SPECIAL REPORT MAGAZINES;RECORD HARVEST SUCCUMBS TO HIGH PRICE;COATED GROUNDWOOD COSTS CAUSE HAVOC, FORCING PUBLISHERS TO SQUEEZE ADVERTISERS, READERS

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A year ago, most publishing executives gathering for the annual American Magazine Conference believed their companies were finally reaping a bountiful harvest of advertising after a four-year drought.

They predicted record ad page totals for the full year, and they were right: Ad pages in 1994 jumped 5.3% to a record 180,588.6, according to Publishers Information Bureau.

In addition, ad revenues also hit an all-time high of $8.5 billion-up a whopping 10.9%, according to PIB.

But this year, as the same executives gather in Boca Raton, Fla., for their annual conference, the topic that's now front and center is the price of paper.

As magazines have fattened up on ad pages, they've consumed more coated groundwood paper-the main grade used by magazines and catalogs-and sent prices for this commodity soaring.

Prices are continuing to climb. Publishers are still adjusting to the last hike on Oct. 1 of 5%-to-6% per ton, boosting the overall list price to $1,400 per ton on No.*5 34-lb. coated groundwood.

That's nearly 60% higher than the list price in mid-1994-before the current wave of increases. It's also about double the tab from mid-1992, when prices last bottomed out.

Paper amounts to 10.3% of consumer magazine publishers' overall costs, the Magazine Publishers of America estimates.

Although the price of paper is cyclical by nature, industry observers say there's no relief in sight, at least for the next several years.

"How quickly [price increases] will come is hard to say," says Sherman Chao, a paper industry analyst at Merrill Lynch, "but I believe we'll see further price increases [in 1996]."

That means publishers must adjust their ledgers accordingly-and may have no choice other than to ask advertisers and readers to help pay the freight.

"I think the paper mills should all take a breather in 1996," says Chris Little, president of Meredith Magazines. Realistically, however, he concedes he's expecting paper prices to rise.

Other top executives also are bracing for the worst.

"I think we'll see two increases next year," says Steve Florio, president of Conde Nast Publications.

Don Logan, president of Time Inc., says he thinks only one price increase will actually fly.

"I don't think there is any basis for huge increases next year. The paper companies might announce two, but I think only one will stick, probably at midyear," Mr. Logan says (see related story on Page S-8).

Publishers are responding to the new realities in a variety of ways.

Many are trying to improve circulation management-and, accordingly, contain paper costs-by extracting more revenues from readers and eliminating bonus circulations offered to advertisers.

The most dramatic decision was Hearst Magazines' move in July to raise ad rates and cover prices and also cut the rate base about 10% on its 13 monthly magazines. Cumulatively, the Hearst move alone cut some 2 million copies a month out of the demand picture.

The move has been praised by some publishers as gutsy and criticized by others as a mask for circulation weakness.

No other major publisher has followed with a similar blanket move. However, the Hearst decision probably encouraged other publishing companies to chop rate bases on certain titles. Other magazines, from TV Guide to The New Yorker, are hiking newsstand and subscription prices.

In addition, advertisers are being asked to help defray the higher costs, through accepting higher ad rates and forgoing circulation bonuses (see story on Page S-4).

Most titles at Time Inc., the nation's biggest magazine publisher, were planning to maintain rate bases, although a few such as Martha Stewart Living had a 7% increase in rate base but no change in the cost per thousand readers.

One or two Time Inc. magazines may ultimately roll back rate bases, but decisions will be made on an individual-title basis, says Mr. Logan.

Executives at Time Inc.'s main titles, People, Sports Illustrated and Time, have mentioned ad rate increases of between 5% and 8%.

Many monthlies seem to be implementing CPM increases as high as 10%.

At Meredith's two flagship titles, Better Homes & Gardens kept its rate base and boosted its ad rates 9.8%, while Ladies' Home Journal cut its rate base 10% to 4.5 million-matching the rate base cut (and the CPM increase) instituted by Hearst rival Good Housekeeping.

Not surprisingly, marketers and ad agencies aren't always willing to pay more. Hearst appears to have lost the Kraft Foods business at least for its big books Good Housekeeping and Redbook, although Victoria, Country Living and Cosmopolitan may escape with some Kraft advertising next year.

Many agency executives seem only mildly interested in the magazine publishers' paper woes.

"I'm not going to pay double-digit increases," says Mike Lotito, exec VP-chief media officer at Ammirati & Puris/Lintas, New York. "My clients' budgets are not going up double digits."

So far, the rising paper costs don't appear to have affected magazine launches set for the near future.

Next year Meredith will release Renovation Style, a spinoff of Traditional Home. Time Inc. is still going ahead with its launch of This Old House, and next September Conde Nast also plans the relaunch of House & Garden.

The rising cost of paper is, however, forcing publishers to restructure growth projections for newer books and is affecting longer-term plans.

At Hearst, Esquire Gentle a twice-yearly, 350,000-circulation magazine, was scrapped with paper prices partly to blame. And at Time Inc., a spinoff project from Martha Stewart Living was put on hold.

Mr. Little says he's still planning to increase the rate bases on relatively new magazines such as Home Garden and Traditional Home, but he's keeping a careful eye on the moves.

"We'll probably increase rate bases slower than we would have three or four years ago," he says.

But Mr. Little predicts there's likely to be more emphasis on circulation and newsstand revenue streams, especially among startup projects.

In addition, he says, magazines that had been relying predominantly on advertising may not get off the ground.

Publishers will look harder at any other new titles now on the drawing boards. "The hurdle has been raised for new magazines," notes Mr. Logan.

Ultimately, most publishers now say they are making hard business decisions about expenses, ad rates, circulation and marketing which may affect the shape of the magazine business for years to come. In fact, Times Mirror Magazines last month laid off 125 staff members, or 20% of its workforce.

"I think 1996 is not going to be just another year," says Mr. Florio.

"I think it is going to be a pivotal year for the rest of this decade and into the next millennium."

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