Onward ABC Soldiers

By: Jennifer Saba Since last summer, three large and three smaller dailies have been cited by the Audit Bureau of Circulations (ABC) for misstating circulation by a combined total of hundreds of thousands of copies in recent years. Circulation scandals have occurred in the past, but 2004 was different ? mostly because they just kept on coming. Industry watchers wondered if this was the circ equivalent of the four horsemen of the apocalypse, or just a handful of bad actors linked by wretched timing.

So far, to the surprise of some, no other papers have been hit with major circulation transgressions. Good news? Definitely. But here's the downside: Efforts to prevent future scandals at a few papers will seriously impact the circulation numbers of very many others, in the short term (and possibly forever).

Michael J. Lavery, president of ABC, has likened the reported fraud to "ice cubes"? as opposed to the oft-used tip-of-the-iceberg metaphor ? in assuaging fears that the problems were widespread. In a January speech he said, "While no one can predict the future, but with the benefit of seven months of hindsight, it would appear that these were the acts of a few wayward publications. Certainly that's the view of ABC's board."

At the same time, the organization is sending a stern message to the newspaper industry that the scandals did indeed create disorder. Lavery also said in his January address, "Circulation accountability has become as important as financial accounting to all publishers. It certainly is to public companies, whether the price for circulation transgressions has produced a significant hit to everything from P&L reserves to stock prices. And the image and advertiser perception costs suffered by the entire print industry have been very high."

So the 90-year-organization that audits nearly 1,400 newspapers turned the screws on its rules, most recently at its March board meeting. Now, for example, separate circ reports are required for every day of the week and the "omitted days" provision has been tightened. It has toughened punishments, including stiff fines for papers that were caught fudging numbers. Furthermore, any legal fees that ABC might incur from a fraudulent action now get passed on to the newspaper responsible.

ABC has taken the message public through advertising and speeches. In November, in a full-page ad in The New York Times, the bureau stated, "ABC's standards are needed now more than ever." The message, signed by eight members of the advertising agency board directors including chairman Robert Troutbeck, assured media buyers and publishers that ABC was doing everything in its power to guarantee the integrity and accuracy of its audits.

There's a consensus view that ABC is indeed "taking exacting steps to get these scandals under control," says Stephen C. Johnson, circulation director for the community newspapers division of Freedom Communications Inc. and publisher of The Lima (Ohio) News. That said, the impact of the circulation scandals is just beginning, as will become clear in the FAS-FAX reports coming this spring and autumn.

One reason for that: New or revised ABC guidelines will make circulation more transparent in future reporting periods. It will be harder to obscure circulation of lower "quality," leading to probable cutbacks in those categories. Also, the new daily reports will surely tempt advertisers to avoid or at least think twice about buying certain days of the week from now on.

All of this considered, it's hard to imagine that overall circulation numbers will not decline, perhaps steeply in some cases, at quite a few newspapers by the end of this year.



When being critical is positive

In the past, ABC "verified" the numbers provided by publishers, as John Payne, senior vice president of strategic planning and corporate communications at ABC, puts it. Audits are now more aggressive. Payne says ABC's job is not unlike that of airport security: not everyone is strip-searched, but when something gets past the system, new measures are put in place.

After some of the fraud cases had been reported, ABC moved in July to adopt a standard from the American Institute of Public Accountants called "Assumption of Fraud in Audits." It includes the "assumption of fraud in the assessment of audit risk in all audits regardless of previous audit history or audit findings. This means ABC will conduct discovery-level confirmation of subscribers and newsstand sales in addition to existing audit procedures," ABC told E&P in an e-mail. "It does not mean that fraud can't or won't happen again, but ABC is certainly doing the best possible job at preventing it by doing our job: auditing our member publications with a very alert eye."

As for why the audits were not and are not forensic in nature (or why they weren't aggressively looking for fraud in the first place), former ABC chairman of the board and current CEO of Advo, Scott Harding, explains, "The system is designed within a fiscally responsible non-forensic technique to minimize the risk. The fact that there have only been a few incidents indicates to me that it's working. Forensic audits are unrealistic unless you have auditors housed at the publications 365 days a year," he says. In other words, it would cost way too much money and take way more time to constantly go about dusting for prints.

To adopt some of the new techniques the ABC has put in place, however, the organization says it's looking to hire about 20 new auditors for roughly $33,000 a year. Thirty percent of ABC's current auditors have been with the organization for less than a year; their average age at the moment is 32.

"From what we can see, they beefed up their ranks and added people," Bob Shamberg, chief executive of Newspaper Services of America, observes. "It's our understanding the audit rigors have gotten more intense and more focused. They are far more conscious of fraud."

And publishers will feel the price increase in small ways. Forensic or not, the net result is that audits will take longer and cost more. Members pay estimated audit deposits and subsequent yearly dues that vary on the size of the newspaper: Daily papers with a circulation over 50,000 pay ABC $8,800 per year after an initial audit deposit of $7,800; those with a circ between 25,001 and 50,000 pay $6,400 a year with an initial audit deposit of $5,700; and those with a circulation of 15,001 to 25,000 pay $2,700 per year with an initial audit deposit of $4,400. "Our audit fees have stayed relatively level, with only minor increases to keep pace with the rate of inflation, about 2% per year," ABC says.

But there are more implications. Even ice cubes raise the water level ? and if the scandals did anything, it drew floodlights on circulation. ABC is the one entity responsible for leading everyone, publishers and advertisers alike, to dry ground. Now that the scandals have been addressed, the organization is moving to concentrate on the aftereffects ? which could prove to be considerably more troubling ? while trying to balance the needs of its three constituents: publishers, agencies, and advertisers.



'Other paid' becomes an issue

Since last summer, there has been a renewed focus on "other-paid" circulation, which includes hotel/guest copies, Newspapers in Education, employee copies, and third-party sales. "People are less concerned about fraud but are very focused on overall circulation, more so than I have ever seen in more than 15 years of covering this group," says Lauren Rich Fine, a newspaper analyst with Merrill Lynch. She notes "our confusion over what the breakouts are and how relevant they are for advertisers, and we don't know the answer to that," adding that she wants to understand the other-paid category better "because it strikes me as an area that's grown so rampantly, you sort of wonder how real it really is."

Two other influential financial analysts, Paul Ginocchio at Deutche Bank and most recently Steven Barlow at Prudential Equity Research, have issued detailed reports which zero in on the other-paid category, asserting that circulation is declining much faster than the industry claims. The concern at hand is that other- paid circulation is considered lesser "quality" than full-paid circulation because the reader is less likely engaged in the product.

"[The scandals] tended to cement the notion that circulation is in a slow and irreversible decline," observes Rick Edmonds, a writer and researcher on business issues at the Poynter Institute. "As of a couple of years ago, people were saying it's slowed, it could be reversed. We stopped hearing that. There is this effect from the scandals, and that's third- party.

"Third-party circulation is at least as big, if not more so, with advertisers," he adds. "My best guess is it's more of a factor in sort of negotiating rates and the pricing power of newspapers."

The latest report from Prudential Equity Research on this very subject noted that the scandals opened the door for the firm to compare the pre-circulation scandal data of September 2003 with September 2004's filings: "As circulation is not only a revenue source but also a key metric in setting advertising rates, it is critical to examine the trends at this point."

The report said that total average daily circulation across 50 of the top papers in the country was down 0.7% for the period between September '03 and September '04; if the three censured papers were included, that average would be lower. Though the overall drop seems slight, the firm looked at other aspects of circulation, mainly full-paid home delivery and full-paid single-copy sales, and found the declines to be more dramatic, at 2.5% and 6.8% respectively. What's more, other-paid circulation grew 34%.

Right or wrong, this is setting off alarms, and fears that advertisers may feel they are paying top dollar for lower quality. As the NSA's Shamberg says, "We are fans of newspapers trying to grow their circulation. We are not fans of our advertisers paying for that."

In his keynote address at the November board meeting, ABC's Troutbeck suggested that some of the scrutiny has run amok: "When trust in the information breaks down ? when buyers start to lose confidence in the data ? and when the issue gets fueled by irresponsible journalists who care more for the angle than getting it right, start writing things like 'to prop up a wheezing industry, ABC moved a couple years ago to define paid circulation down' ? or how about this one: 'Newspapers lie about their circulation numbers because industry auditing standards make it easy to do so' ? that's when you as publishers ? and we as ABC have a problem."



Behind the ABC's curtain

Considering the make-up of ABC, it's surprising the disparate parties haven't nearly come to blows more often. The ABC is comprised of 36 board members. At any given time, 10 or 11 members are advertising directors, eight or nine are advertising agency directors, and about eight represent newspapers (the other members come from magazines, business publications, and farm publications).

Accordingly, no one part is greater than the sum. "There's an eternal debate that media companies want their profitability to go up and we want our costs to go down," says ABC board member Linda Thomas Brooks, executive vice president and managing director of General Motors Mediaworks/General Motors Cyberworks.

She explains that everyone on the board takes his or her position very seriously: "There's a lot of homework and prepping we have to do on these subjects. We're not just coming in there and having a top-line discussion. We have to dive deep into the issues that are there and elevate the conversation to a different level. We can disagree without being disagreeable."

Everyone at newspapers interviewed for this story acknowledged that ABC is always available to answer questions or listen to concerns. "ABC will happily pre-approve your program," says Freedom's Johnson. Jeff Barber, circulation director at The Post-Standard in Syracuse, N.Y., agrees: "We share everything with them. If I do a program, it has to be 100% ABC compliant. They can be sticklish over wording, but they are very accessible."

Though the board works together it doesn't mean that some constituents don't feel confined, or that shifts in power do not occur.

For example, some years ago, newspaper executives felt that the ABC rules were too restrictive, hamstringing creative marketing ideas, says one industry executive familiar with ABC. A task force was put together and eventually the rules for such things as other-paid were relaxed, allowing for some flexibility. "Never was there anticipation during that process that some of the changes would and could be abused and still be within the rules," he says. "I think a number of newspapers and circulation managers saw third-party sponsored copies as a quick fix and it got out of hand."

Over the past several board meetings ? the not-for-profit organization hosts three a year ? members started to put the brakes on. During the July meeting, the censure orders got a lot of attention. Notable? Yes, but another action put in place, the "days omitted" rule, has implications as well. Effective as of last October, ABC limited the amount of days that a newspaper can exclude when averaging circulation. Under the old guidelines, newspapers could strike low circulation days due to inclement weather or holidays, for example. Some took dozens. Now papers can only take 10.

The result is that circulation at some newspapers will almost inevitably sink. The Prudential report noted that The New York Times, in its latest audit report over a 12-month period, struck 20 days, compared with the average two days for the top 50 newspapers measured. (The New York Post omitted 29 days and the New York Daily News omitted 30, the report noted.)

And during the most recent board meeting held in March, the board unanimously voted to revise the day-of-week reporting, essentially changing the entire look and feel of FAS-FAX and audit reports. Newspapers with circulation over 25,000 are now required to report circulation averages on a daily basis, as opposed to daily averages (such as Monday through Friday, or Monday through Saturday).

The shift is more than cosmetic. Prudential warns: "Newspaper publishers may see more significant circulation declines of the next few reporting periods, than previously expected, due to tighter controls, and greater disclosure requirements."

One circulation executive concedes that this is a way to clamp down on other-paid circulation, giving advertisers the upper hand and choking a legitimate way to market newspapers. "The issue that is unfortunate is that third-party bulk programs are now being tarnished as useless or not effective," says Freedom's Johnson. "It's a shame. We've got the philosophy [that] if there is a program that serves the advertiser or the reader we would do it, even if it doesn't count."

Members of ABC say the rule change was not implemented to punish newspapers. General Motors Mediaworks' Brooks says that while she was not at the meeting where the day of week rule changed. "the impetus was not to make reporting onerous. If you are planning business for your client that's time sensitive, this helps. If you are a movie studio or a retailer running a 13-hour sale, there's a difference in delivery between one day or another ? it's huge."

Scott Stawski, a vice president with newspaper consulting firm Inforte, says he's beginning to see a backlash against circulation and third-party programs. He reports "significant pressure" on the ABC to restrict lower-quality circulation. "In my opinion, newspapers need to concentrate on paid circulation," he advises. "Many newspapers, though I would hesitate to say the majority, are concentrating on [other paid] to maintain circulation growth."



Third-party circ: Good or bad?

Other-paid circulation has become a particular problem with insert advertisers, one of the fastest growing ad-revenue sources. This is because insert advertisers need to know precise circulation counts so they can provide an adequate number of copies, the NSA's Shamberg explains. Some papers allow advertisers to "opt-out" of delivery to the other-paid category. Insert advertisers have to pay for eyeballs they may not want at papers that don't allow opt-out.

While Merrill Lynch's Fine thinks there could be some upside to the day-of-week reporting in that the transparency will help advertisers make buying decisions, the jury is out. "It takes time in knowing what the advertiser's reaction is going to be," she says. "In that sense, we aren't seeing a lot of pressure on rates yet. But there is an expectation. National advertisers do buy on circulation and they do have other choices in the market. They could be really sensitive to this whole topic."

William Dean Singleton, CEO and vice chairman of MediaNews Group, says at first he fought rules to allow third-party circulation but now he's come to embrace them. "I actually opposed third-party circulation way back when it was being introduced," he says. "I thought it gave major newspapers an advantage because they would have the ability to find sponsors that other suburban papers couldn't find. But we use it and it's successful. What we found is that circulation delivered to a home, even if it's paid by a sponsor, ads to readership."

Singleton also mentions that "other" circulation has always been counted, and it's clearly noted on reports.

The Post-Standard's Barber says the new ruling won't change things much for him. "It's not a huge issue for us, especially if it helps our advertisers with information," he says.

ABC passed another change at the March meeting that requires newspapers to break out third-party sales as a separate line item. Disclosure of the programs is also necessary in the form of a explanatory paragraph. Advertisers should be able to judge if they want it or not. But Inforte's Stawski says that a good chunk of newspaper advertising comes from local advertisers; media agencies and national advertisers can interpret an ABC report, but local advertisers such as car dealerships don't, he says, adding that more local advertisers should have a seat at the ABC table. "Frankly, I don't have a good solution for that," he admits. "But the question should be raised, how do we get the voice of the local advertiser on the board and committees?"

In the end, advertisers are looking at more than just circulation. Brooks of General Motors Mediaworks points out that circulation is only one set of data her company uses to judge the value of a particular buy. And although the circulation scandals were serious, and she thinks anyone can present circulation in 20 different ways, it's about time for the industry to start moving forward.

"There's a lot of other issues out there," she says. "I wish newspapers would have responded faster, but they were late and slow. The people that still have to deal with it are small. The industry will be much better served if they start asking, "How do we market our paper?"