Cut-price journalism

It's nothing new for The Sun's editor to denounce the "two-bit nobodies" running the Daily Mirror, or for the Mirror's editor to demand his "ranting" rival be held on mental-health grounds. This time, though, they are putting their money where their mouths are. In an extraordinary gamble, the Mirror this week slashed its weekday cover price from 32p to just 20p. The Sun declared war as it matched the cut - hours after its rival's announcement last Friday. "If they pick a fight with us, we have to retaliate," explains Les Hinton, executive chairman of News International. "They miscalculated that we wouldn't respond."

It threatens to be the most brutal and costly price war since The Times shook up the broadsheet market in the mid-Nineties. With the Express now costing 20p and the Star at just 10p, you can buy four tabloids in the Carlton TV region for just 70p - half the cost of a cappuccino to drink with them, and a subsidy to readers approaching £200 million a year.

"The long-term goal is to arrest a 35-year decline in sales," says Piers Morgan, editor of the newly relaunched Daily Mirror. "I'm very confident that in a year's time we'll be selling more papers than we are now - and that's not dependent on what any of our rivals do. The Sun is clearly rattled. If you see some of the things that are being said there, it's white-van time - you might as well take David Yelland off and put him in the clinic."

Yelland, The Sun's editor, made his feelings clear in an e-mail to staff promising to "take apart the Daily Mirror's business and destroy it". This was, he said, "a full-scale declaration of war". Executives at Trinity Mirror had "made two massive, huge, gigantic miscalculations ... First they have repositioned their paper wrongly - it is a dull product - and they have allowed the ego of their editor to dictate commercial policy. Then they have foolishly taken Rupert Murdoch on in a price war. Who do these two-bit nobodies think they are?"

Amid concern within Trinity Mirror that executives are underestimating the battle ahead, Mark Haysom, responsible for its national newspapers, insists that "price is the most effective way of building purchase frequency and circulation". The Mirror certainly needs to do so: in the year to April, circulation fell by 4.93 per cent. Early figures for the first two weeks of May suggest that the relaunch has not reversed the decline: rivals gleefully point out that its ABCs are 6.4 per cent below the same period last year.

The question being asked this week is whether the Mirror panicked. "If the plan was to relaunch the Mirror targeted towards a more upmarket readership, then, had it been working, they wouldn't have needed to cut the price," a rival circulation controller says. "This company has spent an awful lot of money relaunching the product, and then found it hasn't got them anywhere." A senior source at News International is "flabbergasted" at the cut, which he estimates is costing Trinity Mirror £1.1 million a week in lost revenue. "This may prove a pretty epic miscalculation for their shareholders and their readers."

But Piers Morgan proclaims himself "very satisfied so far" and denies as fatuous, claims that he was panicked. "The pricing was part of the plan four or five months ago. We announced some time ago that we would spend £20 million on our relaunch, which some commentators seemed to think was the cost of a black masthead. Anyone who thinks that mastheads and branding alone will drive hundreds of thousands of new readers to us doesn't understand newspapers."

Unofficial returns last night suggested that the strategy may be working, at least in the short term. The Mirror's circulation this Monday was up by around 160,000, or eight per cent. The Sun sold an estimated 196,000 extra copies, a rise of five per cent. More telling is the Star's early result: at 10p it is up by 12 per cent in the Carlton TV region, but two per cent down elsewhere at the full 30p price.

On the surface, the main beneficiary of the price wars has been The Express, which costs 20p in the London area on weekdays, 25p on Saturday and 50p on Sunday. But a closer look at the numbers suggests that Richard Desmond might as well be giving cash away to every reader. On weekdays, the circulation in the Carlton TV area has risen by an estimated 26,000 to 202,000; but each of the existing readers is now saving 15p a day, which the circulation department at Associated Newspapers ( owners of the Evening Standard) calculates at a £136,000 weekly bill for Desmond. "On Saturday, they're up by 18 per cent to 260,000, but that day alone is costing £55,000 in lost revenue. And that doesn't include what they're spending on promotion and advertising." The Daily Mail, which shows no intention of cutting its price, has maintained its sales over the period.

Survivors of the broadsheet price wars of a decade ago warn that there will be no winners. "Price cuts lower the worth of newspapers in the eyes of readers," warns Jeremy Deedes, managing-director of the Telegraph Group, which fought a brutal battle with The Times from 1993. "When we cut to 30p and The Times to 20p, after a period of time it ceased to be a special offer; anything higher risked being seen as profiteering. It's ludicrous: here we are today, selling the Telegraph for 50p, only 2p more than it was in 1992. That's seriously bad news." The Times price cut also led the Telegraph to launch a discounted subscriber offer that, even now, accounts for 308,000 copies of its 975,000 daily sale in the UK and Ireland. "Many of those readers would have bought the Telegraph anyway," a rival executive points out.

For his part, Rupert Murdoch sustained extraordinary losses in doubling The Times's circulation to around 720,000. "I've heard a figure of £200 million," Jeremy Deedes says. "It's a very expensive strategy, though if you're getting ad revenue on the back of it, that takes out some of the pain. But the advertising recession that we're all currently in has made itself felt much more than 10 years ago because of the way we're pricing our papers." In 1992, the broadsheets typically depended for 45 per cent of their revenue on cover price and for 55 per cent on advertising. Today advertising accounts for 75 per cent, according to Deedes. "You feel the cold much more now. The tabloids are in the same advertising recession."

Roger Alton, editor of the Observer, also blames the Murdoch-led cuts for the depth of today's slump. The tabloids, he warns, should not underestimate the damage they could cause themselves. "The Nineties price war was like the First World War - you were slogging it out for minuscule movements of market share. This will be a very hard, attritional war, and there will be casualties."