After a handful of newspapers confess that they inflated circulation figures, the industry finds itself facing a new credibility problem.
By KRIS HUNDLEY
Published September 19, 2004
For Scott Harding, head of the nation's largest advertising buying group, the revelations this summer that four large U.S. newspapers had inflated their circulation was a stunner.
The bogus circulation numbers resulted in higher advertising rates, which meant that Harding's clients - including such major companies as Sears, AT&T and BMW - had been routinely overcharged for their ads.
Since mid June, Tribune Co.'s Newsday and Hoy, Hollinger International's Chicago Sun-Times and Belo Corp.'s Dallas Morning News have admitted boosting the paid circulation figures on which ad rates are based. Instead of delivering newspapers - and advertisements - to paying customers, at least two of the publications reportedly tossed thousands of copies into trash bins and even onto dead people's doorsteps.
"I don't think it's the tip of the iceberg, but it's a little larger than an ice cube," Harding said. "It would not shock me if there were another disclosure."
Newspapers make as much as 85 percent of their revenues by selling an audience - their subscribers - to advertisers. The bigger the audience, measured in paid circulation, the more a newspaper can charge.
That makes fudging circulation numbers the newspaper equivalent of cheating on the bottom line. Coming on the heels of several high-profile cases of reporters' fabricating stories, it can only add to newspapers' credibility crisis.
The three publishers' confessions also come at a time when newspaper circulation nationwide is on a gradual downward trend as the public bypasses daily papers for the Internet, radio and TV.
Three years ago, the industry tried to compensate for the decline by allowing deeply discounted and bulk sales to count toward paid circulation. Some of the fraudulent numbers disclosed this summer came from these new categories of paid circulation.
In response to the admissions of wrongdoing, the Audit Bureau of Circulations, the industry group that is supposed to verify publishers' numbers annually, censured the guilty papers and has scrambled to tighten its audits.
Newspaper executives double-checked their own circulation practices, and ad representatives everywhere tried to reassure clients, particularly savvy national accounts, that their newspaper's circulation numbers are real.
"This has kind of rattled my confidence," said Conrad Szymanski, president of Beall's Department Stores, a major advertiser in Florida papers. "When circulation numbers have an audit stamp, that gave me a lot of confidence. If I'm getting something less, I'm paying too much."
Tribune Co., the Chicago-based media giant, rocked the newspaper industry in mid June when it disclosed that its two papers on Long Island had inflated their circulation numbers. Three months later, on Sept. 10, Tribune acknowledged that the bad situation was even worse than previously acknowledged.
According to the publisher, Newsday's daily circulation in 2003 was between 480,000 and 490,000 copies, about 100,000 less than reported. Sunday circulation was between 570,000 and 580,000, not 672,000.
At Hoy, Newsday's Spanish language tabloid, daily circulation was in fact about half of what had been reported, in the range of 45,000 and 55,000, rather than 93,000.
Tribune Publishing president Jack Fuller attributed the discrepancies to "poor documentation, records mismanagement and programs that deliberately violated (Audit Bureau) regulations and Tribune policies."
The Audit Bureau expects to complete its investigation into both papers by mid October. Tribune said it is continuing its review of circulation practices at its 12 other papers, including the Los Angeles Times and the Chicago Tribune.
After its initial announcement, Newsday fired its vice president of circulation. The publishers of both Newsday and Hoy subsequently announced their early retirements, and five circulation managers and directors were fired. Two executives from the South Florida Sun-Sentinel, a Tribune paper in Fort Lauderdale, were brought in to handle Newsday's circulation and managerial duties.
By late July, Newsday announced that ad rates would be reduced for 16 months, with rebates if circulation falls below a guaranteed minimum. A total of $95-million has been set aside for use in negotiating settlements with advertisers who had been overcharged since 2001.
The district attorney on Long Island is investigating possible criminal charges against Newsday and Hoy.
Meanwhile, outsiders wondered how the newspapers could orchestrate such a massive fraud, involving the routine disposal of tens of thousands of newspapers that advertisers had been told were going to readers. According to Newsday's published reports on its own scandal, and the lawsuit filed by several advertisers in February, pressure was intense on circulation staffers and independent distributors to meet unrealistic circulation goals.
A Newsday systems analyst said she was repeatedly ordered by her boss to enter inflated numbers into the company's computer program and remove figures that showed circulation dropping. At the same time, carriers and distributors of single copies were given hundreds of papers they could not sell with instructions to toss them into Dumpsters or on doorsteps of former subscribers. One former distributor said, "We even delivered to addresses where the house had been burned down."
A former Hoy employee told reporters the Spanish-language paper was dropped off at stores, regardless of the potential audience. "They would require stores, if they were carrying Newsday, they had to have copies of Hoy whether they wanted it or not," the unidentified source said. "Even if . . . there wasn't a Spanish-speaking person within 40 miles."
The revelations on Long Island followed by just two days the disclosure that the Chicago Sun-Times, the nation's 13th-largest paper, had overstated its single-copy sales, those sold individually in stores and in boxes, by 23 percent for several years. The paper's owner, Hollinger International, had installed a new publisher in November in the midst of an acrimonious battle with its controlling shareholder, Conrad Black. Circulation discrepancies came to light after the paper raised its newsstand price to 50 cents from 35 cents on April 1, but revenues failed to increase.
The Sun-Times' current and former circulation chiefs left the paper in late June. The paper said it was too early to determine how much advertisers are owed, pending an internal audit.
In early August, another major metropolitan newspaper made another startling announcement. Belo Corp. said circulation at its flagship paper, the Dallas Morning News, had been overstated by about 1.5 percent daily and 5 percent Sundays. The paper's executive vice president of operations resigned, and the company set aside $23-million to settle with advertisers. At least five shareholder lawsuits have been filed on behalf of Belo shareholders because of the circulation restatement.
Circulation changes
There were several common threads among the three circulation scandals. All involved public corporations, all involved large-market newspapers with a high number of single-copy sales (as compared to home subscribers), and all relied heavily on independent distributors.
And with the exception of Hoy, which boasted that it had tripled circulation in four years, the other papers reported very modest increases. In some cases, these papers even showed slight circulation decreases, despite adding phantom sales.
By lying, these publications were mitigating the circulation declines faced by nearly every newspaper in the nation.
"Newspaper readers are dying off," said John Morton, an industry expert in Silver Spring, Md. "Circulation has been in decline for more than a dozen years. And it probably will continue to decline unless some of these attempts to attract young readers prove more successful than likely."
Morton said declining circulations have not kept newspapers from being highly profitable. The industry last year reported average operating margins of over 20 percent as publishers cut costs and raised ad rates despite lower circulation figures.
Faced with gloomy numbers, the U.S. newspaper industry and its audit bureau agreed in 2001 to change the way they count paid circulation.
Previously, only papers sold at 50 percent or more of the cover price counted as paid circulation that could be counted in the setting of ad rates. Under new rules, the bar was lowered to 25 percent.
The change meant that newspapers could increase circulation by selling highly discounted subscriptions. There was one treacherous side effect to these cut-rate deals: New readers attracted by bargain prices tend to drop the paper when the discount ends, so newspapers have to spend more on marketing to retain the same number of subscribers.
Another circulation change allowed publishers to include as paid circulation papers sold at bulk discount to entities such as airlines, hotels and sports teams that distribute them to patrons. These so-called third-party sales, which are hard to track and of questionable value to advertisers, grew rapidly.
(Newspapers donated by subscribers or underwritten by third parties for students through the Newspapers in Education program are considered paid circulation and were prior to 2001.)
John Payne, senior vice president of the Audit Bureau, said third-party sales are still a small percentage of most newspapers' circulation. Such sales are also itemized in audits so that advertisers can see them.
"Whether third-party sales are good, bad or whatever, that's for advertisers and publishers to decide," said Payne, whose board includes representatives from both publishing and advertising. "It's all clearly spelled out on the statements."
The Audit Bureau, which earned $22-million last year in audit fees from publishers of newspapers and magazines, has been criticized by one former employee for failing to uncover the circulation scams. In an article in Editor & Publisher, Jay Schiller, an ex-Audit Bureau auditor, said auditors ignored red flags, such as the phenomenal growth at Hoy.
"If Hoy was an Olympic or professional athlete, it would have been taking drug tests every week," Schiller wrote. "No one gets that big that fast."
The Audit Bureau's Payne rejected Schiller's criticism, adding that he left the company more than a decade ago. "The (Audit Bureau) does not tolerate fraud," he said. "And we'll do whatever it takes to ensure it doesn't happen again. Or we'll catch it."
"The core medium'
Though readers might not see a problem with the trend toward discounted or free newspapers, advertisers do.
"Not all circulation is created equal," said Harding, chief executive of Newspaper Services of America.
Beall's, for example, wants to know whether a newspaper's home delivery circulation is increasing in high-growth areas near its stores. Single-copy sales in tourist areas or giveaways in hotels are considered largely irrelevant because those readers are unlikely to become customers.
Newspaper executives have long wished that advertisers would drop the emphasis on circulation and focus instead on the number of people who pick up the paper. In a home, for example, only one person counts toward paid circulation even though others in the household may read the paper.
In recent years, the Audit Burea u has begun reviewing a paper's methodology for determining readership and including that data in its annual circulation audit. Jay Smith, president of Cox Newspapers, based in Atlanta, said studies have shown that readership is generally 2 to 21/2 times the paid circulation. Though the 17 dailies in the Cox chain have shown circulation declines of 1 to 2 percent per year for the past several years, Smith said the readership number has remained fairly constant.
"As an industry, I really worry that if we limit ourselves to a discussion of paid circulation, we're going to be selling ourselves short," Smith said.
Advertisers say they're willing to pay for readership, but not at the same rate they pay for circulation. At the same time, media buyers like Harding, who is on the board of the Audit Bureau, say they haven't detected a shift in ad spending as a result of the circulation shenanigans at a few big players.
"For our clients, newspapers are the core medium," he said. "They get a measure by the ring of the cash register every day as to how productive their ad is. But clearly they insist on accurate numbers and getting what they pay for."
That's the conundrum faced by 60 car dealers on Long Island who sued Newsday in July after the fraud disclosures. The newspaper responded by refusing to carry the dealers' ads.
With both sides losing money - dealers' sales were down, while Newsday reportedly was missing out on $1-million per month in ad revenue - a resolution was reached earlier this month.
The ads are back in Newsday, with the dealers paying a lower rate than before the lawsuit.
Times researcher Cathy Wos contributed to this report. Kris Hundley can be reached at 727 892-2996 or hundley@sptimes.com
At a glance
Tribune Co.
Newsday: inflated weekday and Sunday circulation by nearly 100,000 in 2003; earlier years being reaudited
Hoy: daily circulation of the New York edition in 2003 about half of what had been reported
Remedy: up to $95-million set aside to compensate advertisers
Stock price since announcement: down 12 percent
Hollinger International
Chicago Sun-Times: single-copy circulation overstated by 72,000 daily copies for several years
Remedy: No compensation program yet announced
Stock price since announcement: down 3.2 percent
Belo Corp.
Dallas Morning News: inflated daily circulation by 1.5 percent, Sunday by 5 percent
