Down with the Count?

By: Mark Fitzgerald and Jennifer Saba To gauge how far the shockwaves from the circulation inflation scandals in New York, Chicago, and Dallas are penetrating into Main Street America's newspapers, just look at the reaction inside Morris Communications Co.

Now, there hasn't been a whiff of impropriety about the circulation numbers of the 40-plus papers published by Morris, where company meetings open with a prayer and executive luncheons with the saying of grace. When E&P talked with Morris Vice President of Circulation Douglas Sumrell, he was at The Topeka (Kan.) Capital-Journal, where the circulation director had just resigned. Not because of any scandal ? but to join the seminary.

But Morris is tightening what it says was already a rigorous auditing of circulation, which for years has included scheduled and surprise visits to papers from accountants dispatched from corporate headquarters in Augusta, Ga. But before the circulation cheating episodes, the "Morris Principals of Circulation Accountability" included a dozen rules. Now there are 27.

The new internal regulations range in detail from forbidding transportation allowances for single-copy route deliverers to requiring a newspaper's circulation manager to get written permission from the publisher, the controller, and Sumrell himself before any barter program can go ahead. "We are trying to tighten down and limit the ways people can take advantage of the rules," Sumrell says. "You assume people are honest, but you also, like they say ? trust but verify. I tell all my circulation managers: You think everybody in your office is honest, but if you lay a $20 bill on your desk, sooner or later that's going to be gone."

The scandals are hitting home as publishers implement new circulation safeguards or dust off old ones at businesses as varied as mid-sized chains like Morris, giant groups such as Knight Ridder and Gannett Co., and smaller family-owned individual papers.

But there's plenty of ambiguity in the industry's response as well. For one thing, a lot of publishers don't want to talk about it at all. Many refused to comment for this story or issued bland assurances through spokespeople. You can't blame us, one executive said: "You're damned if you do, and you're damned if you don't. If I say we aren't doing anything different because we're confident of our numbers, inevitably there will be some problem. And if I say we're being more aggressive [about auditing], the lift-out of the story" would be that his group "is rechecking its numbers because of problems."

The silent treatment may only hurt papers, even those with no current circulation flaps. "They should be more proactive. They have a responsibility to shareholders and advertisers," says Scott Stawski, vice president and client executive at Inforte, a management consulting firm in Chicago. "I think newspapers are waiting for the Audit Bureau of Circulations (ABC) reporting period. They're a little bit reluctant to go on the record prior to [that] being published."

For some advertisers and media buyers already worried about the long-term prospects of the business ? and for Wall Street analysts who say they were blindsided by the scandals ? the newspaper industry's response has been sluggish and half-hearted.

"The industry is not responding in [its] totality, and it's not reassuring advertisers," says John G. Miller, a managing partner at Mediaedge:cia, and director of the agency's out-of-home and newspaper communications. Miller, whose clients include Xerox, Accenture, and Met Life, says rate negotiations will be tougher this fall.

With their muted reaction to the scandals, newspapers may be committing a cardinal sin even graver than phonying circulation numbers: complicating a media buyer's life. "What really ticks me off," Miller says, "is the fact that I spent far too much time on this and it overwhelms our planning season. It makes clients and agencies question auditing in general. I had one client ask, if they can't trust newspapers, how do they know their outdoor numbers are right?"

Scott Harding is chairman and CEO of Newspaper Services of America, the nation's largest print media planning and buying firm, and served a term as ABC chairman. But as much a friend as he is to the newspaper industry, he's not inclined to downplay the significance of the circulation scandals. "I don't think it's been overblown," he says. "There's nothing more important than the creditability of what an advertiser buys."

Some good will come out of this, he says, though his list of positive outcomes looks to circulation managers as a recipe for a harder job: more intense third-party auditing, ABC rule tightening, and stricter accounting for distribution of preprinted inserts.

Other observers complain that newspapers don't seem to understand that the revelation of circulation scandals at famous outposts of three widely separated chains naturally leads people to expect yet another shoe to drop. When the Hoy and Newsday fraud first surfaced, "I had so many newspapers in the industry say that I'm crazy, that it isn't a scandal," says Lauren Rich Fine, the newspaper industry maven at Merrill Lynch. Even now, the general feeling among newspapers is this is something happening to the other guy. "I am surprised that the industry is not taking a more contrite view, that they're being more dismissive," she adds.



An 'A' for the Big 'D'

Ironically, the one newspaper company winning applause from advertisers and analysts is deep in the heart of the scandal. "I think Belo has been remarkable," Fine says. "I think their response both with Wall Street and advertisers has been so concise and appropriate [in their] methodology and approach ? they're really determined to set it right and see it as an investment in their future."

Belo Corp., publisher of The Dallas Morning News, said in mid-September that it had already sent out 19,000 checks to advertisers from its compensation fund of $26 million. Belo also appointed an internal task force, headed by the publisher, president and CEO of The Providence (R.I.) Journal, to recommend changes in circulation practices.

Indeed, the groups in the thick of the scandal are the ones struggling most publicly to undo the damage.

Tribune Co. is so far taking the biggest hit for the circulation fraud at Newsday in Melville, N.Y., and its national Spanish-language daily Hoy. The publishers of both papers, as well as several of their circulation executives, left Tribune in the aftermath. In its second quarter accounting, it recorded a pre-tax charge of $35 million ? and then came back in September to say it would take an additional charge of $45 million to $60 million in the third quarter.

Hollinger International Inc. broke a long silence in early September when it told its advertising salespeople they could begin offering advertisers compensation for fraud at the Chicago Sun-Times, where reported single-copy sales were inflated by some 23%.



New sheriff at Scripps

But probably the most attention-getting move came from a group untouched by a circulation scandal, The E.W. Scripps Co., when the Cincinnati-based chain appointed Jeffrey S. DeLoach to the newly created position of "director of circulation compliance" for its 21 daily newspapers.

A former ABC senior regional manager, DeLoach cut his teeth on the operations side of circulation at Denver's Rocky Mountain News when the Scripps paper was in the midst of a heated newspaper war with The Denver Post that included promotional offers of penny-a-day subscriptions and furious street-hawking campaigns. DeLoach is the chain's liaison with ABC and will continue to serve as circulation manager at The Commercial Appeal in Memphis, Tenn. Scripps says he has been the company's compliance director in all but name for the past several years.

"We felt it was important to elevate Jeff's relationship with the newspaper publishers, controllers, and circulation directors," says Tim Stautberg, Scripps' vice president of communications and investor relations. "He's played an advisory role for several years given his background." (Scripps declined to make DeLoach available for an interview for this story.)

While Scripps is so far the only group to appoint this kind of circulation czar, other chains are pushing the onus for honest reporting further up the organizational chart. Knight Ridder, for instance, just started requiring the top circulation executives at each of its papers to sign the quarterly certification of financials just as their CFOs and CEOs must, says spokesman Polk Lafoon.

Like Morris, Knight Ridder is also re-emphasizing its corporate "Principals of Circulation Accounting" that go into exhaustive detail on such rules as requiring return copies to be delivered to a locked room where they are counted by employees who don't work in the circulation department.

Gannett Co. runs three to four internal audits on its circulation numbers before they ever get to the ABC, spokeswoman Tara Connell says. Lauren Fine at Merrill Lynch has singled out Gannett for praise. "They are the biggest out there ... and Doug [McCorkindale] indicated that they have had people signing off on numbers for a long time. It wasn't so much that it couldn't happen to them, but there was a comfort level that it couldn't happen very long. They have a take-no-prisoners approach."

And Robert Jelenic says that as chairman, president and CEO of the Journal Register Co., he's looking harder than ever at the circulation reports that land on his desk every week: "I make sure I go through them pretty thoroughly."

McClatchy, which has reported 19 consecutive years of circulation growth, hasn't gone out of its way to reach out to advertisers (or shareholders) "unless they have inquired," says Chairman, President, and CEO Gary Pruitt. But he does admit the scandals, along with other financial controls that are required to be in place, have intensified the process of counting circ. "We put a lot of emphasis on circulation. We count it and we count it right," he says, adding that now publishers and circulation directors are required to sign off on monthly and quarterly reports. Fraudulent statements at other chains "are a concern, and I hope there are not any others ? but we have to wait and see."



Safe and steady

Some newspapers are taking comfort in their long-established conservative approach to building circ. For instance, the Daily Herald has a couple of circulation red flags that might otherwise attract suspicion: It faces crowded competition for its primary market in the affluent suburbs of Chicago, and it frequently is the fastest-growing Illinois paper during a given ABC reporting period. But at the same time, single-copy accounts for just 9% of its 150,794 circulation. The Daily Herald does not sell papers through distributors ? and it's not inclined to experiment on circ-building programs.

Jim Galetano, vice president of circulation, "has been here for 35 years, and in terms of programs and marketing products he's very diligent, before doing those programs, to seek out ABC in advance, and get them approved in advance," says Paddock Publications President and CEO Douglas K. Ray. "He's very conservative."

MediaNews Group has adopted the same approach over the years, says Steve Hesse, vice president of circulation for the Denver-based chain. "Any type of program that a newspaper is considering implementing ? if it's anything different than what they've done in the past ? has to be submitted to us, and approved in advance," he says. That kind of top-down conservatism clearly has bred caution among publishers. Hesse says he hasn't had to veto any program for a while now.



The fire next time?

Though the circulation scandals took many in the industry by surprise, the Journal Register Co.'s Robert Jelenic said he wasn't one of them: "I worked in competitive markets in Toronto and Houston, and that pressure can come up. Hopefully it was just an isolated thing, but it's going to happen when there is pressure ? sometimes it's self-induced. I'd rather it hadn't happened. Hopefully there aren't any more bombshells."

If there are, though, many fewer people will be shocked. The skepticism outside the industry seems to be growing even as newspapers say they're doing all they can. "I think the industry has responded rather well, considering the real concern here, and the potential for a longer-term problem here, are the advertisers," says Newspaper Association of America President and CEO John Sturm. "My view is that the papers that have had some problems have dealt with [advertisers] fairly swiftly."

But this spate of scandals is the worst Morris Communications' Douglas Sumrell has seen in his almost 30 years in newspaper circulation. "It casts everybody in a bad light," he says. "I always tell circulation managers, it just isn't worth it [to cheat]. The newspaper industry is a small business, and once you've done that, you're finished."