Declining Newspaper Penetration Isn't Fatal   

The stock market suggests that newspapers are doing fine.

An enduring lament about the newspaper industry is that readership has been in a precipitous decline for 50 years.

Ìhe statistic usually cited to prove this is the ratio of circulation to households, called household coverage or penetrationÑin effect the average number of newspapers sold to every home in the country.

Certainly the ratio has dropped. In the mid-1920s household coverage peaked at about 1.33 – every home on average received about one and a third papers every day. The ratio fluctuated until 1945, then began a steady slide to .63 of a newspaper per home last year.

The slide in coverage buttressed arguments by newspaper competitors that newspapers are in decline, that newspaper reading is in decline, and that newspapers are on their way to becoming the buggy whips of the future.

One would think that this kind of record would show up in other assessments of the newspaper business, such as how the stock market values publicly owned companies with significant investments in newspapers. The stock market is not noted for rewarding declining industries, yet it has rewarded these paper owners with hefty increases in their share prices.

Since the end of 1970, which is when my database begins, a composite index of publicly owned newspaper stocks has risen more than 3,000 percent, compared with more than 400 percent for the New York Stock Exchange's composite index. In 1993, the newspaper index went up more than 18 percent, compared with nearly 8 percent for the New York Stock Exchange index.

Does the stock market know something about newspapers that counters the downward trend in household coverage? I think the answer is yes, and it involves a sophisticated assessment of economic efficiency and a recognition of what the household coverage ratio leaves out.

The coverage ratio only measures daily papers. Some part of the ratio's decline, especially in the last 20 years, signifies not a decline but a shift in newspaper readership. The huge increase in weekly news- papers of all types, fueled by a technologically lowered cost of entry into the publishing business, has captured a substantial number of daily newspaper readers.

These readers are the people who turn to television for national and international news but retain an interest in the intensely local community news found in weeklies. They are still newspaper readers, just not daily newspaper readers. They remain a source of possible circulation growth for dailies smart enough to enlarge and improve local coverage.

Many newspaper companies have responded to this trend by buying up or starting weekly papers. Their efforts, of course, are not reflected in the decline in household coverage, which counts only dailies.

Another factor left out of the household coverage ratio is the extent to which improving economic efficiency contributed mightily to the ratio's decline. In the newspaper business, competition has always been the enemy of high profitability. In the peak household coverage years before 1945, and indeed for many years since 1945, it was common for even small cities to have two newspapers, sometimes published by separate companies, sometimes by the same company. In big cities there might be three to 10 separately owned dailies.

When television began to take hold in the 1950s, increased competition for advertising and readers' attention made it uneconomical for the weakest competitive dailies to continue. It also made it uneconomical, especially in the last 15 years, for those companies publishing both morning and afternoon dailies in the same market to continue the afternoon paper.

From the point of view of pure economic efficiency, there should never be more than one paper to a household because it is only when a paper has the local market to itself that it returns high profits. Thus when the weaker papers were shut down, circulation declined because many people read more than one newspaper a day, but profitability soared for the newspapers that remained in business.

Taking the analysis further, consider removing illiterate and lower income residents from the household side of the equation. After that it might be argued that ideally the ratio of circulation to households should be no higher than 80 percent. Above that, papers would be spending money to reach people that typical advertisers do not seek and are unwilling to pay for with advertising. Before compuweri- zation of circulation lists, advertisers did not have access to information about readers' incomes. Now they do.

Of course this economic-efficiency analysis begs for answers about how the decline in numbers of papers has affected the quality of public discourse. It surely has not helped. But at least it shows that the decline is not so ominous as many would have it, and why the stock market still views newspaper publishing favorably. l