TERENCE SMITH: The newspaper industry has a problem, and it's not money. Despite the competition from television, cable, and the Internet, many newspapers make upwards of 20 percent profit a year. But they are losing an essential commodity: readers.
JOHN MORTON: Financially, it's very healthy, but clearly there are some long-term problems, notably circulation, which has, for the last ten years, been gradually declining.
TERENCE SMITH: Industry analyst John Morton says increased newspaper prices in the early '90s started the circulation decline. He expects that to continue, but he sees an even more serious problem looming.
JOHN MORTON: You find that the nation's schoolchildren are being trained to get information from a computer screen. And when they come of age, it will be a second nature for them to pick up a computer and look at it for information, as it was for our generation to pick up a newspaper.
TERENCE SMITH: So what will foster a newspaper habit for this generation and the next? Some publishers think they have come up with a solution: Give the paper away.
NEWSPAPER EMPLOYEE: It's free, it's fresh, it's the evening edition of the "Daily News Express."
TERENCE SMITH: More than 90,000 copies of the breezy New York Daily News Express are distributed free at key transit stops for afternoon commuters.
MORTIMER ZUCKERMAN: I actually thought it was an exciting thing to do, an intriguing thing to do as a media experiment. To try something in the afternoon-- a newspaper in the afternoon and a free newspaper in the afternoon-- and to see if you could make the newspaper work as an editorial product.
TERENCE SMITH: Mort Zuckerman, a real estate magnate and self-described media junkie, is publisher of The New York Daily News.
MORTIMER ZUCKERMAN: Frankly, it's worked out better than we thought. Everything has been against it. Every afternoon newspaper has croaked. And to go in, as they say, at a price point that's called zero, you really have to rely on our advertisers. And we're very pleased with the way it works.
TERENCE SMITH: Mort Zuckerman knows a fundamental truth of newspapers: Upwards of 80 percent of revenues for most papers comes from advertising. Circulation is important mainly to attract advertisers. So the morning edition of his New York Daily News -- which once sold two million copies a day but now is down to 700,000 -- is trying to lure new readers with its free afternoon paper.
EDWARD KOSNER: You get a lot of updated business news, both market news and business related news. Occasionally there are things that happen in sports. You get a handy entertainment and movie guide. You get the cream of the gossip.
EDWARD KOSNER: Can you write something?
TERENCE SMITH: Ed Kosner, editor-in- chief of the New York Daily News, says advertisers are comfortable with the Express...
NEWSPAPER EMPLOYEE: So this is otherwise okay?
TERENCE SMITH: ...Because they already know the Daily News. And the Express targets an audience retailers want: Commuters who are outside the News' traditional city base.
SPOKESMAN: I met the senior VP, I met the CFO.
EDWARD KOSNER: I mean, the people who are going in and out of Grand Central and Penn Station, those are people with jobs and income, and they are good prospects for some upscale advertiser, which they are getting.
TERENCE SMITH: Publisher Zuckerman says the free afternoon paper thus far has had a minimal effect on the circulation of the morning edition. But it certainly caught the attention of the Daily News' traditional rival: The New York Post. To compete, the Rupert Murdoch tabloid cut its newsstand price in half. The free newspaper experiment is also working outside of New York. In wealthy, tree-lined Palo Alto, California, the freely-distributed Palo Alto Daily News, started in 1995, now has a circulation of 30,000. It has spawned offshoot free dailies in three neighboring California communities.
DAVE PRICE: Our advertisers, we think, get more bang for the buck. In other words, if you spend even 25 cents for a newspaper or 50 cents or whatever, you covet the thing, you feel territorial about it, you're not as apt to give it up to a friend. Whereas, if it's a free paper, you are going to go through it and then you'll leave it for the next guy.
TERENCE SMITH: Dave Price is editor and publisher of The Palo Alto Daily News.
DAVE PRICE: There, right now, he's interviewing a person who's helping out a lady that was in today's paper who got carjacked, and she's helping with a car.
TERENCE SMITH: He thinks local news coverage is the key to success.
DAVE PRICE: The bread and butter of what we do in this newspaper is coverage of local issues that matter to people here.
REPORTER: Anything else going on?
REPORTER: Do you know how many officers tried to qualify?
DAVE PRICE: And nobody else is doing it. If you want to find out what is going on locally, our paper is the one to look at.
TERENCE SMITH: While free daily newspapers are relatively common in Europe, they are a newer phenomenon in the United States. Here, publishers face two problems: They have to convince the readers to trust the editorial content and they have to persuade the advertisers that the people who get the paper for free actually read it.
JOHN MORTON: With a free paper, you know, you don't know how well read it is, how well, widely distributed it is. A free daily is, in industry parlance, is a "throwaway" and advertisers are concerned about that.
TERENCE SMITH: But Price says, over time, readers come to trust the product, and advertisers follow.
DAVE PRICE: You have to report the news, and do it all the time, and do it consistently, and on a fair basis, and be consistently accurate. And if you do that, you are going to get a track record with people.
TERENCE SMITH: So even though it's free?
DAVE PRICE: Yeah, if you are consistent.
TERENCE SMITH: The Palo Alto Daily News does not claim to cover national and international news in the way a major metropolitan daily would. But Dave Price is not apologetic
DAVE PRICE: Your average Joe has time for one newspaper. So what we're hoping to do is create a package that not only has all the local news, but also has an adequate summary of national and international news so that they feel as if they are getting their full diet of that type of information.
TERENCE SMITH: Fifty miles up the California coast is a publisher who has built his business on free newspapers. His new challenge is resurrecting the nearly moribund San Francisco Examiner and continuing it as a paid daily.
TED FANG: It's all about delivering a market to advertisers. If you can deliver a newspaper that the market reads, advertisers are looking for that, whether it is a free newspaper or it's subscription-based.
TERENCE SMITH: Ted Fang, whose family distributes the free Independent, is locked in a lopsided struggle with the larger and more powerful San Francisco Chronicle, now owned by the Hearst Corporation. Despite his success with the Independent, he argues that the venerable Examiner will prosper as a subscription newspaper.
TED FANG: There are businesses that would like to target more toward subscribers, people that subscribe to a newspaper. A lot of department stores fall into that category, airlines and banks fall into that category. And so the Examiner is going to fill that niche while the Independent fills a different niche.
TERENCE SMITH: Back in New York, Mort Zuckerman confesses that his decision to distribute a free afternoon version of the Daily News was, in part, defensive.
MORTIMER ZUCKERMAN: We sure as heck didn't want someone else coming in to build up their reach to a wider audience.
TERENCE SMITH: Metro, for example?
MORTIMER ZUCKERMAN: Yes.
TERENCE SMITH: "Metro" is Metro International, a European based company that is the colossus of the free newspaper industry. It publishes free tabloids in 18 cities around the world, including Toronto and Philadelphia, and has targeted scores of cities for expansion, including some in the U.S. Metro papers are economically successful, but critics complain that such free tabloids carry only a semblance of news.
TERENCE SMITH: What's the editorial quality of these free newspapers?
JOHN MORTON: I would say, sparse and sparser. The Metro is the sparser one. You know, a major story there would be three paragraphs long. A lot of it is picked up from wire services, they do very little original reporting.
TERENCE SMITH: And others question whether additional free newspapers will cannibalize an already declining number of traditional newspaper readers.
MORTIMER ZUCKERMAN: The Daily News, thanks be to God, is profitable, but it's not gigantically profitable. And I think if you had another newspaper there, there would be more blood in the streets.
TERENCE SMITH: But Ted Fang believes there is room for both free and subscription papers, especially in cities with mass transit systems.
TED FANG: While the "Metro" model may have a place in the American newspaper industry, I don't think it will supplant anyone. The readerships are different and they serve different advertising needs, and serve different audiences.
TERENCE SMITH: In Philadelphia, thus far, Fang seems correct. That city's Metro, distributed in the subway system, has had little effect on the city's established subscription newspapers. But if advertising confidence in free distribution builds, free daily newspapers may spread. To find out, check a transit stop near you.