Ignoring the Elephant in Newspaperland

Just how deep is the newspaper circulation scandal of 2004? Combined with other substantial circulation losses, how damaging will it be to the bread and butter of advertising revenues for 2004, for 2005 and by extension in years to come? Is it yet another sign of the gradual but inexorable decline of the industry and the medium in which many of us practice journalism?

These will be top-of-mind questions as the curtain rises Monday on a pair of annual Media Week conferences in New York. The meeting provides a platform for executives of publicly-traded newspaper companies to present their results and prospects to analysts and investors. This year, the usually polite and deferential Wall Street audience will probably be asking more pointed questions than usual.

Lately the party line in the industry is that the worst of the scandal part is behind us. Industry leaders say the tally of recent losses, while admittedly bad, is not quite as bad as some had predicted. Business is getting back to normal, they say.

Not so fast, we are here to tell you. We stumbled serendipitously on a set of facts suggesting that the impact to date is actually 50 percent worse than we and others who track the industry had thought.

Missing from these “not as bad as predicted” formulations is all those readers fraudulently counted as paid circulation at papers involved in the scandal.  That circulation never existed in the first place.

What follows is an account of how an industry association, Wall Street analysts, and the presumed watchdogs of American life -- the newspaper business -- managed to lose track of a quarter of a million phantom readers in this still unfolding scandal.

The Newspaper Association of America reported in a press release November 1 that for the six-month period ending September 30, industry circulation was off 0.9 percent daily and 1.5 percent Sunday versus the same period a year ago. That was based on a comparison of 841 dailies that issued on-time publisher’s statements each year, subsequent to later audit.

That is a decline as steep as ever after a couple of years in which losses had nearly leveled off. As The Washington Post reported Nov. 30, there hasn't been a nationwide circulation gain since 1987. Or as NAA president John Sturm put it in a comment to The New York Times, "We see results that aren't a heck of a lot different from what we have seen over time," a classic glass-half-full spin as befits an industry association leader. Veteran analyst Edward J. Atorino, went a step further. "Fears of some massive circulation decline were just overwrought," he told The Times' Jacques Steinberg.

But wait, as they say on the TV reality shows, there's a twist.

NAA did the analysis and presented the statistical report, one of many for which it is the standard authority, exactly as it has in the past. Many smaller papers do not buy audits and thus are not in either sample. There are always a dozen or two stragglers that don't get a timely six-month report together. The sample is still big and inclusive of about 85 percent of total industry circulation (as estimated by NAA). So, in normal times, those little missing data points make no difference.

These are not normal times, however. Remember?  We have just had this unprecedented wave of faked numbers by four big-city papers: Newsday; its Spanish sister daily, Hoy; the Dallas Morning News; and the Chicago Sun Times..

A small, but entirely on-the-record detail of the story is that each of the four papers has been censured by the Audit Bureau of Circulations (ABC). As part of their punishment, the Scandal Four were not allowed to do a statement for the six months ending this September 30. The NAA release made no mention of that. Jim Conaghan, NAA vice president of business analysis and resarch, who prepared the report, confirmed to us Friday that no adjustment was made to account for the impact on the comparison. (You can read Conaghan's challenge to our interpretation of NAA's report here.)

Omitting that little qualifier yields a snapshot of how the industry is doing, ignoring the elephant in this particular room.

And we're not just talking metaphorically. It may just have been four papers, but as is often the case with assorted kinds of wrongdoing, once they got into cheating their way to apparent success (it's not so clear just when that was), they got into it in a big way.

Neither the NAA nor ABC nor perhaps even the companies themselves could be precise enough yet in reconstructing more truthful numbers for the apples-to-apples, precise estimate that the ABC reporting methodology requires.

The order of magnitude, though, is clear and, once again, on the record. The totals have risen as investigations, internal and external, unfold.  Each company has released guidance updates as part of their effort to get on top of a huge problem, to begin to restore reputation and make good to advertisers who got bilked on how many people they were reaching.

Here is a current paper-by-paper estimate of losses not included in the NAA report or The New York Times story:

  • Newsday, nearly 100,000, both daily and Sunday.

  • Hoy, 43,000, almost half its claimed paid circulation.

  • Chicago Sun Times, around 50,000.

  • Dallas Morning News, at least 50,000 daily around twice that Sunday.

That adds up to 230,000 to 250,000 people who we thought were paid subscribers but are not. Combined with the reported losses in NAA's sample, that's another half a percent hit. From that perspective, the real damage is 50 percent worse than the NAA and The New York Times report on it leads one to think. This added complement of phantom readers has literally vanished into the ether. There is no wooing them back with sharp tuning content to reader interests, fast-format design innovations, better customer service and the like.

Had the NAA set out to practice the public relations ploy of putting out information that is technically accurate but materially misleading, we could never prove it. The circumstantial evidence leaves us 95 percent certain it was 95 percent inadvertent, mixing in just a pinch of spin and some wishing and hoping this damn thing would be over.

Steinberg, one of the abler reporters on the newspaper beat for The Times in recent years, appears not to have thought of the arcane omission on deadline.

After consulting with his editors, Steinberg said, “We feel that we accurately reported what the NAA reported.  Certainly going forward in reporting data like that, we would take the caveats you raise into consideration.”

Sooner or later, once the investigations into the scandals have been completed, those lower numbers will be reflected both in ABC and NAA reports. 

Daily stories in the Wall Street Journal and Editor and Publisher provided a nod to what would become the thesis of this story. They mentioned the censure and the exclusion of the scandal papers from the sample. They did not go on to the math and interpretation suggested here.

Oft-quoted analyst Lauren Rich Fine (a member of Poynter's National Advisory Board) also got to the same part of the story that the Journal and E&P did, footnoting the missing reports in her November 5 analysis of the trends. She focused on public companies that she covers as opposed to the newspaper industry as a whole.

Rising star Paul Ginocchio of Deutsche Bank Securities, making like a daily reporter, weighed in November 2. He skipped the NAA altogether and plugged into his model the newspaper-by-newspaper total that ABC posts concurrently on its website. By policy, ABC does not offer its own analysis of industry-wide trends or comment on anyone else's.

Ginocchio has led the way and Fine and others have joined along in documenting yet a third dimension of current circulation erosion. Since the turn of the decade, there has been quick substitution of deeply discounted circulation for fully paid circulation. Deep discounts have at least doubled their share from less than five percent to more than 10. Both count in the bottom-line paid total under ABC rules. The discounted portion is broken out. So is unpaid distribution.

We're not talking just about the papers involved in the recent scandals and others you might suspect of slick practices. The New York Times, Wall Street Journal and Los Angeles Times also distribute increasing numbers of discounted and free copies that revised rules permit them to count as subscribers. In fact, that's Ginnocchio's point: full-rate circulation is falling even more precipitously than overall circulation.

Returning to advertisers, the big question is whether they will take the three factors together to bargain successfully for muted rate increases. That is a lot more of a realistic scenario than any wholesale flight to competing media. Long experience and even recent events show that advertisers work hard to pay as little as possible. At the end of the day, though, even a disgruntled group of Long Island auto dealers, suing Newsday, fought to keep their ads in the paper.

If you think like an analyst, short-term impact is long-term too.  Suppose, other things being equal, newspaper ad revenue would have risen eight percent in 2005.  Instead circulation troubles drop the growth to four percent. In constantly revising their earnings forecasts, the analysts are figuring that a lower total, even for a quarter, certainly for a year, rolls over as the new base for 2006, 2007 and onward.

We will close, as typically in these periodic reports from the business-side front, with the question working reporters and editors really want answered. How is this going to affect us? The results are trickling in, and they are not encouraging. Newsday and the Dallas Morning News announced a round of cuts in November. With earlier attrition each is trimming at least 70 newsroom staffers, upward of 10 percent.

On the non-scandal side several big city papers were hard hit. The Chicago Tribune, Los Angeles Times and Washington Post all lost more than two percent year to year. 2004 was a years of stasis, formal and informal job freezes and a few bigger announced cuts. More of the same in the service of demonstrating commitment to cost control is in prospect for 2005.


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