Earlier this month, remarks prepared by long-time circulation consultant John Harrington were included in program materials for the Periodical and Book Association of America (PBAA) convention. Titled “What Will the Recovery Be Like? If there is a recovery”, John’s thoughts also published in the New Single Copy, a weekly newsletter that John edits, and picked up in Bob Sacks’ blog.
I found John’s analysis compelling. While we have blogged about subscription prices being too low for most magazines, John clearly has led the way in thinking through this part of the business. His weekly newsletter, available by e-mail or fax, is the single best resource I have found for consistent reporting on single-copy distribution. If you have any interest in this topic, a subscription ($425 annually) is a must.
What follows is his complete remarks, reproduced here with his permission. I am responsible for additional linking, which was not part of the speech.
“What Will the Recovery Be Like? If there is a recovery”, by John Harrington
If the economy recovers, will magazine newsstand sales return to the stable performance of 2003 through 2007, a period of modest unit and dollar growth (plus 2.4% and 9.7% respectively)? A yes answer assumes that the sorry numbers of 2008 were primarily the work of the most severe economic downturn since the Great Depression of the 1930’s. Some analysts contend that the sharp declines, which accelerated during the year, were also attributable to an over dependence on the celebrity weekly category and an too aggressive approach to cover price increases. However, a longer look at magazine retail sales trends demonstrates that total industry performance is more often than not influenced inordinately by a few key categories or titles. Regarding pricing, it must be acknowledged that some unusually sharp hikes turned out to be ill-timed, however the newsstand had been remarkably friendly to pricing for a decade or more, and it is not unimaginable that it will be again in a recovering economy.
Consequently, if one accepts these assumptions, and all things being equal, we should expect the newsstand to return to levels of 2007. Unfortunately, in the broader nature of the publishing model, all things are not equal. The magazine financial model is the infamous three legged stool – advertising, subscriptions, and newsstand – and the legs of the stool are not equal. According to a 2006 Magazine Publishers of America (MPA) study, advertising accounts for 56% of publishers’ revenue, subscriptions for 32%, and newsstand 12%. During the same turbulent period, last year and this year to date, that has seen better than an 11% slip in single copy units, magazine advertising has been clobbered even more dramatically. Ad pages were down 26% in the first quarter, after falling nearly 12% last year. Like newsstand, there is an opinion, perhaps a wish, that the primary villain was the troubled economy. However, there is also an emerging consensus that the causes of magazine advertising’s woes are more numerous. Pages have been soft for several years, and even the better numbers of the early part of the decade are widely thought to have been sustained by steep discounting off published ad rates. Print advertising, newspapers to an even greater degree than magazines, felt the impact of the internet, most specifically Google, which virtually overnight changed the advertising landscape. Yet advertising, despite the plethora of statistics generated by numerous research organizations, essentially relies on a leap of faith by the advertiser. That faith is especially vulnerable when consumers stop buying products. In the financial debacle of the past 12 months or more, all media has suffered as a result. In fact there is a general uneasiness in the media community that manufacturers are rethinking the value of advertising, and subsequently the size of their commitment to it.
What that translates into is a sinking feeling that magazine advertising, even in a rebounding market, will not return, as newsstand very well might, to the levels of 2007. In fact, it may not even come close. And, if true, that could impact on the newsstand environment as well.
If publisher ad revenues do not return to pre-recession levels, or to even a significant share of those levels, then many publishers may be unwilling to invest in newsstand to the extent they did in the first half plus of the 2010’s. Some major publishers may delay or cancel plans for launches. Or, as has been already adequately demonstrated, kill existing titles. New launches have been rare in the past two years, but one-shots and specials capitalizing on the brand awareness of successful, existing magazines are still a mainstay of newsstand. Sometimes, these publications mature into regular frequencies, or at least become annual fixtures. The celebrity weekly (notably People), women’s service, and shelter title categories regularly publish such books. However, if sufficient ads cannot be generated, the frequency and viability of such ventures are in jeopardy. Another publisher tactic, in a weak ad market, is to reduce frequency. This has occurred recently, with some monthlies cutting back to 10 issues, even though their newsstand sales have not been down (at least not radically). This is a case of good publishing economics (editorial, printing, production, paper, and distribution costs are all reduced) being bad for newsstand partners; national distributors, wholesalers, and retailers all lose revenues. To a lesser degree, recent launches whose business plans called for eventual frequency increases are likely, if the ad support is not there, to postpone if not cancel those plans.
An alternative, in a shrunken ad market, for major publishers, is a modification of the publishing economic model that dominates the American magazine business. Some major players are already moving in that direction. It is sometimes to referred to as the British model, but more simply, it is a return to a truly three-legged stool model of publishing revenue. In such a model, all of the legs generate profits out of the revenues they produce. As my colleague, Baird Davis, has pointed out, the average price of a subscription copy has actually declined since the beginning of the decade, while the newsstand cover price has risen by more than 30%.* Simply stated, subscriptions have been viewed primarily by publishers as a means of supporting their ad rate guarantees, and not as profit centers in their own right. Newsstand has sometimes been viewed similarly, especially when management is willing to accept a less than 10% sales efficiency on the last part of their newsstand sales, again to make a rate base. The difference between newsstand and subscriptions is that publishers have not regularly used newsstand to devalue their product. The subscription devaluation of a magazine most commonly results in notorious promotions, such as “75% off the newsstand price.” This tactic is responsible, more than any other factor, for newsstand’s share of consumer magazine circulation shrinking to less than 20% (some analysts peg the number even lower).
In broad strokes, a more balanced publishing economic model will mean lower ad rate bases and reduced circulations. The circulation cutbacks are almost certain to come out of currently bloated subscription numbers, and will mean pushing price increases that will make subs actually generate profits in their own right. That should also translate into a greater emphasis on newsstand, which will not have to suffer from aggressive, desperate subscription marketing.
Before the newsstand magazine distribution channel gets carried away with the above prospect, remember that, at this moment, only a few publishers have actually embarked on this change of direction, although many are clearly considering it. However, particularly for the larger publishing entities, often divisions of much larger media conglomerates, turning around the financial model does not take place overnight. And, if the ad market were to rebound more dynamically than most expect it to, returning to pre-2000 levels, or even exceeding them, then publishing history demonstrates that management would be likely to go back to its old ways in a heartbeat.
So, in a recovering and hopefully recovered economy, the newsstand marketplace is likely to be as welcoming of publications as it was during the stable period of 2003 to 2007. The bigger question is will the American publishing community be prepared and/or willing to take advantage of its opportunities?