20 Jan 10 Magazines: Ad-ing up the losses

The newspaper and magazine segments are the largest contributors in revenues to the global publishing industry – contributing close to 52% of global publishing revenues. It would therefore be safe to assume that of all the challenges faced by the industry, none would be as altering (in terms of revenues) as the challenges faced by these two segments. The newspaper and magazine segments have already lost considerable revenues on account of dip in ad revenues. This is directly attributable to the global economic slowdown, which has led to decrease in consumer and corporate spending.

Does a drop in revenues merit a need to re-invent the business model? How are publishers coping with the dip in revenues? Will the digital market provide a strong revenue source? Will this mean more outsourcing/offshoring?  In this post I look at the magazine segment.

The Magazine Segment
The magazine segment represents a major chunk of the global print publishing market. Considering that more than 100,000 magazine titles are being published in the US and UK alone, the magazine publishing industry is huge in scale and operations.  Each year the US and UK magazine market sell upwards of 4 billion magazine copies. However, like the newspaper industry, over exposure to ad revenues is hitting the segment hard.

December 2009 figures reported by the Magazine Publishers of America suggest that advertisements with finance, automotive and retail themes have drastically reduced. Advertising revenues dropped by 18% and while the segment generated almost 169,218 advertising pages through the year, there was a drop of 25% from the previous year.

The emergence of Web advertising has added to publisher woes. Print ads are billed higher and the shift in ad dollars to digital forms has seen substantial decline in print ad revenues. While publishers tend to push for print ads, advertisers look at digital ads as a cheaper yet effective means to address the reader.

Production costs and increasing salaries coupled with distribution and printing are crippling publishers. The diagram below illustrates the relative cost and revenue contribution of each functional head in a typical magazine publisher’s work flow. It illustrates the pressures brought on by declining revenues and increasing costs:

Source:ValueNotes

What options do magazine publishers have?
We have mapped the probable course of a magazine publisher’s operations – the purpose of which is to determine stages during which magazine publishers will evaluate options – to increase revenues and look to decrease costs.

These options are illustrated below:

Source:ValueNotes

Many publishers are now moving to Web only form to cope with cost pressures and dwindling revenues. While this might be considered a favorable option, the shift of ad revenues to Web advertising is one of the biggest challenges that magazine publishers face. Presstime, the monthly magazine of the Newspaper Association of America (NAA) has transitioned to a Web form that saves them up to $500,000 per year for a circulation of 20,000. While this might suit the NAA, it might not necessarily suit a small publisher whose circulation is too small.

The advantages of migrating to web-only form are:

• Massive cost savings, attributed primarily to the absence of printing and circulation.
• Cost saving from scaling down operations – building and office overheads are done away with.
• Sizeable reduction in manpower redundancies.
• Easier management of  workflow.
• Easier monitoring and monetization of content.
• Opportunity to tap a larger subscriber base that can be generated due to internet percolation.

 
However, there are severe repercussions to transitioning completely to a web-only form:

• Shift in ad dollars from print to Web advertising may not sustain the publisher. There is a massive difference in pricing and this will not help the publisher unless there is drastic reduction in operations and manpower.
• Redundancies in the workflow may remain especially with smaller publisher where one person does many jobs. In cases where certain publishing heads are removed (printing and circulation), there may exist employees who are not used to complete capacity. This will require severe restructuring of the workforce and thereby a dip in productivity.
• The online competition is high. To retain attention is a challenge and there would to be a need for strong in-house presence for content and new media expertise.
• Lot of employees will need to be reduced, leading to lower employee morale amongst existing employees.

The biggest of them is the fact that not many people are conforming to paying for content – thereby resulting in the publisher looking at ads for revenues. While some magazines like Time have already started restricting access to non-subscribers, the trend is yet to catch on. More often than not, when a reader is faced with restricted access, he/she might just look for another source. Traditionally, magazine publishers have encouraged a digital paradox – wherein they have provided content for free in the hope that it would result in a subscription for the printed form. Paying for content online is a trend that is slowly picking up, but might just hinder a publisher’s plan to shift to a Web only form.

Publishers have also grappled with excessive printing. Take for example news magazine, Newsweek. In May 2009 Editor Joe Meacham announced plans to cut magazine circulation by half, and was met with skepticism and in some cases ridicule. However, it makes sense looking at the cost aspect. While ensuring that the printing costs do not overwhelm them, Newsweek’s plan to cut back circulation has allowed them to retain their loyal readers – thereby creating and retaining an elite (read: high quality) subscriber base. With magazine print operations under control, Newsweek can now concentrate on its other subscribers using its web form. (How is Newsweek doing – got any comments?)

Will the need to cut costs result in more outsourcing or offshoring? While publishers have been outsourcing, offshoring is still nascent. Overcoming language issues, quality, delivery, etc is critical if the segment is to open up. However, more on this when we analyze our survey data.