Pittman opens publisher eyes as AOL pares third-party links

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In the immediate wake of his speech at the American Magazine Conference in Bermuda last week, there was a somewhat muted reaction to Bob Pittman's message -- that magazines are perfectly positioned to profit from the Internet revolution.

His presentation, enthusiastically delivered, contained mostly recycled revelations. Listeners were quick to point out that Pittman, who will oversee the nation's largest magazine group once the America Online-Time Warner deal is closed, had no choice but to be an evangelist for the power of print. Others noted many of the advantages AOL's president cited for magazines -- they are a portable, random-access medium with strong brand names, scalable financial infrastructures, established distribution systems and loyal audiences -- have been touted for years but have yet to translate into digital success for publishing houses.

But as his audience finished chewing on his words, digested them over coffee in the hallway outside the hotel ballroom, they realized two of Pittman's bullet points were immensely intriguing and hold enormous consequences for anyone who earns a paycheck in the magazine business.

Hell, it even suddenly became clear to every publishing group CEO in the room why Time Inc. was willing to pay a seemingly unjustifiable price to acquire Times Mirror Magazines. More on that later.

Pittman's first stunner was that AOL now has annual revenue from advertising and e-commerce of $2 billion. Yet, he noted, only 10% passes through advertising agents on its way to AOL. That means not only had it found a way to tap new sources of revenue beyond media dollars, including promotional budgets and even sales costs, it had bypassed the third party. It had established direct relationships with marketers by providing a more convenient, efficient and profitable way to conduct transactions.

The second head-turner was Pittman's revelation that Time Inc. titles, in a recent synergy test, had sold 500,000 subscriptions through AOL solicitations in just five months. Ninety-five percent of those subs were paid for by credit cards, and fully half sold as "evergreens," which renew automatically until the subscriber cancels.

AOL provides Time Inc. electronic links to those readers and dramatically slashes the costs of acquiring and renewing those subscriptions -- a huge cost advantage over rivals. It also means AOL has again found a way to bypass a third party, subscription agents in this case, to establish a direct, more convenient and more profitable relationship with consumers.

There's the common thread. The Internet always held the promise (or threat, depending on your viewpoint) of cutting out the third party. AOL has done that on two fronts, clearing direct paths to both advertisers and consumers.

Publishing bigwigs were struck by both a sense of opportunity and of anxiety, the latter stemming from the advantage Time Inc. will hold in a combined AOL-Time Warner. With an eye towards such regulatory concerns, Pittman told reporters after he spoke that AOL will continue to work with other publishers. "This isn't a world of exclusive relationships. It's a world of partnerships," he said.

As for Time Inc.'s surprise buy of Times Mirror Magazines, that was a hot topic of discussion in the first days of the conference. Attendees couldn't understand how the fiscally conservative, acquisition-shy company could justify spending an eye-popping $475 million for the parent of Golf and Field & Stream.

After Pittman's speech, however, it dawned on them, eliciting reluctant admiration, that AOL-Time Warner has a growth plan for its magazines, a plan that leverages direct relationships with advertisers and consumers for incremental growth and fatter profit margins.

One of the smartest CEOs in the business was approached by a journalist after Pittman's speech. Did Time Inc. pay too much for Times Mirror? "It bordered on irresponsible," the CEO said. "Then Pittman stood up there and talked about the half-million subscriptions . . ." He trailed off. For a Time Inc. rival on this morning, there was nothing more to say.

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