Tossing Out a Few Numbers

By: JenNifer Saba As summer neared, the circulation side of the newspaper industry went through its own version of the Jayson Blair or Jack Kelley newsroom debacles. On June 15, Hollinger International announced that the Chicago Sun-Times had been inflating its circulation figures for several years. Only days later, the Chicago-based Tribune Co. acknowledged that two of its papers, Newsday (Melville, N.Y.) and the Spanish-language Hoy had been exaggerating their circ numbers as well.

It seemed unthinkable: Three papers in two huge markets admitting to falsifying circulation in one week.

The revelation "caused everyone to take a collective gasp," observes Chris Christian, vice president of circulation for The Kansas City Star. National media outlets and influential newspaper industry analysts, including Merrill Lynch's Lauren Rich Fine, suggested these three jagged examples might be just the tip of the iceberg, or could chill advertising and stock prices in short order. Some took hard shots at the alleged lack of strict policing by an overburdened Audit Bureau of Circulations (ABC).

Five weeks later ? as E&P goes to press ? not a single other circ catastrophe has struck, and advertisers seem to be hanging in there. Respected industry analyst John Morton thinks it's unlikely the scandal will have any significant impact on the industry's overall credibility. ABC, while defending its practices, announced several new initiatives following its summer board

meeting in early July, in addition to laying down severe sanctions against the three offenders. Reuters reported Douglas H. McCorkindale, chairman and CEO of Gannett, saying that the media is "blowing it out of proportion ... there is no circulation scandal."

The crisis seemed to have passed. Then, on July 19, in two major articles, Newsday cast serious doubt on ABC's reliability and exposed some of its own shocking circulation scams. Hours later, Raymond Jansen, 65, publisher of Newsday, and Louis Sito, 60, publisher of Hoy and a vice president at Tribune Publishing, had been forced out or resigned.

So has this massive iceberg melted, or is the newspaper industry heading for a disaster of titanic proportions?



Adjusting for inflation

Full details on how the Sun-Times and Newsday faked the numbers have yet to emerge. Rumors suggest that the Sun-Times inflated circ by as much as 25%, though John Cruickshank, publisher of the Sun-Times, denies that figure.

What is known is that Cruickshank blew the whistle on the whole operation when he started looking into circulation in order to raise newsstand prices. Mark Hornung and Stephen Hastings ? the two responsible for reporting circulation from 1996 through the present ? left the company after the scandal broke.

Newsday first reported daily circ inflated by 7% and Sunday circ by 9% in last year's FAS-FAX reports. Hoy pushed it further, with 16% and 12% respectively in the same period. Those increases also occurred in the six-month period ending March 2004. Now it appears Newsday's problems go much further back.

During its Q2 earnings call in mid-July, Tribune executives shocked analysts by taking a $35 million pre-tax charge, a reserve set aside to settle any advertising disputes. The levels in the coffer could change as Tribune continues with its internal investigation slated to be completed by the end of July.

Yet one still wonders if this is only the beginning, and more papers will come forward with other sordid circ stories. Executives at companies beyond Hollinger and Tribune, at least publicly, seemed unconcerned. Some seemed to feel, or at least hoped, the problems are confined to tabloids and super-competitive markets. Even so, the June jolt will likely have long-reaching effects. "There will be a period of more scrutiny until we can repair any damage," says John Murray, vice president of circulation for the Newspaper Association of America. "It has caught the attention of our customers and advertisers."

As a result, all newspapers, fairly or unfairly, have been branded. "I think everybody feels it, and it brings a spotlight on the industry that I'm not certain is a good thing," says 30-year industry veteran Scott Frantzen, senior vice president of circulation and operations for the San Antonio Express-News.

Miles Groves, president of MG Strategic Research, gauges the fallout this way: "Many people will be putting their careers on the line for their numbers." He adds that circulation costs will probably rise, and "that's a distraction."

Merrill Lynch's Fine, while softening her tip-of-iceberg concern, nevertheless issued a scathing note taking the industry to task: "One of the basic tenets of newspaper investing has been broken," she wrote. "Newspaper companies are not supposed to be the subject of scandal; they are supposed to report on it ... This revelation that a company as pristine as Tribune has overstated circulation could dampen enthusiasm for newspaper advertising sales for some time."

And Morton says the initial alarms were fully warranted. "It captured so many headlines because it's very rare," he says. "In effect, inflating circulation is a form of theft. Audited paid circulation has been the financial backbone of the newspaper business."



Bad news, bad timing

None of this comes at a good time for the industry. The ad recovery is not exactly in full swing, as was expected by now. "Circulation is very important for establishing rates," says Jeff Piper, vice president and general manager of Carat Press, a media-buying agency in Chicago. "A lot of people look at it for trending, and how a paper is doing in the market. If there are inaccuracies in newsstand sales, that's [going to have] a huge impact."

However, there hasn't been a rush by advertisers. Most of the papers that E&P spoke to said that they were unaware of any fresh advertiser demands for refunds or make-goods. Even at the Sun-Times, Cruickshank says that many advertisers have been understanding. Tribune Publishing President Jack Fuller agreed when pressed by a room of investors and analysts during June's Mid-Year Media Review: "We have been proactive in getting out and [speaking] to our advertisers, and the response has been good."

Bill Offill, vice president of circulation, packaging, and distribution for the Houston Chronicle, says "there's a concern, but I don't think it's to the point that anyone is calling or asking a lot of questions yet."

Piper, the media buyer, confirms that consequences have been minimal. "The ones pushing for make-goods are not regular advertisers," he notes. Nor does Piper believe that many more dominoes will fall: "If I have to predict, I think it's a situation limited to those papers with a bigger percentage of newsstand copies [that are] ripe for potential errors."



Fuzzy math

Advertisers have had to deal with funny numbers before. Last year, the magazine industry was rocked when executives at Gruner + Jahr, the publishing company behind Rosie magazine, were caught jacking up circ in 2002.

Robin Steinberg, vice president and director of MediaVest Print Service in New York, points to the Rosie flap when discussing the Sun-Times/Newsday fiascos, saying that incident raised a "red flag" with advertisers that has not yet come down. "That's where it originated," she says. "Now that it has [hit] newspapers, it only makes our job even harder."

It's more work for advertisers and for circulation executives, too. The NAA's Murray says newspapers want to make sure that everything is on the up-and-up. "I've gotten calls from publishers and corporate executives asking for guidance on how to self-examine," he says, noting the volume of questions picked up considerably after the scandals broke. Merrill Lynch's Fine says she suspects that papers will have to incorporate circulation into financial audits subject to Sarbanes-Oxley standards, which require public companies to have internal controls.

Tribune announced at the Mid-Year Media Review that the company plans to institute tighter quarterly internal reviews that will require the vice presidents of circulation at all its 14 papers to sign off on numbers. If foul play is suspected, the company can withhold bonuses or prosecute suspected wrongdoers.

Tribune had a similar process before, though not as wide-sweeping as the new internal audits."What had been in place for a long time was an internal quarterly financial system that required the CEO and CFO at business units to sign off on financial information," says Gary Weitman, vice president of communications at Tribune.

The Kansas City Star's Christian expects to go through a much more detailed and rigorous process for his paper. "There's little question in my mind that two of the top 15 markets having this type of story in a short period of time will increase the audit scrutiny, on the part of ABC and on the part of newspapers," he says. "I just don't want advertisers wondering in the back of their mind if this thing is prevalent."



ABC drops the hammer

If there's any one organization other than newspapers that wants to see these scandals fizzle out quickly, it's the ABC. The largest organization of its kind, ABC conducts yearly audits of each paper (smaller papers with a circ under 25,000 have the option of undergoing audits every other year).

The auditing process consists of running numbers from the Publisher's Statement against past years. If any discrepancies are found, ABC goes deeper, probing hawkers, carriers, newsstands, and even subscribers.

ABC insists that it knew something was fishy with Newsday and Hoy's circulation figures when it was conducting its routine yearly audit of the papers. When Tribune got slapped with the Newsday lawsuit, ABC stepped up the process.

That may be the case, but ABC appears slow on the uptake. As Tribune continues its internal investigation, new revelations have surfaced that the circ flap was taking place well before ABC's winter audit. During the company's Q2 earnings call, executives announced that circ had been misstated at least since 2001. The Newsday article that appeared on July 19 quoted former Newsday distributors and circulation people claiming that the numbers racket had flourished since the late 1990s.

As for the Sun-Times, ABC was completely caught off guard. "We're really disturbed about the Sun-Times," Payne says. As soon as Hollinger made the revelation, ABC immediately began looking at Publisher's Statements and other reports for most of 2002 through 2004.

ABC has caught papers guilty of overstating figures before, including the New York Post 12 years ago and The Oakland Tribune in the late '90s, says Payne. But never, in the history of the organization, have three papers fallen into disfavor in such short order.

"The fact is, the audit is not designed to catch collusion," Payne says. "Managers and distributors all working together can fake the numbers. If there is a real concerted effort to cheat, it can work."

Since ABC acts kind of like the "print police," as MediaVest's Steinberg puts it, the organization is going through its own internal review while reaching out to publishers and especially advertisers. The timing was perfect in many ways, as the ABC's tri-annual board meeting was scheduled to take place during the first part of July in Vancouver.

There, ABC board members unanimously voted to punish the three papers with unprecedented censures. The harshest: All three papers will be excluded from next year's FAS-FAX reports. In the place of circulation data, a note will be included that will say "censored."

Added to the censure provision, though it won't affect the three papers, is the ability to levy a cash fine. ABC spokesperson Martha Dittmar said the amount will be decided on a case-by-case basis, as to what will happen with the money once collected.

The board also voted to tighten reigns on how single-copy sales are reported, including a revision to the "omit day." This provision lets papers off the hook with circ numbers during natural disasters, holidays and production problems. In the past, papers could take at least 40 of these days. Now they are limited to 10.

It's still unclear whether ABC will shore up the ranks and hire new auditors. Currently the organization employs 150. Dittmar expects an increase in auditing hours. Whether that requires more bodies remains to be seen.

Industry analyst Morton says that ABC seems to be on the right track in firming up standards to gain confidence. And through it all, ABC seems to have kept the faith of most of its constituents. "There's been a great leap that this could be widespread and happening at other papers. I take great issue with that, and I think ABC does a magnificent job," says Steven Alexander, senior vice president of circulation at the Star Tribune in Minneapolis.

While many publishers, circ executives and advertisers agree, some sources off the record express concern that any rule or policy changes due to the scandals will come at the expense of all newspapers. Indeed, ABC has just announced a price hike of 4% for audits, the first increase in two years. Payne insists it had nothing to do with the circ scandals, saying that ABC was simply due for a rate increase.

"We spend a fortune ? six figures ? with ABC for audits. I'm not sure I want to see that double," says one source in the circulation department of a major daily. "I want them to be real efficient with the money being spent," he explains, "not just auditing for the sake of auditing because of an isolated incident."