Fight Over Postal Rate Hike Goes Down to the Wire

Folio: The Magazine for Magazine Management, Sept, 2000 by Susan Thea Posnock

Publishers hold out hope for a reduction, but a double-digit increase now appears likely.

Despite a $10 million lobbying effort by the magazine industry, sources say the proposed 15 percent United States Postal Service rate hike is likely to go through. Some publishers may possibly get hit a few percentage points higher.

"If it were to happen right now, it would be a 12 to 15 percent increase," says Gordon Hughes, president of the American Business Media. "Whether they are consumer or b-to-b, this is a very scary issue. With the inflation rate at a little over 3 percent, this is just insanity. It's devastating for everybody."

A final decision on the rate increase is expected sometime in November.

For some, a double-digit rate hike will hit publishers where they live. "We're prepared to put in a 12 percent increase effective January 1," says Evilee Thibeault, president and CEO of Network World Inc., publisher of Network World and a subsidiary of tech publisher IDG. The company is budgeting for the increase now because its fiscal year begins October 1. Thibeault says the rate increase will cut directly into profits for the 164,000 controlled-circulation title. The magazine's advertisers will not see more than a standard rate increase, she says. "It's not something I can directly pass onto my customers--we're not paid for by readers."

Both the Magazine Publishers of America and the ABM insist they will work with the Postal Service until the last minute in the hope of getting the increase down to a single-digit. Both organizations have been working with other groups in keeping rate increases in check. At this point, it appears as though periodicals will bear the brunt of the increase. But a direct-mail hike-- expected to be around 9 percent--is another concern for publishers.

For magazine industry executives, the debate over a postal rate hike has been like a roller-coaster ride. Until recently, Hughes says officials on both sides of the issue were hopeful that the increase could be reduced by as much as half. But after reviewing updated data, the USPS has now indicated it can't realize the $150 million in cost cuts originally hoped for by the magazine industry.

What's more, while the USPS says it can still reduce costs by $113 million, that figure doesn't take into account an additional $79 million in new costs forecast for 2000, according to David Straus, counsel for the ABM. These additional costs were included when the Postal Rate Commission (PRC) asked the Postal Service to use 1999 data, as opposed to the original forecasts, which were based on 1998 data. The result is that the net savings amount to only $34 million, says Straus.

The key to reaching single digits may hinge on testimony, scheduled for early September, in which the USPS must make a convincing case that the rate increase should be in single digits. But the final decision rests with the PRC.

If the 15 percent increase does ultimately go through, the MPA estimates that both consumer and b-to-b publishers will incur a $300 million increase next year, based on the $2 billion the industry will spend in 2000, according to the USPS.

"Bottom line, we think the post office is coming in at about 14.5 percent; they say they're coming in at about 7.5 percent," says the ABM's Hughes. "Every company will take a hard look at what it does and will react individually. I think some will have to make cuts in their operations-that could mean people." Others, he says, will pass some of the costs on to consumers.

Indeed, publishers can't ask either advertisers or subscribers to pay for all the potential increase, says Christopher Little, president of the Meredith Publishing Group. "We'll have to use a combination of things to cover it," he says. "I'm particularly worried about smaller magazine operations that may not have as much of an advertising base to fall back on, or don't have the resources. I think that's where the most severe issue is.

"In terms of raw dollars, it will affect large publishers more and it will certainly be a difficult challenge for us, but I don't think it will have the kind of impact that it will on smaller publishers," adds Little.

One alternative that publishers have explored is to have the Postal Service handle periodicals very late in the distribution cycle. For example, Time Inc., whose titles include People and Entertainment Weekly, is experimenting with a program dubbed the "last mile" in which the publisher gets the magazines to the "last mile" between a local post office and the consumer. So far, Time Inc. has tested the program in 46 Zip Codes in the Southern California area. Jim O'Brien, director of distribution and postal affairs for Time Inc., says the company plans a widespread expansion of the program from the current number of Zip Codes to 7,000 by the end of 2002.

Little remains cautiously optimistic. "We're not counting on a 15 percent increase, although we are concerned," he says. "We are hopeful that the PRC will have enough evidence to be able to come down substantially from the 15 percent."