Many are expecting larger advertisers to begin hammering away at newspapers when negotiating ad rates as particular attention is paid to circulation that is sold at less than 50 percent of basic rate and the category labeled "other paid circulation" on ABC statements.
Scott Stawski, vice president and client executive at media consultancy firm Inforte is worried about the November 1 release of the fas-fax report from the ABC, which presents preliminarily circulations for newspapers just prior to the release of individual publisher's statements. He is fearful of more scandal.
"I know other people are saying the other situations were isolated, but I think it's the tip of the iceberg," he said.
Stawski, who regularly works with the Tribune Company, also believes that the portion of newspapers' subscription bases which are sold at discounts are in jeopardy as advertisers begin to question their quality.
"ABC's rules of paid circulation open up a very gray area," he said. "While [these figures] might be legally correct, [to some] it doesn't look very good."
Stawski is referring to the practice of selling newspapers through bulk paid circulation via organizations like hotels, car dealers, schools, and flea markets. Readers receive these copies for free, while they are technically considered "paid circulation," by the ABC. "It's become very popular in newspapers," he said. "Most people don't realize they paid. Under ABC rules, they can ask to have that taken off their bill."
Analyst Paul Ginocchio of Deutsche Bank Securities is particularly attuned to this issue, and wrote a critical report on the growth of this practice last month. He found that industry wide, circulation paid at 50 percent or greater than the basic rate declined 4.6 percent in the six months ended March 2004.
On the flip side, circulation that is paid at less than 50 percent of the basic rate coupled with "other paid circulation" now accounts for 10 percent of total circulation through March 2004. That figure was at 4.8 as of March 2002. "It's been a fairly rapid shift."
In that report, he also predicted another major circulation scandal, though he is holding back at this point. "I thought we would have seen something by now," he said. "We are probably almost through it."
He says that most papers have been conducting comprehensive internal audits. "The window of opportunity for CEOs to make circulation disclosures without major shareholder revolt will likely close in the next month."
Meanwhile, Inforte's Stawski predicts that during the next two rounds of publisher statements, newspapers will begin to voluntarily "write off" any low-cost circulation in an effort to avoid further scrutiny. Such moves may result in significantly lower circulation figures throughout the business.
"The problem is serious, but not life threatening," he added. "In finance, we would refer to it as a market correction."
Both men agree that major advertisers are likely to revolt.
"Advertisers are going to be upset," Stawski said. "They are going to feel that circulation is not legit and they are going to hold on ad rates. This will put enormous pressure on publicly traded companies."
Ginocchio said that papers may even be asked to offer tiered rates for different categories of circulation.
[Advertisers] may now say, 'I am willing to pay you this CPM for those readers, and another CPM for the rest,'" he said.
Media analyst Lauren Rich Fine of Merrill Lynch is less anxious about potential circulation scandals, though she echoed the contention that advertisers are likely to begin pushing newspapers harder.
"Circulation practices continue to be of interest to investors after the recent circulation misstatements by a few publishers," she said in a report issued late last week. "Apart from company-specific concerns, questions are also being raised on the potential impact on ad rates and allocation of budgets among media by advertisers."