Consumer Strategies Report July 13 2004/Research

One morning, on my commute to work, some person thrust a free newspaper into my hand, then wished me a "nice day" with a smile.

I looked through this newspaper and found it to be quite informative, with great color photos and concise stories. Even the ads were 4-color, from major advertisers. Instantaneously, this news daily, that seemed to come out of nowhere for hardened New Yorkers, changed the dynamics of the New York newspaper marketplace. Sure, there are tons of free dailies out there, most notably the Village Voice and New York Press, but their passive distribution and niche articles didn't deliver as great a competitive threat.

To this mix, throw in another free daily, distributed by a totally new army of aggressive nice people, and the combination seemed an insurmountable threat to the establishment. Not only were readers being taken away, but the value of the paid for dailies have diminished noticeably for their investors and owners.

The most obvious question we get asked is how these free newspapers has affected our business?

Targeting 189 local readers of a major New York City newspaper, al berrios & co. set out to understand the effects from the readers' perspective and our findings have been extremely grim. Free New York metro area daily newspapers AM and Metro pose a significant threat to newsstand sales because of 1) the aggressive "in-your-hand-with-a-smile" distribution and self-serve corner newspaper boxes and 2) perception of high-quality news and photographs for free.

Not only has Metro registered a 6% penetration rate in reader preference in June from 0% in April, but the total number of other newspapers read by our readers increased by 26 percentage points, meaning readers are trying news content from other newspapers during the time we surveyed them. We believed that this was a severe drop in readership due to the combination of unprecedented competition, however, as it turns out, it is not uncommon for daily newspapers to experience up-and-down fluctuations in their readership on a month-to-month basis.

How have free newspapers been able to capture a market that was previously thought to be impenetrable?

At an industry conference hosted in November 2002 by industry auditor, the Audit Bureau of Circulations (1), the overly aggressive circulation management practices of newspapers were put under a spotlight as "gimmicky". These practices haven't slowed, as demonstrated by last week's censure of Newsday and Hoy here in New York by the ABC. Our research supports that such practices do indeed affect the value of a newspaper as an advertising medium, as subscribers have told us that they aren't always interested in reading the newspapers they get. (This trend is also supported by our recently published study on consumer magazines, al berrios & co. Analysis of Favorite Consumer Magazines June 04 [2]).

Nearly 20% of consumers forget to pick up a newspaper and are infrequent readers, only read a newspaper if its available at work or don't read at all because they're too busy, and/or prefer other sources of news, such as the internet or magazines as opposed to newspapers. Given these obstacles to reading a newspaper, when handed a thin, beautiful color newspaper for free, most consumers will read it and shift their interest away from the paid-for newspapers.

And here lies the greatest challenge for established newspapers - although circulation practices get papers to consumers and other marketing tactics generate measurable awareness, branding is poor. Our analysis revealed that the reason 25% of our readers are currently not reading the newspaper we asked about may be traced to poor branding. In other words, the armies of branded, friendly, "in-your-hand-with-a-smile" distributors combined with the high-quality of the product is enough to permanently steal away market share from established dailies that make no effort in developing brand equity, or the perceived value of their product.

Other than sports and business sections, our analysis doesn't reveal any additional interest in specialized inserts. Although marketing efforts work in generating awareness and interest in them, in our 4-month analysis of a recently launched insert in the newspaper we asked about, there doesn't appear to be any increase in the perceived value of the entire newspaper to readers.

In publishers' disregard for the free news model, we believe they have overlooked the simplistic, yet brilliant strategy that are giving free dailies their competitive advantage in the New York market: 1) thin-prints, where a complete paper averages just under 40 pages, keeping printing costs low and enhancing the value for an advertiser; 2) outsourced newsgathering, maintaining news-acquisition costs low; 3) no mailing and circulation costs, with a moderate investment in hourly distributors posted at strategic high-traffic areas during morning rush hour times, which in turn, will modify readers to look for self-serve newspaper boxes themselves.

Our analysis should be used as a gauge of consumer sentiment and behavior, not as a definitive source of actionable data. Our 4-month micro-study queried 186 mostly male A19-35 consumers, with survey questions designed to learn more about consumer interest in specialized inserts within the newspaper we asked about. Fortunately, we also identified other notable trends that pose serious threats to any competitive newspaper marketplace. Based on our initial findings, we recommend to major metropolitan paid-for newspapers to:

1) consider shifting measured spending from circulation to branding rather than launch competitive free newspapers,

2) evaluate strategic acquisitions to consolidate some of the dozens of ethnic newspapers serving niche markets in your larger metropolitan area rather than compete head-on with free mass newspapers,

3) enhance advertising products and diversify advertisers, as traditional advertisers have evolved away from newspapers, seeking better advertising choices (1), and

Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

al berrios & co. does and seeks to do business with companies covered in its research reports and studies. As a result, the reader should be aware that the firm may have a conflict of interest that could affect the objectivity of this report or study. Readers should consider this report or study as only a single factor in making any strategic or investment decisions.

(c) 2001-2005. All Rights Reserved. al berrios & company, inc. Published by al berrios & co. This Report may not be reproduced or redistributed in any form without written permission from al berrios & co., subject to penalty.

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