American Magazine Conference: Magazines confront flawed business plan

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[phoenix] The business model for U.S. magazine publishing is broken and needs to be repaired to ensure the medium's survival. So said some of the industry's biggest players, who gathered last week at the American Magazine Conference here.

"We have no choice but to change," said Thomas O. Ryder, chairman-CEO of Reader's Digest Association, during a roundtable discussion that featured four industry CEOs.

He and others cited the industry's over-dependence on advertising, its unwillingness to charge more for subscriptions and the shakiness of the newsstand distribution channel among the most serious long-term challenges to magazines.

Despite the continued recession and at-times-painful confrontation of the industry's shortfalls, the overall mood at the conference at the Arizona Biltmore was surprisingly upbeat.

But almost universally, magazine publishers and editors called for the industry to evaluate its pricing policies, which drastically undercharge readers for subscriptions in relation to the cost of producing magazines. "This is so ass-backwards it hurts," Mr. Ryder said of the practice of selling subscriptions at $1 or less per issue for magazines that charge $2.95 or more at newsstands. "We are teaching generations what we do has no fundamental value," he said to loud applause. "I hate that."

ego check

The issue speaks to more than the magazine world's formidable collective ego. Magazines have dual revenue streams-circulation and advertising. But the sustained `90's ad boom provided an incentive for publishers to play games with circulation, funding questionable expansion of rate base-the circulation guaranteed to advertisers-or paying to prop up rate bases at levels beyond what consumer demand could support.

The decline in advertising-magazines are currently on track to post their second consecutive year of ad-page losses-have left some publishers questioning such practices. Still, they're afraid to abandon them for fear that advertisers would view the reduction of rate bases as a sign of weakness or would balk at the resulting increase in cost-per-thousand ad prices.

Ad revenue's percentage of overall consumer magazine revenue has steadily crept upward, from 50.3% in 1996 to 56.8% in 2001, according to investment bankers Veronis Suhler Stevenson.

"So many of our consumer marketing decisions have been driven by advertising decisions," said Jack Kliger, president-CEO of Hachette Filippachi Media US. "It's thrown the business model out of whack."

At least one leading media buyer, Renetta McCann, CEO of Publicis Groupe's Starcom North America, agreed. "There may be too much circulation out there," she said, and added that a rate-base reduction isn't always perceived as a negative.

Whether the alarms sounded at the conference will translate to action has yet to be seen. During the last recession, publishers also decried their reliance on advertising, but did little to change the situation.

Among the suggestions that surfaced at the conference: revamping circulation practices and significantly shortening production times of monthly magazines to better squeeze in late ads. Most intriguing-and under-discussed-was a point raised by Mr. Kliger suggesting magazines consider approaching major advertisers such as Procter & Gamble Co. with cross-company deals by category, establishing in effect a print form of TV's upfront market.

All of these offerings won nods of approval at the conference. All of them also, unsurprisingly, have high-profile dissenters-making an industry-wide path to change unclear.

One high-ranking industry executive with significant circulation-side experience suggested that the hand- wringing over circulation would ultimately amount to little. "The economic model still supports" maintaining current rate bases, the executive said. "[Advertisers will] support a little extra circulation, but they won't reward you for lowering rate base." And for now, the executive added, "advertisers are in a good negotiating position."

schedule change

George Green, president of Hearst Magazines International, supports the notion of reworking production schedules to enable later closes. "The customer is always right," he said. "Advertisers will force us to change."

Regarding an upfront market for magazines, Starcom's Ms. McCann said, "It's an idea worth debating," although she added that it wasn't in the best interest of media buyers to have to deal with an upfront. Regardless of how it would affect her business, Ms. McCann said magazines have to think radically about how to change the way they sell advertising. "I don't know if it will help them, but if they don't do it, it will hurt them."

No executive at the conference spoke of any visible turnaround for the industry-which could force publishers' hands on these issues. "I wonder if [the ad market] will ever come back as strongly" as it was during the last peak, Mr. Kliger said. If it does, though, and the industry uses that as an excuse to avoid change, he added, "Shame on us."

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