The going rate

Last week, Reuters reported that IAC/InterActiveCorp would take majority control of Newsweek Daily Beast. IAC had merged Daily Beast with the magazine in 2010, a few months after Sidney Harman had purchased Newsweek from The Washington Post. IAC and Harman each took half ownership of the combined entity.

At the time, neither the magazine nor Daily Beast was profitable. The combined venture continues to lose money, as much as $30 million a year according to some reports. IAC denies that the losses are that big, although it has not disclosed how big they actually are.

Harman passed away in 2011, less than a year after he had acquired Newsweek. Since then, his estate has apparently covered its share of the continuing losses in Newsweek Daily Beast. His heirs recently decided to stop investing in the business, and with its continuing capital contributions, IAC has claimed majority ownership.

The change in ownership is a mild one, but it prompted questions during IAC's second-quarter earnings call. At Jeff Bercovici noted, "Without saying anything definitive, Diller suggested that the newsweekly could cut back or eliminate its physical edition as early the fourth quarter of this year."

Cutting down on the frequency of the physical edition is tempting, especially for a media business that already has a web business up and running. I wonder if it's the right answer, though.

On its web site, Newsweek offers a year's subscription for $39, but a quick survey suggests the going rate is something like half that ($19 a year) – about 34 cents an issue. That means the print publication loses money on every copy it prints, with the hope that advertising revenue will (more than) make up the difference.

Newsweek is far from the only magazine to pursue this business model, but it's a tough road back to profitability. At its current circulation (1.5 million), a full page of four-color advertising sells for $178,400. After discounts and agency commissions, the magazine likely gets 30% of that, or $53,500 a page.

Let's assume that Newsweek is losing "just" $20 million a year. The magazine would need about 374 more advertising pages to cover that gap, a 50% increase over the 745 ad pages it sold in 2011, in an otherwise flat advertising market.

Not. Going. To. Happen. Anytime. Soon.

So that $45 million that Newsweek probably spends on paper, printing and distribution looks like a nifty target. The thing is, if Newsweek cuts its print frequency, ad and circulation revenue (which I estimate were about $69 million last year) will fall with it. If they fall at the same rate, the net contribution (which I estimate at $24 million) gets worse.

If everything is on the table, I'd like to see a willingness to shed some of the current rate base and move to a higher subscription price. That's an approach The Atlantic took, with noted success. More profitable circulation might also help Newsweek Daily Beast pursue stories, like its "Women in the World" initiative, that can get lost in a money-losing media property.

About Brian O'Leary

Founder and principal of Magellan Media Consulting, Brian O’Leary helps enterprises with media and publishing components capitalize on the power of content. A veteran of more than 30 years in the publishing industry and a prolific content producer himself, Brian leverages the breadth and depth of his experience to deliver innovative content solutions.