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Organic Growth



By Matt Kinsman and Bill Mickey
03/01/2007

As private equity continues to dominate the magazine industry, the priority is on identifying new acquisitions for a rapid revenue build-up, where a company can then be flipped in another three to five years.

Organic growth, however, remains an essential part of doing business. No executive will tell you that organic growth is sacrificed in favor of growth by acquisition. And the rise of multimedia assets makes it easier and more relevant than ever. Folio: spoke with a handful of publishers on the lessons they've learned about growing organically and how they're applying it to their companies today.


Growth Via Cost Management

Future US focuses its attention on cost efficiences to boost profits.

Initiative: Circulation, a critical revenue contributor at 50 percent of the total for this enthusiast publisher, has become a focus of cost efficiencies and growth opportunities.

Example: A circ review is underway to identify strategic and operational changes to boost circ performance.

Takeaway: "We found that a focus on revenues could take our eye off the margin of the business if we went after revenues only." - COO Tom Valentino

Future US, a San Francisco-based enthusiast publisher of gaming, computing, action sports and musician magazines, has largely shelved its former acquisition-based growth strategy for an inward focus on organic growth of its top performing brands, and also newsstand and subscription efficiencies.

The acquisition market has not gone unnoticed by Future's COO, Tom Valentino. "We've seen a lot of these equity players acquiring titles, more than strategic players," he says. "But we've been thinking about how can we continue to expand the strong magazine brands that we have beyond print. We've pulled back a bit on the acquisition strategy in the last year. That's been due to the overall corporate focus coming from our parent company in the United Kingdom. If we were able to find some properties that would bolt on nicely to the properties that we have, we'd be interested from an acquisition standpoint. But right now we're focused on the platforms that we have and how we can build out those brands."

Typically, the company has funded its organic growth by rechanneling EBITDA from profitable properties and plowing it back into new startups. Acquisitions, historically, were funded through debt financing. The company posted 2006 EBITDA of $3.4 million with a profit margin of 3 percent on revenues of $108 million.

One area of focus has been the newsstand and subscription sales;both significant revenue generators for the company. Circulation, as a revenue source, accounts for 47 percent of the topline. "We're trying to find better and smarter ways to analyze newsstand information and trying to move copies from inefficient outlets to the more efficient outlets," says Valentino. "It's easier said than done, given the wholesaler landscape these days. On the subscription side, we're trying to explore ways that we can more effectively market subscriptions through the Internet and trying to be less reliant on no-remit or negative remit sales."

Valentino adds that ratebases have become a challenge as well. "We're spending a fair amount of time and resources looking at how we can improve circulation efficiencies;looking at ratebases. Chasing after the ratebase and the advertising dollar has created some real inefficiencies on the circulation side for publishers," he says.


Focus on Profit

Future has recently flip-flopped its growth strategy to emphasize profits over revenue. "We found that a focus on revenues could take our eye off the margin of the business if we went after revenues only. Now we want to grow profits over the next couple of years and that's why we've done a lot of refocusing on the strong brands that we currently have, and how we can make them stronger and build out from those brands."

Among those strong brands are PC Gamer, Guitar World and Maximum PC. And, as many publishers are doing this year, Future is building out brand extensions online. Readers of PC Gamer, for example, are downloading video podcasts over 500,000 times twice a month. And, says Valentino, sponsorships are in the $5,000 to $10,000 range per sponsor.

However, the profit focus does put pressure on new product launches since they're funded from earnings. "It sets the hurdle higher for new startups," says Valentino. "I think the market research behind the startup has to be much more rigorous. In the past we may have been able to go a little more with our gut, and today we've got to go with a lot of research around a market and around the product."

As a result, while the company expands its products into other media, Valentino is simultaneously examining operational opportunities for cost control. "I'm doing a study to try and find out quickly but accurately what the challenges are in circulation;external/market and internal;and identify areas where changes in strategy and operations will positively affect circulation performance," he says. "At around 50 percent, circulation revenue is a major driver of Future's revenues and a much higher contributor than most other publishers of our size."


Targeting Investment Where Growth Is Quickest

Time Inc. zeros in on digital growth's rapid payback cycle.

Initiative: Time Inc. executive vice president John Squires is focusing growth on digital assets.

Example: Time.com, SI.com, People.com and CNNMoney.com are all growing editorially while underlying technology is integrated via acquisition.

Takeaway: "The payback cycle is so fast right now online that it's just simply a question of us making investments where they can have the fastest return," Squires says.

Time Inc., while still making acquisitions (and selling assets), is also focused on building out its brands internally. Currently getting the most attention are its digital products. "There is a lot of investment going on in building out organic extensions of our businesses. They just happen to be directed more at digital development at the moment," says John Squires, executive vice president of Time Inc. "And I think that's largely because magazine startups take an enormous amount of capital and tend to take a pretty good number of years to pay back. So in a public company there are challenges in terms of making current earnings and investing at the same time in those kinds of sizeable startup losses."

The launch of a properly-scaled print product, says Squires, would need a minimum circulation of over a million. "It doesn't mean that we wouldn't do something that's less, but I think it has a higher hurdle rate because they aren't likely, unless they are very niche and high-income oriented to specific audiences, to make much money in advertising revenue."

So, for the time being, Web sites such as CNNMoney.com, SI.com and People.com are getting plenty of attention. Yet in this area, organic growth tends to come from the editorial sector;the technology is integrated through acquisition. Case in point is Time Inc.'s purchase of FanNation.com, a sports site specializing in content aggregation and social networking. "The way we grow digitally is largely through creating content and delivering it through publishing technology that we may be modifying, but it's not stuff we're building."

At the end of the day, Squires notes that the company's digital assets are getting as much investment as a print startup might get. The difference, however, is how quickly the profits arrive. The payback cycle for virtually all online products, says Squires, is typically 12 to 24 months. "The payback is so fast right now in online media that it's just simply a question of us making investments where they can have the fastest return.

Organic growth, says Squires, doesn't always come at a moment when corporate determines earnings are sufficient enough to fund it. "You might get opportunities because there's more capital to take more risk, but we don't look at capital in the company and say, ムHere's the right moment to ratchet up development work.' We tell all the business owners within Time Inc. that they're responsible within their operating budgets to do a certain amount of this anyway. To me, their responsibility is to constantly invent out of current earnings."

Two examples Squires points to are Style Watch and Sports Illustrated's swimsuit issue. Style Watch grew out of People as a twice-yearly newsstand special. It's now up to ten issues a year. The swimsuit issue, says Squires, has grown its revenues 60 percent over the last five years. "Some would argue it is a mature property. But what is powering that growth is calendars, digital wallpaper, huge online advertising growth, and books. It's basically taking an event in magazine publishing and making it a substantially bigger event."

However, group managers are not simply given free reign over how to spend earnings. "The only time we get to a capital deployment question is where there's a real startup cost that's extraordinary;where we say if we do it we may not do something else. It might be where there's significant incremental staff to do it and we're starting to run into the millions of dollars of investment," says Squires.


Reviving Old BrandsPeter Sprague specializes in breathing new life into brands.
Initiative: Has leveraged live events to kick start growth in both consumer and b-to-b companies.

Example: Expects events and trade shows to be a $7 million business for Gearhead Communications.

Takeaway: "Multiples have gotten so high that the ROI tends to be much better on organically developed extensions than it is on acquisitions."

As a longtime magazine entrepreneur on both the consumer and b-to-b sides, Peter Sprague has taken the lessons he's learned about organic growth from his earlier ventures and applied them to his current venture, enthusiast publisher Gearhead Communications.

In 2001, Sprague turned to organic growth to revive his acquisition of Physician's Weekly. The magazine had gone from making $2.3 million per year to losing about $1 million annually. To stem the flow, Physician's Weekly introduced a series of specialty issues targeting specific markets. "We basically took a horizontal medium, rendered it vertical, and made it multimedia," says Sprague. After four years, Physician's Weekly had regained ground to the point that it made more than $3 million in revenue per year.

Sprague later applied those lessons as president of NurseWeek Communications, a publisher of bi-weekly trade newspapers. "If they loved the newspapers, why not create a series of shows where in essence the attendees are the circ, the seminars are the edit content, exhibitors are the advertisers?" says Sprague.

NurseWeek launched a series of career fairs in 20 markets that were highly successful from day one, says Sprague. The program offered continuing education for nurses while the print products drove traffic to companion Web sites. NurseWeek processed over 90,000 continuing education tests per month. "I hate the word ムsynergy' but we had the means to promote them, we had advertiser relations that could be extended to exhibitor relations, and the Web site to promote them," Sprague adds. "The ROI was phenomenal because no real net investment was needed to get started."

The key to organic growth is understanding your core constituency. "If you don't have audience, you've got nothing else," says Sprague.

With Gearhead, the company is recognizing new areas, specifically live events, to better serve the audience for its flagship magazine, Premier Guitar. "We cater to serious guitarists and they kept telling us there's nothing out there they can go to for a live event that combines instruction, product and entertainment," says Sprague. "We trying not to build a trade show in the conventional sense, but much more of a festival and celebration of the guitar. We'll teach how to play, fix and enhance gear."

The shows will debut later this year in markets such as Boston, Chicago, New York, Washington D.C. and New Jersey. "In a way, this is similar to what we did with the NurseWeek career fairs," says Sprague, who adds that Gearhead hopes to attract 15,000 to 20,000 guitar players at each show. "We'll spend through the nose for this," he says. "We will probably spend over $100,000 on attendee promotion for each event. But when you have a paid gate, if you do it right, the math works pretty well."

Gearhead is also leveraging online for organic growth. At www.premierguitar.com, the company is creating a social network area where bands can visit, attach mp3s, troll for other members and book gigs. "The Web site is currently breaking even and it will probably earn 15 percent on a million in incremental sales over the next year," says Sprague. "That's excluding it as a source of subscriptions."

Sprague expects trade shows and events to ultimately be a $7 million business with $3 million EBIT for Gearhead. "In 2007, we want to bill about $3 million and make money, but modestly," says Sprague. "We're probably 80/20 organic in terms of growth."


Safer than M&A?

While today's PE-crazed market emphasizes M&A, organic growth may be the safer bet, according to Sprague. "Acquisitions often look better when they close than they do two or three years later," he says. "Multiples have gotten so high that the ROI tends to be much better on organically-developed extensions than it is on acquisitions. The down side of organic growth is if you don't plan rigorously or if you have a lousy idea, you can dump a lot of money into it and never realize any ROI. But I'm not sure the risk of melding cultures in an acquisition isn't at least as great."


From Home Office To $50 Million

Brand extensions are a big part of the culture of this $50 million, mostly ad-free business.

Initiative: Brand extensions and ancillaries account for 20 to 30 percent of total revenue growth.

Example: Print and conference content is resulting in 100 online archive sales and 500 podcasts per day.

Takeaway: "If you want to build revenue quickly, go buy another company. If you want to build culture, you have to grow organically."

Organic growth has defined August Home Publishing. [For more on August Home Publishing, see "Magazine Publishing in a Digital-Device World," on page 24.] The company was founded in 1979 by Don Peschke, a former low-level training editor at Meredith, who sought to fill his interest in woodworking with the launch of Woodsmith. "I launched the magazine with $7,000 and that money lasted about 30 seconds," Peschke says.

Woodsmith debuted with a 12-page folio. Peschke designed furniture in his shop, then wrote about it. The first issue went to 326 readers, and circulation grew to 2,000 by the end of the first year. The magazine grew to 10,000, then 30,000 and today has a readership of 110,000. "We started by printing one issue and sending it out as a direct-mail piece," says Peschke. "I know that's not what you're supposed to do but we still do that today."

August Home today publishes a stable of five magazines, including ShopNotes, Garden Gate, Cuisine at Home and Workbench, the only title that sells advertising. The company generates between $45 million and $50 million per year. The business has been built primarily through organic growth and direct-mail marketing. "I know there's a lot of emphasis today on private equity and mergers and acquisitions but in 30 years we've never borrowed money," Peschke says. "We ran it to be internally financed. That gave us the freedom to do things, particularly to experiment and make mistakes. We're not always driven to the quarterly earnings statement or the five-year PE window."

Today August Home is driven almost exclusively by organic growth, with 20 to 30 percent of total revenue coming from brand extensions and ancillary products. "That rate of growth is much faster than the magazines," says Peschke.

The company made its titles available on the newsstand for the first time two years ago, and newsstand dollar volume has since doubled. August Home launched two special-interest publications but found it difficult to sell ads. The company revamped the titles as special-interest books, and puts out 12 issues a year for $10 per copy. "We went back to our core strength, which is no ads," says Peschke.

The company emphasizes selling its content in different forms. August Home sells six bound volumes of its magazine articles each year. The company also offers individual articles and woodworking plans over the Web;selling around 100 plans per day. "What would be a six or eight page magazine feature, we'll pull that out, put in on the Web and sell it for $10," says Peschke. "There's virtually no cost because it's the same content. We're surrounding the customer with service. We ask how they want to receive the information, not how we want to publish it. Someone may not want a magazine article or a book, but they will want a video. When articles appear in the magazine, the same content is also going to appear in five other places, including video and online."

August Home has started doing live seminars on woodworking. Its first one drew 200 people, and the publisher had to put in video screens just so attendees could see. From there, August made its seminars available online just to see what would happen. Today its readers are downloading 500 podcasts per day on woodworking seminars. "It's a whole new market, people who wouldn't buy a magazine or a book individually," says Peschke. "It goes back to understanding your customer base and that a customer is not the same across all distribution channels."

Organic growth requires patience and an expectation of a long-term return, Peschke advises. "If you want to build revenue quickly, go buy another company. If you want to build culture, you have to grow organically."

Jeff Lapin, president of Carol Stream, Illinois-based b-to-b agricultural publisher Farm Progress, has also noticed the wave of acquisitive growth in the magazine industry. "That's what's driving things now. But that's not what we're doing on our end."

Growth, for Lapin, is more likely to come from existing brands, rather than through acquisition. "I like to look for the most cost-effective way to do that. One of our magazines, Prairie Farmer, is over 165 years old and we haven't yet completely mined that franchise."

The company, seemingly going against the digital grain (no pun intended), has recently launched two new print products: Farm Futures and the b-to-c Rural Life. While other publishers might shy away from the longer payback of a print launch, Lapin made sure the two magazines launched with a shorter cycle. Farm Futures made its money back in its second year, 2006, and is now profitable. Rural Life, a quarterly that's more lifestyle than business, made money immediately. "I didn't want to put that first issue out unless we could make money out the door. It was profitable with the first issue. It's very much a part of our core market but really more b-to-c."

For now, Lapin's view of the industry is in contrast with his own company's performance. So, while Farm Progress continues to grow through internal investment, Lapin sees no reason to change the formula. "If you look at the Ag sector and BIN numbers it's basically flat. But we are seeing page growth and revenue growth. Investing more in content and making significant improvements in how we deliver it is driving internal growth. Our marketshare has been growing about 10 percent year over year for the last three years. We're also big players in the data side, custom publishing and farm shows;and we're putting much more emphasis on the Web. We've got plenty to grow internally."

By Matt Kinsman and Bill Mickey
03/01/2007







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