Were First Cuts the Deepest?

By: Jennifer Saba This spring's FAS-FAX numbers crushed the slim chance that circulation would start to come back. For the six-month period ending March 2006, the Audit Bureau of Circulations' report revealed another dramatic decline. Many had hoped the industry would catch a break this time, since comparisons would be easier than the previous FAS-FAX last fall. This one followed by a year the steep slide reported in March 2005, which reflected many large papers shaking out lower-quality circ. With much of this shedding presumed done, this latest period promised some small hope of relief.

Indeed, a few of the hardest hit papers a year ago, such as The Sun of Baltimore, did cut their losses this time -- but in terms of an industrywide rally, it was not to be. According to the Newspaper Association of America, which ran the numbers on the 770 daily papers that filed, overall circulation fell 2.5% and Sunday dropped 3.1% for 610 papers.

"This FAS-FAX report is not encouraging," Steven Barlow, an analyst with Prudential Equity Research, said in a research note. "We had hoped all the manpower that has gone into improving circulation in the industry would produce better results. We are not looking for a positive average, but only seven newspapers reported increased circulation for daily and Sunday out of the top 50."

Merrill Lynch analyst Lauren Rich Fine had expected circulation to at least start showing some signs of life. "We had optimistically thought trends would improve slightly in this March audit," she stated in a note. Not even a quarter of the reporting newspapers showed increases in daily circulation. Major metros were hurt the most. According to a Merrill Lynch analysis, the newspapers in its coverage universe with a circulation between 100,000 and 500,000 fared much worse than the average: daily was down 3.3% and Sunday was down 4%.

Even the smaller papers that tend to be buffered from more dramatic declines showed weakness. For papers with a circulation between 40,000 and 100,000, daily circ slipped 2.4% and Sunday decreased 2.6%. "This is somewhat surprising given that smaller markets have been holding up better than average from an ad revenue perspective," wrote Fine.

The national papers came out OK, with both The New York Times and USA Today eking out small gains in daily, up 0.5% and .09% respectively. The Wall Street Journal lost 1%.

Despite the overall bleak picture, delving into the numbers shows an underlying trend that may promise some good news for the industry down the road.

Many publishers -- especially the large metros -- have made a mantra out of vowing to cut back on other-paid circulation. The category is considered "less valuable" by some advertisers since it represents employee, hotel, Newspaper-in-Education (NIE), and third-party copies. Publishers are attributing the latest plunge to scaling back on this type of circulation, which had (it turns out) only just begun a year ago.

"You see individual newspapers making deliberate decisions," says John Murray, vice president of circulation at the Newspaper Association of America. By way of example, he adds, "NIE has a lot of value to it, but, carried out to what extreme?"

The NAA did a back-of-the-envelope analysis and found that for this period, other-paid circulation represented roughly 11% of total circulation. Breaking that down even more, about 3% of circulation is under the third-party sponsored category. "If you take USA Today out" -- where 55.9% of its circulation is other-paid -- "for the entire industry, that percentage is 2.3% for third-party and 9.3% for the other-paid category as a whole," Murray notes.

Prudential Equity Research did an analysis on the other-paid category using the March 2006 FAS-FAX and found that of the top 20 papers, almost half had reduced that type of circulation.

The Los Angeles Times was down 5.4% daily overall, partly because it cut its other-paid circ by 33.7% compared to the same period a year ago. The Boston Globe slashed its other-paid copies by 30.3% (helping feed its 8.5% overall decline). The Star-Ledger in Newark, N.J., on the other hand, reported a gain of 0.9%, despite trimming other paid by 5.8%.

For the 50 papers that Prudential looked at, other-paid circulation dropped 2.1%. In the September 2005 report, it had decreased 2.8%. "The continued decline in this category suggests newspaper companies are becoming less dependent on other-paid circulation to boost their overall numbers," Prudential's Barlow reported.


Walking the walk

Papers are taking this new creed seriously. The Star Tribune in Minneapolis took some PR heat when it converted its employee copies in late March -- which, according to the March 2006 FAS-FAX, account for 1.7% of overall circ -- to electronic editions to cut back on costs.

"Our industry is operating in a challenging climate with substantial marketplace pressure to bring costs in line with revenue," wrote Steve Alexander, the Star Tribune's senior vice president of circulation, in a staff memo addressing the issue of some employees caught pinching papers from the company's racks. "We owe it to our shareholders to find ways to manage expenses, while we owe it to our readers and advertisers to do so without impacting the quality of our content, products, and services."

The St. Paul Pioneer Press went to great lengths to show it's cutting back on other paid. In its advance release, the paper reported that daily circ was up 2% and Sunday was up 1.6%. When the FAS-FAX was published a few weeks later, the gains were even higher: daily grew 6% and Sunday rose 3.6%. What gives?

Andrew Mok, the Pioneer Press' circulation sales and marketing director, says the discrepancy was deliberate. For the FAS-FAX, ABC compared the publisher's statement to the Audit report while the newspaper compared its own publisher's statement to the prior publisher's statement. The reason: Several hotel copies were shifted to unpaid because some hotels were not diligent in stamping copies with notifications telling guests the papers were included in their bills.

"Our core focus is on individually paid," says Guy Gilmore, vice president of circulation at the Pioneer Press. "Those are the numbers we care most about."

Deep in the heart of Texas, meanwhile, The Fort Worth Star-Telegram slumped 6.8% on weekdays and skidded 3.4% on Sunday. "This loss was self-inflicted," says Publisher Wesley Turner. "The decision we made is to reduce discounting. More than our entire loss was in the discounting category. And there was a significant drop in other-paid, NIE, and third-party bulk copies."

At the Star-Telegram, other-paid circ makes up 10.4% of overall daily circ, while discounted copies make up only 5.2%. (According to Prudential, other-paid circulation that makes up more than 10% of overall circ is a red flag.) Turner also points out that this time around, 100% of the paper's home delivery starts are paid in advance -- something that helps reduce churn.


Change will do you good

Perhaps no paper this spring showed such a marked improvement as the Baltimore Sun. For the past several reporting periods, the paper has been kicked in the shins for its continued significant losses in daily circulation. In March 2005, daily was down 11.5%. In September 2005, weekdays dropped 8.5%. This March, daily was down only 3%. (ABC issued a correction for the Sun's FAS-FAX numbers, which initially showed that daily circ was down 9%).

So this was one case in which a paper took a big one-year hit, and then started to come up for air as comparisons eased. Louis Maranto, the Sun's vice president of circulation, says his paper decided earlier than most to cut its other-paid copies, and now the move is starting to pay off. Other paid at his paper is down 46.9% this period, the largest change in Prudential's analysis, and the category represents only 2.2% of the Sun's overall circ. According to Maranto, the paper scaled back on its NIE program, hotel copies, and third-party bulk.

To top it off, the Sun is also doing better in retaining subscribers. "For the first time in several years, we have improved our churn," says Maranto, who puts it at about 50%.

"We launched a consumer-marketing database that helped us go after customers. We are able to track the groups of subscribers that tend to respond to our attempts. That has definitely helped us with churn." He also points out that 35,000 subscribers are on EZ-Pay with a goal of reaching 50,000 subscribers by the end of the year.

"The overall reaction has been positive," says Maranto about cutting back on other paid. "Our advertisers have been very vocal about it. We met with the Newspaper Services of America and they applauded us for doing what we did."

The Sun's sister Tribune paper, the Orlando Sentinel, continues to experience unpleasant drops in overall circulation. For March 2006, daily fell 8.3%. According to Deborah Irwin, the paper's vice president of circulation, since January 2005 the paper has renewed its focus on local residents rather than on visitors staying in area hotels. "We found that we didn't have good advertiser response with hotel copies," she explains, adding that before the paper started to reduce those copies, the Sentinel sent out letters to advertisers explaining the new strategy.

Besides, with about 1,300 new residents moving into the Orlando market each week, the paper has a sizeable pool of potential readers. "We want to capture those newcomers," says Irwin. The other-paid category represents a moderate 7.8% at the Sentinel, according to the March 2006 FAS-FAX.


Retaining the faithful

On another front, some publishers are hanging on to subscribers longer by getting them to pay in advance and by tweaking offers that reward loyal readers.

The Atlanta Journal-Constitution, like other large metros, is concentrating on paid subscriptions. Publisher John Mellott says 95% of new subscriptions are paid up front, up from 65% in 2005. Seventy percent of sales are for seven-day subscriptions; last year, it was 38%. Subscription churn rates have dropped below 54% -- the lowest level in a decade at the Journal-Constitution, he notes.

The paper achieved such numbers by simplifying its message. "We offer a single price, and you choose how many days of the week you want -- two, three, four, or seven," Mellott explains.

Still, the paper lost more than 6% daily. But many publishers are realizing it's vital to hang on to readers who are willing to pay and willing to renew subscriptions versus lifting the overall number with readers who might not stay on.

The Chicago Tribune, one of the few papers that reported gains in daily (up 0.9%) and on Sunday (up 0.3%), nevertheless reduced its reliance on other paid by 18.4%. The category represents 5.3% of overall circ. David Hiller, publisher of the Tribune, says editorial changes in the product helped boost sales.

The Tribune wanted to emphasize Thursdays, a generally weak circulation day, with the launch of its entertainment section "At Play." The paper also featured more profiles, and Hiller touts hard-hitting investigative stories that attracted readers -- and the White Sox's World Series win sure didn't hurt.


Will circ ever level out?

The industry's scrutiny of other-paid circulation followed the circulation fraud committed by a handful of papers, which caused analysts and advertisers to dust off the microscope and see exactly what existed below the surface. While the other-paid category is legitimate, many newspapers had been using it to boost circulation numbers.

The other-paid circulation category underwent a transformation in April 2001 as a way to add more flexibility for newspapers and give advertisers more accountability, explains the NAA's Murray. (Prior to that, hotel and NIE copies were counted in the "paid" category.)

The change, in effect, brought third- party copies "above the line." Before April 2001, it was listed "below the line," and as such it was not included in the overall paid circulation numbers as it is now. Because of the change in the rule, USA Today skyrocketed to the No. 1 paper in the country.

In the most recent FAS-FAX, "I was afraid a lot of babies were going to be thrown out with the bathwater, but it's kind of self-policing," Murray says about the scaling-back on other paid. "It's expensive to push beyond the optimal level."

Consider the Sun. For all its efforts to cut down on other paid, Maranto says they are maintaining some of that circulation simply because it would be foolish not to. The paper wants to keep up with some employee and third-party copies that go to airport programs and parking services.

But how long is it going to take for newspapers to lower other-paid circulation to desirable levels across the board? One industry watcher says he's giving it another six months for newspapers "to get their acts together."

It's also unclear, as publishers cycle through the other-paid category, if the FAS-FAX reports will continue to show dramatic drops, or if the numbers will finally level out. "We are certainly pleased the papers are making efforts to improve the quality of their circulation," says Bryan Jackson, director of newspaper investment at media agency OMD Worldwide in Atlanta. "On the flip side, I'm concerned they are not being replaced by new subscribers."

A new approach is required

When readers migrate, so do advertisers. On May 5, Bear Stearns hosted a call with print-media buyer George Janson of Mediaedge:cia to get a better idea of what advertisers were looking for in newspapers. As managing partner and director of print, Janson reported that newspaper print advertising was down 10% over the past five years, with classified down about 35%. He reported that he did not see much potential for growth, and newspapers have been the least flexible and most antiquated media owners.

Yet newspapers are continuing to step up their online efforts. In its analysis of the March FAS-FAX, the NAA noted that newspaper Web sites averaged 56 million or 37% of all online users during the first quarter of this year -- an 8% increase compared to the same period a year ago.

But is this enough in terms of advertisers? OMD's Jackson says advertisers look at the total audience and thinks a newspaper's Web site offers value. But he stops short there. "I don't believe they are consumed in the same way," he explains about the print and online product. "There's not the same level of engagement with an online ad as with a print ad. People pick up a newspaper to read the news and look at the advertisements."

Looking ahead to print circ, Bear Stearns analyst Alexia Quadrani thinks that past losses are something to get used to: "I think now we are in a more fragmented marketplace, and you should expect declines in the 2% to 3% range." Her sense from advertisers is that there is no longer a "be-all, end-all" place for media buys. "They feel like they have the leverage and the pricing power," says Quadrani. And investors, she adds, are "frustrated with the ones saying 'Don't worry, it will all come back.'"

Yet there is little doubt that newspaper companies have to invest in diverse channels while simultaneously reducing their reliance on the core print product. "As the 'net paid' marketplace corrects itself over time, the audience that is being delivered to the advertiser through a newspaper's brand in its market is growing, not shrinking," insists John Kimball, the NAA's senior vice president and chief marketing officer.

"The point is that the mix of audience is changing, and total audience is growing. Newspapers are uniquely poised to take advantage of that -- and advertisers are starting to understand that as well. Now the challenge for us is to package it in ways they want."