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Shattered illusions.

That's what newspaper and magazine publishers have been facing in recent weeks as paper price hikes have left them reeling.

Worldwide demand for paper has not eased in the first half as publishers had hoped, triggering a new round of price hikes that are steeper and more frequent than anticipated for both newsprint and coated groundwood.

The latest shocker for newspaper publishers came last week when three large Canadian paper mills-Abitibi-Price, Avenor and Stone Consolidated-indicated they were falling into line behind Stamford, Conn.-based Champion International, which had announced a 10% newsprint price hike effective Sept. 1.

That was apparently enough to sway the balance for Times Mirror Co., which announced the Baltimore Evening Sun come Sept. 15 would be merged into a revamped morning Sun, following two years of consumer research unsuccessful at saving the daily.

The Evening Sun will be the fourth daily to disappear this year. "You can't blame the rise in newsprint for all the problems, but it certainly exacerbated the situation," said James Maine, a VP at Resource Information Services Inc., a Bedford, Mass.-based paper consultant.

The latest newsprint price hike comes on top of the May 1 increase that pushed the price for large volume customers to $675 per metric ton. The

upcoming increase-if it holds-will probably push the price to $744 per metric ton. The list price-often the price for smaller buyers is even higher-is $780 per metric ton.

"It continues to be a bad situation getting worse," said Thomas Curley, publisher of USA Today. "People are pushing several levers, increasing cover prices, decreasing circulation in non-strategic areas and cutting whatever costs they can."

The paper price spiral "is still headed in the wrong direction for '96," Mr. Curley added. "We're planning for a worst case scenario."

As for magazine publishers, they are already staring the next price hike in the face. On July 1, the list price jumps another 9% to 10%. That will push the price of No. 34 pound coated groundwood paper to $1,220 to $1,230 per ton. The heavier grade, No. 40 pound paper, will only increase about 5.7% adding another $60 per ton to its current price of $1,050.

"Ouch," said Anne Sutherland Fuchs, senior VP-group publisher at Hearst Magazines. "Everybody is scrambling. It is going to make it toughest for small publishers or for magazines that are No. 4 or No. 5 in their field."

TV Guide, which raised its newsstand price 10 cents to 99 cents in March, had decided to let its rate base drop 7% to 13 million on July 1. For other large-volume producers, such as the tabloids National Enquirer and the Star, a half-inch was shaved off the trim size this March.

"There is a limit to how much of that you can do without hurting the product," said Don Logan, Time Inc. president-CEO. He said Time is trying to regulate newsstands, hoping to eliminate unprofitable circulation, but has not altered trim sizes or switched to lighter weight paper.

He also said the company is pushing through some mid-year ad rate hikes for several of its magazines. Money is raising its ad rates 5%, effective with the July issue. Martha Stewart Living jumped its ad rates 37% effective with the June issue that just hit newsstands, but that increase corresponds with a 37% jump in rate base to 1.2 million making for a steady cost per thousand.

Conde Nast President Steve Florio said of the latest paper price increase: "We knew it was going to happen on July 1, but we didn't think it would be 9% to 10% ..... Prices are 50% higher than a year ago."

But Mr. Florio is standing by his earlier vow not to boost ad rates in mid-year. Further, Mr. Florio has been a vocal advocate of holding fast to the rate card.

There are a number of factors that could keep paper prices high.

"European prices are slightly higher than [in] the U.S.," said RISI's Mr. Maine, and he said the Asian and Latin American spot market prices for newsprint are about $1,000 per metric ton. "That's helping to pull up the price in the U.S."

It also means the Scandinavian and Finnish suppliers that were shipping into the U.S. last year are finding lucrative markets closer to home, thanks to a worldwide economic revival.

Some publishers feel the price increases being put through in the latest round are unreasonable, and that paper mills are now price gouging. Said one senior executive at a major magazine publishing company: "They [paper mills] have had four increases in four quarters now. That's unprecedented."

Though it does not seem to have slowed down the pace of magazine development, it does seem to be spurring decisions to put more titles on the block, said Paul McPherson, a partner at New York investment banking firm AdMedia Corporate Advisors. "The cost is manageable for magazines that are profitable, but it is going to be a problem for magazines that are marginal."

The increased paper costs are cited as major reasons why Mirabella, Family Life and Premiere changed hands this year. Omni abandoned print altogether and opted to exist as an electronic service. Several small 'zine publishers have also scrapped print and gone straight into cyberspace.

Among major magazine publishers, launches still seem to be proceeding. Hearst plans to roll out Marie Claire as a monthly in September and Time Inc. Ventures last week went ahead with the test of This Old House Magazine. Conde Nast said it will launch Conde Nast House & Garden as planned, but two other proposed titles might never get off the drawing board.

"It would make us look hard at a launch right now," Mr. Logan said. "The mills can't just keep raising prices on their customers without it having a negative impact."

The mills, however, disagree. "We're just a tiny bit past where we were in price compared with six years ago," said Mary Green, director of media relations at Champion International. In first-quarter 1994, the company lost $31 million; this year it reversed the loss and made $131.2 million.

Many newspaper and magazine companies reported excellent first-quarter results despite the paper increases. Internal efficiencies and the reviving economy helped, as did the pickup in the pace of classified advertising.

While newspaper publishers have been raising newsstand prices, magazine publishers have more often been locked in to maintaining newsstand prices, lest they have a negative impact on their rate bases.

To make matters worse, publishers have been complaining that many of the subscriptions generated by stamp sheet houses such as Publishers Clearing House and American Family Publishers have been declining this year. Publishers, therefore have to be careful with newsstand price increases and the usual hit such a move creates for single copy sales.

That could create additional demand on ad rates next year. Said Mr. Florio, "It is going to be interesting to see what happens to ad rates heading into 1996."

Added Mary Berner, senior VP/publisher at TV Guide: "My guess is they will probably all go up 8% to 12% in 1996."

Mark Diverio, a VP-paper industry analyst at UBS Securities, New York, said that paper prices are unlikely to subside anytime in the next few years. The price of raw materials remains sky high, and papers are making up for a four-year downturn since the last recession when many of them were forced to operate at a loss.

"There is very little new capacity coming on board for the next two to three years," Mr. Divervio added. "The rate of increase is going to slow from what it has been but paper prices will be moving higher."

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