This economic downturn has hit the newspaper industry hard, and free papers have taken the biggest blow.

In a June 7, 2009 New York Times article on the subject, Eric Pfanner describes the plight of the free newspaper. He writes, “They rely entirely on advertising, which is more volatile than revenue from newsstand sales and subscriptions.”

Unlike their paid counterparts, free newspapers are fairly new. While the first free daily paper is believed to have started in 1940, free dailies did not become popular until 1995. The business model seemed promising, and soon free papers popped up in cities across the U.S. By 2008, free newspapers were available in 58 countries.

Free papers, such as the Seattle Weekly, are read by a younger demographic, and their content caters to this audience. They generally have short news tidbits, with a bigger focus on lifestyle, technology, media and entertainment.

But today, analysts say ad revenue of free dailies has fallen by more than a third compared to last year. To cope, free papers are cutting costs and consolidating. Companies like Metro International, which has papers in more than 100 cities around the world, sold several of its newspapers last month – including those in Philadelphia and New York.

Competition is fierce for the coveted title of the top two most popular free papers in each city, as these generate the most ad revenue. Says Anders Kronborg, CFO of Metro International, “If you’re not No. 1 or 2, get out.”

Fewer papers also means more competition for articles. From a PR perspective, it may be more difficult to place articles in the few remaining papers. Pitches should have a strong local angle and appeal to a younger demographic. As papers cut staff, there may also be an increased opportunity for contributed articles.

Just as other media are consolidating, in coming months we expect to see papers that are not in the top two slots falter – or close altogether. After all, how many free dailies does each city need?