• by Michael Shields , November 3, 2004

Based on continued circulation declines, advertisers are expected to demand lower rates from newspapers while challenging the value of discounted subscriptions, say analysts and advertisers.

The release of the Audit Bureau of Circulations' latest FAS-FAX report on Monday revealed declining circulation among 70 percent of its newspapers. Those declines did not come as a complete surprise among analysts and advertisers, who were actually encouraged by the lack of major shifts in the numbers, as most individual papers showed declines in the 1 percent range.

"We expected larger declines than we saw in this reporting period," said analyst Paul Ginocchio in a new report from Deutsche Bank.

But still, as circulation diminishes, newspapers should expect tougher negotiations.

"It's fair to say that newspapers have linked their circulation to their rates," said Bob Shamberg, chairman and CEO of the Newspaper Services of America. "Clearly that would suggest to advertisers that there would be some control of rates."

"The commodity that newspapers negotiate rates on is circulation and audience," said Steve Moynihan, executive vice president and managing director at MPG. With those figures being lower, "the expectation would be that we would pay less."

In digging deeper inside the latest circulation figures, Deutsche also predicted that advertisers will give more scrutiny to the rising proportion of discounted subscriptions among major newspapers, further impacting negotiations.

According to Deutsche, the number of subscriptions sold via third parties and given away at public places such as hotels and schools has more than doubled in size over the past two years, now accounting for more than 10 percent of subscriptions. The ABC places such subscriptions into the category of "other paid circulation," despite the fact that they are typically sold at less than 50 percent of cover price.

Meanwhile, fully paid subscriptions have declined at a faster rate than total circulation, sliding nearly 5 percent per year versus overall declines of less than 1 percent.

Deutsche listed the National Do-Not-Call list, the growing number of free daily newspapers in many markets, and increased broadband penetration as contributing to declines in fully paid circulation.

This dynamic "may limit the typical 2 percent to 4 percent ad rate increases the newspaper industry typically achieves," says the report. "We don't think advertisers will pay the same CPM for free readers compared to paid subscribers."

NSA's Shamberg agreed that the rise of discounted circulation, while helpful for growing newspaper readership, would factor into negotiations. "We are very conscious of 'other paid,'" he said. "With few exceptions, our clients don't value that and don't want to pay for that."

MPG's Moynihan didn't go that far, but said that circulation source was increasingly becoming a point of contention in negotiation with newspapers, particularly in light of this year's scandals.

"It's a newspaper by newspaper issue," he said. "Many newspapers like USA Today have built their business on that. But for a local paper, it gives you greater pause. Is a business traveler from Boston to San Francisco going to be a voracious reader of the San Francisco Chronicle? You need to make me comfortable with that."

One positive that both analysts and advertisers saw coming out of the new ABC figures was that they did not include any major surprises indicative of scandal. "It's very encouraging that this much time has gone by and there hasn't been another one," Shamberg said.