Analysis of Circ Report: Ads May Be in Jeopardy and 'Other Paid' Still High

By: Jennifer Saba Newspaper analysts have been warning for weeks that circulation in the March 2005 Fas-Fax was likely to sink badly, so the first reports issued by research firms since the Audit Bureau of Circulations released numbers yesterday did not express shock.
Merrill Lynch and Prudential Equity Group, however, have concerns that the declines will affect advertising dollars.

And both Merrill and Prudential noted that discounted or "other paid" circulation, which newspapers reportedly have been rapidly shedding, declined much less than they had thought.

Prudential took the stronger stance on the potential fallout for advertising: ?The overall poor performance may impact the industry?s ability to attract national advertising. Additionally, we think the tougher external reporting standards and greater internal focus by the companies may cause the circulation figures to fall further in the next two reporting periods,? said the report.

But Merrill isn?t quite sure what advertisers will make of the circ drops: ?Certain advertisers buy on reach and readership rather than circulation so it is hard to gauge the impact on ad revenues. Readership figures, while down, seem more stable.?

Merrill also noted, however, that while overall industry declines were about 2% daily and 3% Sunday, slippage was much worse in so-called "quality" circulation that was 50% or better paid: down 5% daily and 7% on Sunday.

Digging into the numbers, specifically in the other paid category. Merrill noted that while many newspaper companies during Q1 earnings calls indicated they are trying to cut back on third party and discount copies, the numbers so far tell a different story: "Our initial analysis of select newspapers shows that in many cases 'other paid' circulation" numbers were "seemingly in direct conflict with some company remarks."

Prudential put a pencil to the matter and found that the top 50 papers continued to rely on discounted copies -- where newspapers sold at 25% to 50% of the cover prices -- finding that this category increased 16.6%. And other paid circulation rose 10% from the March 2004 Fas-Fax.

Though the categories are still on the rise, Prudential points out that in the previous Fax-Fax "other paid" circulation was up even more, at 34%. "We are seeing indications that some newspapers are beginning to wean themselves off reliance on this category," the report said.

Prudential remarked on a few newspapers that experienced roughly a 50% drop in the other paid category, notably, the Arizona Republic, Orlando Sentinel, and The Sun in Baltimore.

Merrill also declared: "The growth in the 25-50% category is a confirmation of a trend verbalized by many companies that they are extending discounts to retain subscribers obtained through sometimes heavy incentives."

Commenting on specific papers, the firm noted:

--USA Today remaining flat was "impressive" given its rate increase last October.

--The plunge at Baltimore's Sun was greater than expected, partly due to "a move to an internal billing system whereby nonpaying customers were being cut off, single copy price increases, the effects of DNC," and more.

--Knight-Ridder outdid the industry, with more modest losses daily and Sunday. McClatchey had a surprisingly large Sunday decline (-2.6%) given its flat daily performance. Scripps had a "below-average" period overall.