The Free Market

By: Jennifer Saba A funny thing has happened to newspaper readers: They're threatening to turn into the minority. Without making fresh, blatant appeals to younger generations, the business may not survive with its profit margins intact. It's the same reason Katie Couric painfully chats with pop group Maroon 5 on the Today Show, and the media obsessively charts the eating habits of the Olsen Twins and the bar-hopping antics of teen actress Lindsay Lohan.

Numerous studies show that despite the tireless efforts of the past few years, dailies are still not attracting younger readers. The Newspaper Association of America reports that in 2004, an average of 38.8% of those aged 25 to 34 read a daily newspaper, while the readership percentage for those 55 and over is 67.4%. Newspaper companies, not exactly known for their risk taking, have attempted to meet the challenge not so much by re-orienting their main product but by launching easy-to-read tabs that, in many cases, also appeal to people on the go who are looking for a cheap, quick read.

Now commuters are targeted by free papers such as the Metro franchise in Philadelphia, Boston, and New York; Tribune's amNewYork; and the Washington Post's express. Youth-oriented papers such as Belo's Quick and Tribune's RedEye chase 18- to 34-year-olds. Then there are free community newspapers like The Examiner, recently launched in Washington, D.C., and Today's Local News in San Diego.

These papers share the same goal: to attract people who shy away from paid dailies. "We were really interested in how we could become more relevant to a group of people who are used to getting information for free," says Jennifer Carroll, director of news development at Gannett, explaining why her company has launched nine free weeklies in the past several years.

Free papers are beginning to take hold. Prudential Securities analyst Steven Barlow wrote in his 2005 industry outlook report that "targeted demo publications (such as free commuter newspapers, specialty publications, and niche products) will continue to be the underlying growth story for the publishing industry."

When The New York Times Co. decides it wants to grab a 49% stake (or $16 million) in Boston Metro less than one year after its chairman, Arthur O. Sulzberger Jr., told an audience at Northwestern University's Medill School of Journalism that youth and commuter papers were condescending, something is cooking. As E&P went to press, Knight Ridder announced that it was buying the company that publishes the free daily tabloid, the Palo Alto (Calif.) Daily News, as well as four other free dailies in the area. "Customers want many kinds of publications, as evidenced by the great proliferation of free-distribution newspapers," said Tony Ridder, CEO of Knight Ridder, in a statement. "Increasingly Knight Ridder is in all of those businesses ? and will become more so in the future."

In any case, if the existing tabs are attracting a new breed of readers, they have to prove it ? and advertisers have to care. There's also the question of whether free papers cut into the so-called "core-paid" newspapers, hijacking their readers and advertisers along the way.

There is no doubt that the market has changed, and newspaper companies have to change with it. Barbara Cohen, president and founder of Kannon Consulting in Chicago, frames it this way: "The most innovative newspaper management recognizes they have to provide a portfolio of products to succeed in the marketplace."

For years, E&P has charted the slow growth of free dailies, but now we've decided to stop and examine how these upstarts are really doing on the business side. Each company and each market is different, of course. The U.S. unit of Metro International increased its operating profits by 35% to $22 million in 2004. Yet, just within Metro, each paper tells a different story. Metro Boston is profitable and the Philadelphia edition, the oldest paper in the American chain, just announced its first full profitable quarter. Metro New York reported an operating loss of $3.5 million.

Are most of the papers finding success, or are they just overhyped resource-drainers? Or as Morgan Stanley analyst Doug Arthur asks, "Do these things make money? It's not cheap to do this."

On average it takes about three years for these types of free products to become profitable ? and at best they can hope for an approximate 15% profit margin, which "relative to [paid] dailies, is bad," Arthur says. Though for the larger media companies, like those with core dailies, Arthur admits, "it's such a small effort, it's not enough to move the dial unless they are bleeding."

Or is profit secondary ? at least for the publishers of mainstream parents who want to maintain or build a newspaper habit?

In short, do these papers have legs, or will they fade faster than the latest teen starlet?



The measures of success

For the most part, it's too early to tell just how well the free-paper format is working. That said, there are metrics that shed some light on the direction.

After all, it's a model that's been around for some time now. According to newspaper brokerage firm Dirks, Van Essen & Murray, free weeklies started popping up in suburbs after World War II for returning military people who started migrating out of the cities. It was a cost-effective and profitable way to reach residents in the new communities. Then the alternative weeklies began emerging in the 1960s in big cities and college towns.

Yet readership measurements are still unclear ? a problem that confronts even the paid dailies as they struggle to convince advertisers that readership counts as much as circulation. And readership, not sales, is all these free papers have to go on.

Consider all the organizations that measure free papers. There are several firms that handle audits, all at varying times, including: the Audit Bureau of Circulations (ABC), Certified Audit of Circulations (CAC), Verified Audit of Circulations (VAC), BPA Worldwide, and the Circulation Verification Council (CVC).

RedEye in Chicago is measured by ABC, since part of its distribution is paid. The latest report in September 2004 shows 12,747 people paying for the paper, with a total distribution of 76,036 copies.

For the month of October, Metro New York reported an average distribution of 303,026 papers, via BPA. Figures for amNewYork for the three-month period ending September 2004 find the paper with total average distribution of 265,251, according to CAC. In Dallas, Quick's publisher's statement with CAC says total average distribution for the six-month period ending September 2004 is 132,326 (down from what it reported in June 2004, 144,070).

So people are seeing these papers, but are they actually reading them? Exactly who is reading (and for how long) is difficult to ascertain ? and that's the question that advertisers consider most important. Whether these publishers are trying to nab the commuter, the upscale suburbanite, or a twentysomething, they have to show they are reaching their targets.

Richard Karpel, executive director of the Association of Alternative Newsweeklies, has been observing the free dailies springing up of late, especially in the D.C. area. "I can tell you for sure there are tons of people reading these things," he says. "And to a certain extent, it proves if you hire people in bright yellow vests to hand them out, people will grab them." But Karpel notes that he's noticing a fairly diverse demographic among readers.

The alternative model, he claims, is different because the papers are written with a certain voice and style that attracts a very specific kind of reader ? mainly young and urban.

In content, most of these new free products are little more than a highly condensed version of a daily newspaper, with a little attitude. Many rely on truncated wire copy and/or articles written from the core daily product (if the paper is attached to a paid daily). Karpel says some of the free papers aimed at younger readers present a mix of original voice and "newspaper-ese," as he calls it.

But is that enough to stand out? John G. Miller, managing partner of local print and out-of-home media for Mediaedge:cia in New York, applauds the industry for trying to capture new and younger readers but isn't totally sold on the concept: "If this can help in any way, I'm a big fan of it." But, he adds, "I'm often disappointed of the quality and brevity of the story lines ? there is nothing here that you can't get better in other papers. It must be different to work."

Slowly making inroads

While it's still hard to discern the readership of these products, another way to determine stability is advertising. When Belo launched its free daily Quick in November 2003 it was a rush to market after American Consolidated Media announced it was launching A.M. Journal Express in Dallas. A.M. Journal folded roughly seven months later, partly blaming the Morning News for being so aggressive.

Laura Gordon, the fast-rising Dallas Morning News executive and publisher of Quick, says since its introduction the paper has been constantly tweaked, especially in its distribution. The target audience is 18- to 34-year-old readers who aren't regular Morning News subscribers. One of their goals is to have 60% of Quick readers fall in that demographic, which requires more than just throwing papers across Dallas ? and again shows that even though they are passed out, it has to get in the right hands for advertisers to pay attention.

So Quick has three distribution strategies. One is related to making sure the paper is available where people travel to and from work along Dallas' rapid transit line. The second goes after that target at lunch, dropping the papers in restaurants, cafes, and health clubs. The third makes sure the paper is handed out during events such as happy hours, where the target congregates. They have specifically avoided supermarkets and grocery stores, which could cut into the Morning News' single-copy sales.

For now, executives are happy with Quick's distribution of about 138,000 copies and have no plans to increase the print run until they decrease the return rate ? now at 10%? to the single digits. When they first brought out Quick, Gordon notes, the return rate was in the 30s.

Gordon points to Quick's relationship with Chipotle, a youth-oriented restaurant chain that sells burritos and tacos, as proof they are getting the paper into the right hands. The restaurant attracts young professionals for lunch and dinner, and Quick made sure to secure a spot for distribution. It's not unusual for hawkers to be sent out from 11 a.m. to 2 p.m. to surround the eateries and persuade diners to take copies.

In one Chipotle location in Dallas, located in the hip Uptown area just a stone's throw from the swanky Hotel Crescent Court, assistant manager Cassandra Pugh says that her restaurant only distributes Quick and the alternative weekly, the Dallas Observer. "We wanted to be very selective about what we allow in," she says, adding that so many people were picking up Quick that they were often running out of copies by early afternoon. The eatery soon upped the drop from 20 papers to 50, enough to last them through dinner.

It's not just lunchtime readers that have been noticing the paper. Advertisers, too, are starting to take heed. Though Belo's Vice President of Investor Relations Carey Hendrickson won't break out Quick's numbers ? nor did any of the companies contacted for this story ? he claims it's on the path to profitability, and that revenues in Q4 of 2004 were almost three times greater than in the Q1 of 2003, the first full quarter after its launch.

Gordon points to the fact that she roped in 157 new advertisers ? really new, meaning they didn't do business with the Morning News. Quick has attracted highly local advertisers, such as those who specialize in personal services like Madison Pain Clinic, which most likely couldn't afford to do business in the main paper.

Undoubtedly, Quick's relationship with the Morning News helps from an advertising perspective ? at least in getting advertisers to give Quick a whirl. Local Dallas furniture store Weir's, also located in a fashionably young part of town, tried advertising in the free tab. "I think we got some sort of special on it," says Brad Weir, vice president of Weir's Furniture, but he added the items they featured didn't fly out the door. Weir's clientele tends to run on the traditional/ conservative side. Weir wouldn't mind connecting with a younger crowd, yet Quick just didn't work for him.

Back at Chipotle, spokesman Chris Arnold says they have yet to buy an ad in Quick. "We're not in Quick right now, as our strategy is directed more to college students and we're supplementing that with some ads in the Observer," he says. "It's a pretty fluid process, and we're always looking at how best to spend our ad budgets."



Advertising remains key

Like Quick, both Chicago's RedEye and D.C.'s express can boast of new advertisers who don't buy in the core products of the Chicago Tribune and The Washington Post, respectively.

John O'Loughlin, general manager of RedEye, says the paper has brought in 450 new advertisers since its launch in October 2002 and attributes part of that success to the fact that roughly 20% of his 76,036 circulation is paid. The paper is free on college campuses ? college students are used to a deal, whether it's a free paper or a 10-cent beer, O'Loughlin notes ? while the rest of the papers cost a quarter in boxes and in distribution points like Starbucks. "What's most important is to deliver a qualified audience," he explains, adding that RedEye's ads tend to be from local retail shops, bars, and restaurants.

Christopher Ma, publisher of the Washington Post's express, says about 20% of his accounts are new business and that he too has a nice entertainment base of advertising: "We have a lot of continuing-education ads, graduate schools, certification programs ? people looking for more training. We also have a good amount of health advertising. We've got a big medical research community in the [D.C.] market that is looking for subjects in medical trials."

So advertisers are beginning to consider these publications ? but J. Patrick Best, co-founder and publisher of the recently launched free weekly The Sunday Paper in Atlanta, says that selling advertisers on the concept is still an exasperating aspect of the free-paper biz. "I've done new products before," says the 34-year-old Best, whose experience includes a stint with alt-weekly Creative Loafing and the start of his own alt-weekly when he was 23. "And you still hear things like, 'I want to wait and see' and 'I want to see what you are going to do.' That can be frustrating. In some cases you just want to shake them and say, 'come on!'"

Further evidence that making free papers successful is an uphill trudge: the national Free Daily Newspaper Network (FDNN), launched in March 2004, quietly folded in the fall. Founded by Journal Newspapers, FDNN was disbanded after Philip Anschutz's Clarity Media purchased Journal Newspapers, according to Susan Peiffer, the network's former vice president of sales and marketing.

Even so, Peiffer, who is now major accounts manager of Clarity Media's new Examiner in D.C., says that since she started selling ads for free papers, she is starting to see pickup and validation of the model. "We got Independence Air, and it took two weeks," she says of the Examiner. "They bought a pretty significant-sized schedule. It's not as tedious to convince [advertisers] as it used to be."

Peiffer should know, since she was on board when Metro first planted a stake in the American market with the launch of Metro Philadelphia in 2000. While there, one of the struggles of getting larger national accounts was combating rates with a core daily in the market. On average, ads in free papers are priced one-half to one-third the cost of those in paid dailies.

In Philadelphia, retailers like Lord & Taylor and Macy's, for example, were locked into combo rates at The Philadelphia Inquirer (where Peiffer has also worked). She still tries to persuade advertisers to take a portion of their print budget and allocate it to the Examiner. "It's very difficult for them to take money away from the larger daily," she says, explaining that once they do, negotiated rates shoot up.

For the most part, the local ads trumping bars and continuing education, as well as medical-research solicitations, spook larger advertisers. "We are looking for environment," says Mediaedge:cia's Miller. "Not just editorial. I don't want to be with the Dr. Zizmor advertising," he says, citing the subway ads for the New York dermatologist as an example. "The environment is critical, especially for a national agency whose clients are very cautious and rightfully so.

"We discuss [free papers] in presentations and make it available without recommending it. I really hope they succeed, but the most damning thing is the quality of advertising now. You bring that to a high-end car dealer or an [investment firm] and they don't want to be a part of it."

Russel Pergament, amNewYork's Publisher and CEO, says that his paper is bringing in high-end accounts like Bloomingdales, Henri Bendel, The Home Depot, and grocery chains like The Food Emporium. He's concerned that down the line, his salespeople could take those advertisers for granted. "One of the dangers," he says, "is that a rep's or salesperson's skills could atrophy because it gets too easy, and that could prevent us from developing new categories."

When it's pointed out that the entire newspaper industry is experiencing sluggish ad sales (particularly The New York Times) and it's hard to imagine that amNewYork is experiencing something different, Pergament responds: "Around here, macroeconomic themes are irrelevant to us. If we knock on more doors and make more phone calls, we get their business."

Not a runaway model

There's a catch, of course, to giving away the papers: the overall newspaper industry is built on paid circulation.

"I think the larger national advertisers are believers in how we [do business]," says Bob Shamberg, CEO of the paid- oriented Newspaper Services of America. "You start with paid home delivery as the best value and the most value, and then you work your way down. Free is what it is; it's hard to make the connection of the value when it's free. There are other tools that allow the advertiser to reach their target more dependently that way." However, Shamberg adds that he doesn't dismiss free papers outright.

Morgan Stanley's Doug Arthur points out that the free-paper movement intersects with the fast rise of "other-paid" circulation that includes third-party sponsored papers at regular dailies: "National advertisers don't trust the numbers and don't want to pay for something when you can't guarantee who is reading it. The explosion of free handouts is at odds with advertisers who want to know who the readers are.

"The circulation revenue numbers out at some of the public companies are pretty weak, largely due to the circ scandals," he adds. "We are seeing some odious numbers in the second half of 2004, and it's troubling. It's unmasked that the fastest form of growing circulation is third-party bulk sales. I don't have a problem with it, but it's important that newspaper companies know what they are selling. That's where all the [circulation] growth has been, and it's a facsimile of a free giveaway."

Arthur refers to last year's circ scandals to underscore his point: "At the end of the day, if your circulation doesn't have integrity you may well close your doors."



Home delivery the answer?

Some companies think the best way to hand out free papers that builds "quality" is by home delivery. The thinking is at least advertisers know who is getting what, even if the household never opens the paper. Washington's Examiner, which launched in February, is taking this approach, as is Today's Local Paper, a broadsheet published in San Diego by The Copley Press.

The Examiner's Susan Peiffer argues that although free papers are audited, there's still a question of who reads them. "Is it being used by a homeless person?" she wonders. "At least with [the Examiner] we know who is getting it. We can deliver a package with inserts. Most major advertisers do nothing but inserts."

The ability to package free-standing inserts might give the Examiner a head start ? that is, if people actually pick up the paper and read it, as opposed to trashing it. John Kimball, the Newspaper Association of America's senior vice president and chief marketing officer, maintains it's the fastest growing category and it's important for advertisers, especially for those targeting younger crowds.

But home delivery is a very costly procedure, especially if people start to cancel. James McDonald, who was with Journal Newspapers before becoming publisher of the Examiner, says that the opt-out rate was 2% then, but it's too soon to tell what it is now.

Nobody rides for free

The Guardian in London reported on Feb. 3 that Rupert Murdoch was worried that Metro was chipping away at sales of his Sun tab in that city. "The free-newspapers market everywhere around the world is breaking out," the Guardian quoted him. "We are watching it keenly and apprehensively. As far as I can see, the record of these free newspapers has been after a while to break into modest profits but to more seriously damage existing newspapers."

It's still unclear how much damage, if any, these products have had on daily circulation of paid dailies, especially looking at free products coming out of Belo, Tribune, and the Washington Post Co. With a history of slowly declining circulation at paid dailies, it's difficult to know precisely how much these papers ? or other free products like the Internet ? have impacted sales.

Take the Washington Post as one example: The latest FAS-FAX figures show that overall, daily circ for the Post declined by about 3%. But if the numbers are broken out, it also shows a decline on Saturday of 2.5% ? a day Express does not publish.

But Express publisher Ma acknowledges that his product is hitting single-copy sales of the Post in some fashion: "You know there's probably been some impact on the margins." Plus, the decline in Saturday papers could indicate that people are happy reading the Express for free on weekdays.

The companies with core dailies that are starting these free products also have to step gingerly around the advertising issue. Metro New York Publisher Henry E. Scott says that one of his company's advantages is that they don't have to worry about the core product in the market. "We can go into the market and call on any account," he says.

It also raises the question: If these products are targeting a youth demographic as many of them are, why even bother with ink and paper? Research shows that young audiences increasingly get their news for free online, or perhaps via The Daily Show.

John Cruickshank, publisher of the Chicago Sun-Times who started the youth oriented tab Red Streak, never saw the point of the model. The only reason he joined the movement, and is keeping Red Streak going, is to be a stick-in-the-RedEye.

He believes the whole easy reading approach seems counterintuitive, or even "reverse technology: You take a Web site and put it in print. The young people are already on the Web. This would seem to be something you'd do for an older audience. I just don't get it."

Maybe Matt Sullivan, the 29-year-old general manager and editor of Spark, a free weekly in Wilmington, Del., started by Gannett, explains it best: "We came into this with the idea of more of a MTV philosophy of reinvention. This is what works right now. Three years from now we might have to change everything, and I accept that. We're still ink on paper. This isn't radical. The next stage for newspapers will be electronic, and it's coming."

CORRECTION, March 9: In listing organizations that audit the circulation of free newspapers, the original version of this story omitted mentioning the Circulation Verification Council.