It’s no secret that the digital revolution has had a profound effect on the consumer magazine industry. The industry’s treacherous transition from print to a print/digital hybrid has been, if anything, more difficult than publishers could have imagined just five years ago. We were reminded of these difficulties in two recent interviews: one conducted by Samir Husni with Bob Garfield, media columnist and critic, and the other a W Magazine interview with Condé Nast's Bob Sauerberg.
Garfield implied in his interview that it’s no longer possible for magazine publishers to change the economics that have been imposed by the digital revolution. He further indicated that in the digital world, the most confounding aspect is that audience grow and grow, but CPMs continue to go down. He rightfully points out that this has created a plethora of what he calls “trash” advertising (reaching recipients not desired by the advertiser). Sauerberg implicitly confirmed some of the industry’s impediments described by Garfield. He indicated that Condé Nast still didn't know how to fully monetize the relationship with the consumer. He also allowed, in this interview, that, although the company's monthly visitors have increased 33 percent in the last year to 87 million, company revenues decreased, primarily because of continued weakness in print advertising.
Their comments perfectly capture the transition dilemma facing consumer magazine publishers. The Sauerberg interview demonstrated that publishers, even ones as big and successful as Condé Nast, still depend on print advertising to support this difficult transition. And in both interviews there’s a resigned acknowledgment that there are no easy revenue solutions in today’s media world, where the consumer magazine industry’s major competitors now include Google, Facebook and Amazon.
Print Revenue: The Foundation for Supporting the Transition
There’s no doubt, as Garfield said, that the digital revolution has profoundly changed media and advertising. But lest we forget, print revenue remains the foundation on which most consumer magazines are being sustained during this transition period. The overriding problem is that every year print revenues decline, weakening publisher’s print foundations. The effect is like Chinese water torture.
That raises the question: Is the consumer magazine print foundation sufficiently sturdy to allow for a successful transition?
It now appears that it is beginning to buckle. In the balance of this piece we’re going to take a hard look at AAM/BPA data to help illuminate the cracks. In doing so we’ll venture into the “circulation weeds” a bit. But please bear with me because it’s necessary in order to fully demonstrate the precarious condition of the consumer magazine industry’s print foundation.
Eight Years of Major Changes: First Half 2007 to First Half 2015
The audited consumer magazine business (defined here as audited publications with more than 5,000 paid/verified circ, excluding publications whose circ is primarily derived from foreign circulation, association or sponsored circ sources) peaked in 2007. At that time, the industry circ level was at 278 million, there were 550 audited titles, newsstand sales revenue of audited publications reached a lofty $3.2 billion, circulation profitability was strong and advertising sales were near record highs. In 2007, life was good in the consumer magazine business.
These industry peaks will never be reached again. The "Great Recession," combined with the transforming impact of the digital revolution changed the consumer magazine industry forever. What’s followed has been an incredibly challenging eight-year period of trial and error for publishers, as they scrambled to monetize digital while desperately trying to hold on to a significant portion of their print revenue.
The industry retreat has been swift. This is clearly revealed in the audit bureau data shown below:
This data, however alarming, is still one-dimensional. By itself it doesn’t fully describe the multifaceted issues plaguing the industry. We’ll try to put the pieces together by showing how the interconnected effect of consumer demand erosion (which is significant, but not easily quantifiable), circulation source mix changes and maintaining high circulation levels have combined to compromise the viability of the magazine industry’s print foundation wall.
High Circ Levels and Their Serious Consequences
It could be argued that the consumer magazine business has nearly always (at least for the last 25 years) carried circulation levels that outstripped reasonable consumer demand. But that was then. In the pre-2008 era the industry was afloat with a constant stream of new titles. Publishers—and entrepreneurs—were anxious to take advantage of an industry ripe with opportunity, enticed by the compelling appeal of relatively low entry costs. There was room to err on the side of high circulation levels.
Today, the margin for error has been dramatically reduced. But many publishers have disregarded the over-circulation warning signs. Yes, the industry’s paid/verfied circ level has declined 27 percent in the last eight years. This is certainly a significant fall. But when measured against the descent of consumer demand and key circulation performance data the decline appears to be too shallow.
Modifying Circulation Source Mix to Maintain High Circ Levels
The adequacy of the industry’s current circ levels can be determined by measuring the full extent of the dramatic eight-year change in circulation source mix. These changes are best exemplified by two significant circulation source mix developments. One involves the relatively new addition of digital copy circulation. The other, and more significant change, involves the startling shift in the single copy circulation and paragraph 6 circulation equation.
Digital Copy Circ: Digital copy circulation has two very distinct elements: subscriptions and single copies. Subscription digital circulation, after a turbo start several years ago, has surprisingly stopped growing. Its use declined nearly 9 percent (excluding Game Informer to 3.5 percent of total paid/v circ) in the first half of this year. Single copy digital circ, although much smaller in volume than subscription digital circ, is growing rapidly—up 45 percent in the first half this year—accounting for 1.2 percent of total paid/v circ and now 13 percent of total single copy circ.
Because the use of digital copy subscription circulation is declining, it’s expected that its circ level effect will be minimal in the future. Digital single copy circulation, on the other hand, is still very much a wild card and a potentially disruptive circulation force. As its use increases it will surely add continuing pressure on the already embattled newsstand channel. But, perhaps most importantly its future has been clouded by questions concerning the reader quality of this source of circulation. AAM categorizes digital single copy circ from Next Issue Media (now called Texture), which accounts for over 90 percent of digital single copy circ, as being “subject to AAM review.” This has been done because of issues (still to be resolved) regarding whether the copies have been “opened” or not.
Paragraph 6 Circ/Single Copy Circ Equation: On one side is single copy print circ. Historically, it’s been the circ source considered best for gauging consumer “wantedness.” It was the circulation most desired by advertisers, but it plunged 67 percent in the last eight years. In its wake, it's left a huge hole to fill.
On the other side of this shifting equation is paragraph 6 circulation (hereafter called P6 circulation). Its circulation is largely derived from five sources: verified, partnership, sponsored, combination and award. These sources are shown separately in AAM Publisher’s Statements because they’re generally perceived as being of “lesser quality” than other sources. Its use (as a percentage of paid/v circ) has risen 63 percent during the same eight-year period, essentially filling the large hole left by “lost” print single copy circ.
Paragraph 6 circ, and to a lesser extent digital single copy circ, have filled the void left by the descent of print single copy circ, but its come at a steep price.
Circ Source Mix Changes Compromise Reader Quality, Lessen Demand for Publisher Directed Promotions and Reduce Circulation Profitability
The events of recent years have made it far more difficult for publishers to properly balance the often opposing forces of setting circulation levels, maintaining reader quality and maximizing circulation profitability. Many publishers have tipped the balance in favor of maintaining high circulation levels, but as a result reader quality has been compromised, demand for publisher-directed circulation promotion has been lessened (including the newsstand) and circulation profitability has been reduced.
Reduced Reader Quality: Digital single copies have potentially compromised reader quality, but changes in the single copy/P6 circ equation have had an even more profound quality impact. Replacing single copy circ (high reader engagement, purchased at full price) with lower quality, more costly, P6 subscription circ has amounted to a reader quality tradeoff of significant proportions. One might describe it as kind of a level-enhancing pact with the devil.
Lessened Consumer Demand for Publisher-Directed Circulation Promotions: The pervasive use of P6 circ, some of it given away and others “sold” at greatly reduced prices, has had an increasingly adverse impact on publisher-directed circulation promotions (like renewals and direct mail), which are sold at regular rates. It’s believed (not fully quantified) that its effect has been particularly severe on newsstand sales. Think about it—when you give a lot of stuff away it makes it far more difficult to get others to pay for it.
Decreased Circulation Profitability: P6 circulation reader quality concerns and lessened consumer demand are critical issues, but the difficulties don’t end there. P6 circulation doesn’t renew very well. This, in turn, has meant the acquisition of more new subscriptions, which nearly always means adding even more P6 circulation with its attendant propensity to reduce consumer demand for publisher-directed promotions. The effect is insidious; every year P6 circulation use grows, reader quality is further compromised and circulation profitability is lowered.
Getting Off the P6 Circ Train: Once a publisher is on the P6 circulation train it’s very difficult to get off. The only realistic way to exit this train is to reduce the circulation level. Good examples of this occurred in the last year. During this period ten audited titles reduced their circulation by 60,000 or more. This included publications with the three largest level reductions: Prevention (down 952,000), Readers Digest (down 649,000) and More (down 531,000). In all cases, the reduction in P6 circulation use was fully commensurate with the level reduction. After the circulation level reductions P6 circulation use for these 10 publications was reduced from 15.0 percent to 9.7 percent of paid/v circ. Overall these 10 titles reduced P6 circulation use by nearly 1.2 million.
The circulation source mix changes that have occurred in the last eight years have had a profound, year-over-year, compounding effect on reader quality, publisher-directed promotions and circulation profitability. If that weren’t enough, there are some significant unintended consequences of these actions as well.
The Law of Unintended Consequences
Accelerating Industry Consolidation/The Big 4 Get Bigger: In the shrinking consumer magazine business, the process of industry consolidation has coalesced around the Big 4 publishers – Time Inc., Hearst, Meredith and Condé Nast. In 2010 their share of the audited circulation market was 41 percent. Five years later, their share is 56 percent. Based on current trends it's projected that they will command a staggering 70 percent of the audited circulation market by 2019.
This path of consolidation has serious ramifications for the industry. The Big 4 have used their superior human and financial resources to maintain high circulation levels. One of the chief tools they’ve employed in doing this is the use of large quantities of P6 circ. They’re the largest users of P6 circ, accounting for an estimated 70 percent of total industry use. Time Inc., Meredith and Condé Nast are the three largest users of P6 circulation, all with use levels over 30 percent of paid/v circ (industry average is 20.8 percent). Nearly one-third (16) of the Big 4’s 51 audited publications have P6 circ usage greater than 40 percent of paid/v circ.
By maintaining high circ levels the Big 4 have placed an extraordinary burden on other publishers to keep pace. It’s become one of the key factors imperiling midsized publishers, particularly those that are more newsstand dependent. It’s hard to compete when the big guys are bending the circulation level adequacy rules.
Greatly Diminished Capacity for Launching New Titles: In order to remain healthy, consumer markets must have a renewable source of new products—it’s their lifeblood. Conversely, the lack of new products often preface market declines.
By that measure, the consumer magazine market is now face-to-face with a serious sign of market decay. Only four significantly-sized audited publications have been successfully launched in the last five years. Not surprisingly, these four titles are published by two of the Big 4—three by Hearst (Food Network Magazine, HGTV Magazine and Dr. Oz The Good Life) and one by Meredith (Allrecipes). This comes to an average of less than one new title per year. Not nearly enough to fill the huge gap left by the continuing loss of audited titles.
The consumer magazine print product well is running dry.
The Desperately Endangered Newsstand Channel: Print single copy sales of audited publications are declining at an ever accelerating rate. In the last year, print single copy sales of audited publications fell more than 16 percent. When this performance is combined with the preceding seven-year annual sales decline of more than 11 percent, it accurately describes a market channel that is in serious peril.
An efficient newsstand channel has meaning for publishers far beyond its contribution to magazine circulation. It’s arguably the most important platform for showcasing the magazine industry’s products. A walk through supermarkets, bookstores and airports offers a view of well placed, often elaborate displays of consumer magazines. Consumers love it, advertisers love it, and industry executives love it. This kind of promotional exposure is of immeasurable value to the magazine industry—a natural resource that benefits all publishers. It’s one that simply can’t be replaced. Yet, publishers seem baffled about how to protect it.
What Should Be Done Now?
Here are some suggestions that might help patch the cracks in the print foundation wall and ease the transition to a more digitally-oriented business environment.
A. Balance Circulation Levels: Not every publisher or every publication has paid/v circ levels that are too high. But, nonetheless, the industry’s “over-circulation” problem is of significant proportions. Based on the assumption that P6 circ use greater than 15 percent of paid/v circ represents the potential for being “over-circulated,” it’s estimated that 50 percent of the audited titles for the top 20 publishing companies (they account for 84 percent of the industry’s total paid/v circ) are in over-circulation jeopardy. For those publications, the most important thing that can be done to help improve reader quality and enhance circulation profitability is to offload some of the P6 circ and lower circ levels.
The goal for nearly every publication should be to limit P6 circulation use to less than 15 percent of paid/v circ and single copy digital circ to 10 percent of single copy sales. To reach these industry goals would involve unloading 10 to 12 million P6 circ and trimming 20 million (10 percent) from the audited consumer magazine industry’s nearly 202 million paid/v circ level. It’s big, but not an impossible task. It would, however, go a long way towards restoring industry credibility with advertisers and allowing publishers some much needed financial relief during this critical transition period.
B. Fix the Newsstand: Publishers have always seemed to be a step behind when it comes to understanding what to do about the endangered, but invaluable, newsstand channel. It’s a business where the channel participants continually appear to be working at cross purposes. The disagreements all seem to involve trying to solve the basic puzzle that has bedeviled the channel forever: publisher trust versus eliminating duplication of effort. In theory, this puzzle doesn’t seem to have Rubik’s cube complexity. I don’t want to over simplify, but, as they say, it’s really just a matter of “trust, but verify." Publishers have to be willing to extend more trust in return for verifiably accurate accounting from wholesalers. Why can’t publishers and wholesalers find the common ground to do this? Solving it won’t completely stop the precipitous sales decline, but it could slow its rate of descent and, who knows, maybe save the newsstand channel.
C. Enhance Circulation Staffing: Publishers, for the most part, have systematically reduced circulation staffing. In so doing they have considerably lessened their capability to economically acquire circulation. These staff reductions have contributed to the rise of what might be called “path of least resistance circulation practices.” This includes loading up on easy-to-acquire P6 circ. In order to stabilize circulation profitability, publishers will have to commit to more adequate levels of circulation staffing. If the goal is stabilizing circ profitability and improving reader quality, reduced circulation staffing won’t get it done.
D. Industry Leadership: Patching the foundation cracks will require many individual publishers to adopt better circulation practices. But to make these patches permanent, it’s going to require strong industry leadership. That leadership must come from the Big 4 with an assist, perhaps, from the MPA.
The leadership problem here, however, is that the Big 4 are part of the problem. Their aggressive market share advances have been partially fueled, as we’ve discussed, by heavy doses of P6 circ and a certain disregard for the dangers of maintaining high circ levels. Their actions have shaped industry behavior, but not necessarily for the better. If the industry is to adequately address its print difficulties, the Big 4 must exert more disciplined leadership. This includes selectively reducing circ levels on many of their titles, taking the lead in initiating newsstand channel reform and demonstrating greater concern for the industry as a whole. It the Big 4 don’t step up to this responsibility, they will be gazing over a barren consumer magazine landscape. It will, indeed, be a hollow victory.
Making Print a Priority
In the rush to the digital future, publishers have taken their eyes off the “print ball.” The quality/engagement of print readers has been jeopardized, producing a more marginal print audience for advertisers. The accelerating decline in circulation profitability has reached serious, probably unsustainable, proportions. Publishers' appetites and capacities for launching significant new print publications have been nearly extinguished. Industry consolidation and the rapid advance of the Big 4 have adversely affected the ability of mid-sized and smaller publishers to compete. Publishers have allowed the vulnerable newsstand channel to atrophy.
It’s not a pretty picture. Over the last eight years the print transition bridge has been seriously weakened. In order to repair it publishers will have to revise their thinking and change their priorities. They’ll have to fully accept that print (far from being dead) is the indispensible bridge to the future. If the consumer magazine business is to have a bright future with a diverse, broad-based, cadre of consumer brands reaching consumers from a vast array of different platforms, then the publishing industry must act now to protect its critical print base.
It’s going to take, dare I say it in the digital age, some serious “retro” thinking by publishers if they hope to complete a successful transition.
