Hyping the Numbers   

The Chicago Sun-Times and some Tribune Co. properties acknowledge reporting inflated circulation totals.

Audited, paid circulation is the financial backbone of the daily newspaper business. It is why newspapers have continued to prosper despite the advent of other media seeking advertising — first magazines, then radio, television in all its forms and now the Internet.

So it is a serious blow to the newspaper industry's credibility when the owners of major newspapers acknowledge publicly that the circulation numbers have been falsely inflated, as happened recently at the Chicago Sun-Times and at Tribune Co.'s Newsday on Long Island and at the company's Hoy Spanish-language dailies.

Inflating circulation is viewed as a form of theft from advertisers, since advertising rates are based largely on circulation. Indeed, the district attorney for Nassau County has initiated a criminal investigation into Newsday's circulation inflation. Some advertisers have filed a lawsuit against Newsday, and more such actions are likely.

These events have raised troubling questions about the veracity of all newspapers' circulation claims and about the authority of the Audit Bureau of Circulations, an organization created in 1914 by publishers, advertisers, advertising agents and others with an interest in bringing order to what then was a chaos of conflicting circulation claims by competing publications.

In light of these concerns, it is worth examining how the ABC goes about its work (for the record, my firm is a member of the ABC). But first, some observations about circulation fraud and the relationship between circulation and advertising rates.

Circulation fraud has been rare in the newspaper industry. In my more than 30 years of analyzing the business I can recall no more than a half-dozen instances in which it has come to light. There surely were more, but it's likely they were quietly resolved through negotiation and private arbitration.

A second point is that though circulation is the basis of advertising rates, it is not the only factor. Because a newspaper's circulation falls 10 percent does not mean that the newspaper should charge 10 percent less for advertising. For example, the Kansas City Star's circulation dropped 2.9 percent from 1999 to 2003, yet its open advertising rates over the same period rose 32.5 percent. The reason for this disparity is that many other factors besides circulation are involved in rate-setting, including actual and expected increases in the cost of newsprint, labor and benefits. Some of these cost increases are offset by circulation revenue, but newspapers are loath to raise the price of the paper for fear of driving down circulation.

Moreover, in this era of greater competition for advertising dollars, few newspaper advertisers pay published rates. Instead, advertisers negotiate discounts and are often offered special deals off the rate card to encourage them to advertise more frequently.

Finally, it is worth noting that the circulation inflation at Newsday and the Hoy newspapers was discovered through an ABC audit. At the Sun-Times, the paper itself discovered inflation when a new publisher noticed a discrepancy between sold copies and revenue received.

Just how does the ABC audit circulation? First, publishers submit their own unaudited circulation numbers, with supporting documents; these numbers are published twice a year in a report titled FAS-FAX that shows the average circulation for six-month periods ending March 31 and September 30. After analyzing the submitted data and after conducting an audit, the ABC issues its formal audit report showing the average audited paid circulation for a 12-month period.

During the process, a field auditor visits the newspaper and examines pressroom reports, invoices for newsprint purchased and newsprint inventory records to verify that enough newsprint had been available and enough copies printed to back up circulation claims. The auditor also examines circulation records by category and geographic zones and reviews prices charged, premiums and discounts offered, return percentages of unsold copies, and various other factors that have a bearing on circulation claims. Apparently, deliberate mishandling of unsold returns was at the heart of the current cases.

Finally, because the ABC does not have the manpower to nail down each copy a newspaper claims it has sold, it also relies on sampling techniques. This entails a statistical extrapolation from interviews of a random sample of subscribers. A key element is to determine that the person who received a paper is the one who paid for it, a requirement to qualify as a paid subscriber.

It is a comfort that in circulation-inflation episodes of the past, and apparently the current ones, the fraud was not a deliberate top-management strategy. No doubt many publishers are now intently investigating their circulation departments for similar misdeeds, and more revelations may follow.