Last week's decision by Ken Livingstone, the mayor of London, to invite bids for a second free newspaper that will be distributed on the capital's Underground transport network will stoke the notorious rivalry between UK national newspaper chiefs.

Richard Desmond, publisher of Express Newspapers, will be particularly keen to break the stranglehold over the market enjoyed by Associated Newspapers, the group run by Lord Rothermere that publishes London's Evening Standard and Metro, the existing free newspaper for the London Underground.

Express Newspapers has planned for more than two years to launch a free paper in the capital, but has been waiting for a decision from the Office of Fair Trading on whether Associated's exclusive contract to distribute on the Underground is anti-competitive.

Associated is likely to make a bid to distribute Standard Lite - a free, slimmed-down, lunchtime edition of the Evening Standard that it launched last year - but is awaiting the OFT decision before making any formal announcement.

Other publishing groups are expected to enter the fray for one of the most coveted contracts in newspaper publishing and a stake in the growing free newspaper market.

There are more than 130 free newspaper titles worldwide and a total of 16m copies are given out each day. In the US, new publishers are entering the market on an almost monthly basis as the format - which makes its money from advertising - proves not only a means to extend newspaper readership, but also a potential money-maker.

The largest player is Metro International, the Swedish group that publishes 45 daily editions in 67 cities around the world; it launched five new editions in Italian cities last week.

Many European cities have at least two free newspapers and the product is diversifying into new niches. In Sweden, for example, Metro has launched a spin-off, Hus & Hem, for people interested in property; in France, Economie Matin, a daily business paper, is given away free at Metro exits and in business centres; in South Korea, sport and cartoon titles are available for free.

London's Standard Lite is aimed at women but, while it has increased the readership of Associated's Standard brand, its launch could be affecting sales of the paper's paid-for version - which reported a year-on-year circulation dip of 12.5 per cent during February. Many believe it is only a matter of time before the title relieves itself of a cover price.

During the same month, the Audit Bureau of Circulations (ABC) reported that sales of UK newspapers - particularly tabloids - continued to slide. The Sun slipped 3.7 per cent year-on-year. Rupert Murdoch, its owner, has said that his company is "devising strategies" to deal with the rise of free titles.

But how much of a threat to paid-for titles has the free model become?

"Every time we launch into a market, everyone panics," says Greg Miall, head of international advertising at Metro International. "But we are targeting different audiences and deal with the big strategic issue for all publishers: that young people aren't buying papers."

Some newspaper groups make little or no money from charging a cover price, but Jim Chisholm, senior strategy adviser at the World Association of Newspapers, says that newspapers with two sources of revenue - cover price and advertising - should not go down the free route unless they are certain the money gained through advertising revenue can mitigate the loss of a cover price.

"In the US, where publishers make a lot from advertising rather than circulation, there has been an explosion of free newspapers, but in France, newspaper advertising has been slow to take off," he says.

For the advertising community in the UK, free dailies offer a valuable but distinct alternative to the parent title. Claudine Collins, director at Mediacom, a media planning and buying agency, says: "Standard Lite is not a comparable product to the Evening Standard and they should not be sold as one package."

Metro International advertisers are youth-oriented businesses such as Zara, the fashion retailer, that have not traditionally advertised in newspapers.

Vanessa Clifford, managing partner at the Mindshare media agency, says that as signs of the limitations of free titles begin to emerge, "free and paid-for titles will grow and evolve to complement each other".

Indeed, Mr Chisholm predicts that under current distribution mechanisms free newspapers will not exceed 6 per cent of total newspaper advertising revenues and coverage will be limited to about 20 per cent of the population.

"Distribution is such that they will never reach more than a tiny proportion of the population," he says. "People grow out of commuting on the Tube."

Some argue that free dailies will create a daily newspaper habit among hard-to-reach demographic groups that will migrate later to paid titles. While there is as yet no hard evidence showing that readers do migrate, publishers in cities where free and paid-for titles have co-existed for some time are beginning to suggest such a shift could explain a recent rise in the youth readership of some Spanish paid-for titles .

In addition, paid-for publishers are discovering business models that allow them to compete with free newspapers. Joint ventures are a popular route, offering cross-selling opportunities: the New York Times recently joined forces with Metro International to share a stake in Metro Boston. In Germany, there are no free newspaper titles but Axel Springer, the largest newspaper publisher, last year launched a cheap, slimmed-down version of its national daily Die Welt, called Welt Kompakt, to attract younger readers. "Our research numbers say that more than 50 per cent of Welt Kompakt readers have been non-readers and are aged from 18 to 35," says Jan-Eric Peters, editor of Die Welt.

The company then went on to combine the operations of both Die Welt and Welt Kompakt with its regional paper Berliner Morganpost, halving the editorial staff and cutting editorial costs by 40 per cent. "For example, we do not send three reporters of three papers to a press conference any more," says Mr Peters, now editor across all three titles.

The move mirrors the centralised operations at Metro International, where worldwide editorial is run like a mini news agency with one editorial chief in London pooling copy to create an international, yet localised, package.

Many regard Metro's operation as a model of efficiency, which might give the UK's warring newspaper proprietors something to think about given that the Swedish group is widely expected to bid for the latest London free newspaper contract.

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