Another Troubling Warning on Circulation Woes

By: Jennifer Saba Deutsche Bank Securities issued a worrisome report on Friday expressing growing concern over newspaper circulation. And it predicted at least one more major circ scandal will hit the industry before October.

After analyzing 40 of the largest newspapers in the U.S., the firm found that declines in circulation are more troubling than previously reported. It called the "headline" figure of less than 1% annual declines shown by the newspaper industry's total circulation "is misleading and that these underlying trends need to be understood."

One underlying factor: Reported overall numbers are propped up, as low-quality circulation masks a rapid downward spiral in better than 50% paid circulation. Analyst Paul Ginocchio called the trend "hair-raising."

To illustrate the point, the 50% and over paid circ decline is about 4.5% for the six-month period ending March 2004; it was 3.4% in September 2003 and 2.4% in March 2003. He estimates that percentage will hit 6% with the next reporting period.

Furthermore, the report said that paid circulation at less than 50%, along with copies that go towards hotels, third-parties, education, and employee copies, now accounts for 10% of total circulation (for the period ending March 2004) compared with two years ago when it only accounted for 4%.

"Based on the trends we are currently seeing in discounting and circulation volumes, we think the decline in industry circulation revenue will get worse before it gets better," the report said.

More troubling, Ginocchio said, is that newspaper companies will have a harder time negotiating 2005 advertising rates. They will have to start on the wrong foot, he told a group of analysts on a conference call on Friday after speaking with agencies and advertisers.

For years one of the industry's prime selling points to advertisers is that readers are actively engaged in the papers. That is, they actually pay for it. Publishers charged higher CPMs in exchange for delivering a quality audience but with such a decline in 50% paid, it's expected that advertisers "will drive a harder bargain," he said.

"It's looking more like the TV industry than we hoped it would," he added.

The report concluded that there will likely be at least one more major circulation revelation (following what has emerged in Chicago, New York and Dallas) before October, adding, "the window of opportunity for CEOs to make circulation disclosures, without major shareholder revolt, will likely close in the next month."

For a full copy of the report, e-mail paul.ginocchio@db.com.