republic: Its overall daily circulation dropped 2.5%. Below that top line, though, was the kind of phenomenon Wall Street loathes these days: Other paid was up 7.5%, while individually paid circ fell 4.1%, according to Merrill Lynch.

The veteran newspaper-turned-new-media executive Alan Mutter argues there’s nothing wrong with newspaper discounting per se ? and in fact, it’s almost an inevitability given the rise of the Internet and other competing information sources. Just as color televisions forced down the price of black-and-white, and the breakup of monopoly phone service led eventually to free Internet calling, newspapers are coming under price pressure.

“In addition to being a valid tactic to promote circulation, therefore, discounting also represents the opportunity to begin subtly reducing newspaper prices to a level that will sustain a sufficiently large audience of attractive readers for advertisers in an era of widely available free media,” Mutter writes on his blog, Reflections of a Newsosaur. “How low will publishers have to go? That’s hard to say, but free is not out of the question in some situations.”

But discounting alone was not able to stanch the bleeding at big papers. According to the Merrill Lynch analysis, papers with circulations between 100,000 and 500,000 took the worst hit, tumbling 3.6% on weekdays and 4.2% on Sunday. Papers larger than that fell 3.1% daily and 4.5% on Sundays. For the most part, those declines were not efforts to shed marginal circulation.

“Did we lose circulation on purpose? No, we didn’t,” says USA Today spokesman Steve Anderson. After a couple of decades of growing even when metros stumbled, The Nation’s Newspaper has seen its circ rise and fall in the last two to three years. This reporting period, it was down 1.3%.

Anderson attributes the loss to the industry trend in general, and to declines in single-copy in particular that offset gains in third-party and its large campus program.

Another chain that used to be an exception to the rule of decline, the McClatchy Co., now has become an illustration of the rule. Merrill Lynch found that its overall circ declined 4.0% weekdays and 4.5% on Sundays.

“Interestingly, the newly acquired [Knight Ridder Inc.] properties only performed slightly worse than McClatchy’s original newspapers (down 4.2% vs. down 3.8% daily, and down 4.7% vs. 4.3% Sunday),” analyst Fine writes. She notes, though, that the dozen Knight Ridder papers McClatchy immediately sold off, such as The Philadelphia Inquirer, “underperformed” under their new owners.

The wide-ranging slump also snapped The New York Times’ enviable record of six consecutive reporting period gains. While its downmarket rivals gained in the city, the nationally oriented Times reported declines of 3.5% weekdays and 3.5% on Sundays.

Its Times Co. sibling, The Boston Globe, posted results Merrill Lynch’s Fine called “frightening”: While shedding much of its other-paid circ, overall circulation plummeted 6.7% daily and 9.9% on Sundays.

Tribune Co., everybody’s current poster boy for the myriad woes of the newspaper industry, took a big circulation hit ? but for all the reasons Wall Street would normally cheer. Metro-heavy Tribune dailies declined 4.5% overall while its Sunday papers were off 4.4%, but the chain aggressively cut its marginal circulation. Other-paid circ fell 45% on weekdays, and 52% on Sundays.

Learning the hard way

The circulation rollback that’s under way goes so deep that it’s hard to reach any other conclusion except that it’s going to get worse. Even expensive and much-touted redesigns may no longer prove to be a panacea (see sidebar, p. 40). “I don’t see plus circulation numbers coming out of a FAS-FAX report any time in the very near future,” says John Murray, vice president of circulation and marketing for the Newspaper Association of America.

Writing for Forbes.com, media reporter Louis Hau suggested other papers take a cue from the Daily News and New York Post by offering exclusive information, using the tabloid format. But big tabs weren’t especially successful outside the city limits of New York. The Rocky Mountain News in Denver, The Boston Herald, and Newsday in Melville, N.Y., all took substantial hits to daily circulation. The Chicago Sun-Times is still unable to report because of past circulation fraud, but it’s certain sales are down.

The circulation drops also stemmed the once-explosive growth of Spanish-language dailies. Just three Spanish-language dailies remain paid products, and the two that filed in time for the FAS-FAX both reported losing circ.

The largest, La Opini?n in Los Angeles, slipped 2.5% weekdays to 121,572 weekdays, while El Nuevo Herald, published by The Miami Herald, dropped 2.8% to 83,178. Just before deadline for this issue, the third Spanish-language daily, El Diario La Prensa in New York City, says its daily circulation increased 5.8% to 53,090, and Sunday circ was up 8.4% to 36,712.

Black Monday also hammered on newspapers that shun so-called junk circulation.

The Bakersfield Californian, for instance, is a stickler for “quality”circulation. Long before state and federal laws restricted telemarketing, for instance, the family-owned paper had abandoned the marketing tool as part of its campaign against subscription churn. In the latest FAS-FAX, the Californian reports zero copies sold in the discounted category, and its other paid comprised 5.8% of daily circulation, on the low side of the average for its mid-sized peers.

The Californian’s overall numbers fell by 2.9% daily and 2.0% on Sundays. Richard Beene, the paper’s president and CEO, says frankly that one problem is that the paper’s circulation service still needs improvement. And an unusually wet and long rainy season basically knocked out kiosk marketing, the paper’s principal method of recruiting subscribers.

“You have to have a great-looking paper with great content with absolutely Nordstrom-like service, the paper at the doorstep, and porched ? and you still may not be able to grow circulation the way you want,” Beene says.

— Additional reporting by Jennifer Saba

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