As was widely reported, the six-month circulation numbers for U.S. newspapers released earlier this week carried plenty of bad news: an industry-wide tumble year-to-year of 2.8% daily and 3.4% on Sunday. There were much deeper losses in big metro markets like Boston, Los Angeles and Miami.

As grim as those numbers are, a deeper look into the Audit Bureau of Circulations (ABC) reports and into some online data released by the Newspaper Association of America (NAA), makes the overall economic picture even a little bleaker.

True to their word, most companies and individual papers continue to burn so-called “junk” circulation, such as the category called “other paid” as well as third-party or bulk sales, all of it of little value to advertisers. That would support the idea that the business is pruning numbers, but improving the quality of its circulation.

Yet there’s more to the story. ABC further breaks down paid circulation into categories of “over 50 percent” and “25 to 50 percent” of the paper’s cover price. Merrill Lynch analyst Lauren Rich Fine plugged in those figures for a sample of the mid-sized and large papers of public companies and the results were clear: even these losses reported to ABC were achieved with a lot of deep discounting.

In other words fully paid circulation is typically falling even faster than the overall totals reported this week. Apparently, newspaper companies trying to bolster the numbers either pushed deeply discounted introductory offers at readers or extended discounts they were already offering many subscribers rather than trying to convert them to fully paid.

Take the six largest papers of Lee Enterprises, the best circulation performer among public companies. Together they achieved a highly respectable daily loss of just 0.3%. However those same papers lost 25,000 circulation among those paying 50 percent or greater of the full price of the paper, a drop of 4.1%. At the same time, it added 13,500 in the 25 to 50 percent category, a 43.9% increase. That means the papers had significant losses among subscribers paying a higher percentage of the full price while adding readers who paid more steeply discounted rates.

There was a similar story at the Miami Herald. Its Sunday circulation fell nearly 10 percent (9.8) year to year, yet the greater than 50 percent proportion fell more than that, 12.1 percent.Increasing the deeply discounted group by more than 50% is what kept the bottom-line loss out of double digits.

The battered Tribune Company, which is exploring whether to put itself up for sale, recorded the worst result among public companies. Its circulation was down 5% daily and 4.4% Sunday. But according to Fine’s analysis, it was one company, along with the Washington Post, that did not lean on deep discounts to improve appearances.

For years, the publishers group, NAA, has responded to the semi-annual ABC circulation reports by citing newspaper readership totals instead, which multiplies each subscriber by a factor of 2.5 and is falling more slowly than circulation. This week, NAA unveiled a new strategy that highlighted another measuring stick–online growth and total audience reach.

According to Nielsen/Net Ratings research numbers, 58 million people visited newspaper web sites in September and that led to a total audience increase of 8 percent over the previous year. The Nielsen study also estimates that the average visitor spent 41 minutes at newspaper websites—that is all sites, not those of a single local newspaper.

A closer look at those numbers, however, underscores the difficulty of the industry’s current business dilemma. If you divide that monthly total into a daily one, there were roughly 1.9 million people visiting newspaper web sites each day in September. By the same calculation, the average time spent online would be about 1.4 minutes per day. (A recent NAA/Scarborough study estimated that the typical reader spends a little less than 30 minutes with the daily edition of the printed newspaper and more than 45 minutes on Sunday.)

Those numbers may not be big enough to really make up for the loss in circulation. Given the current estimates that total daily newspaper circulation is in the low 40 millions, the 2.8% average circulation drop means that the industry lost about 1.2 million daily subscribers in the course of a year. And those 1.9 million daily online readers did not all appear in one year, given that the annual growth rate is between 20 and 25%. So the bottom line is that the newspaper business is not replacing circulation losses with an equal number of new online readers. And those readers tend to give the contents a much quicker look, anyway.

All this leaves newspapers with another weak story when it comes to print audience as the 2007 ad sales season begins. At the same time, the industry faces a long hill to climb in building and documenting engaged online readership.