Circulation's New Economy

Folio: The Magazine for Magazine Management, Sept, 2000 by Teresa Ennis

ACCORDING TO THESE EXECUTIVES, DIRECT MAIL RESPONSE IS ACTUALLY UP AND TV MAY BE THE NEXT BIG SOURCE--BUT PAPER, POSTAGE AND A CYCLICAL AD CLIMATE MAY MEAN BIG TROUBLE DOWN THE ROAD.

THE ECONOMICS OF CIRCULATION MARKeting have shifted drastically. Over the past decade, costs grew while sales shrank in each of the major sources--single-copy, direct mail and third-party agents. But recent events struck the industry with such force that publishers were forced to reevaluate longstanding business practices.

First, the industry was hit with the negative publicity and legal woes of American Family Publishers and Publishers Clearing House. The number of orders coming from the stampsheet giants plummeted, and as publishers scrambled to secure other agency business, remit rates were slashed. The price of agent-sourced orders skyrocketed. Publishers had to rework budgets, cut subscription prices, phase out their own sweeps mailings and execute additional, expensive, direct-to-publisher efforts.

Around the same time, many circulation directors watched as their titles were pulled from retail shelves when major wholesalers started de-listing magazines, demanding improved efficiency rates and additional handling fees.

Mixed into this scenario is a sustained and exceptionally strong advertising climate. As ad pages pile up, circulation executives are pressured to maintain, if not increase, ratebases. The strain is such that audit bureaus are now taking a look at redefining what counts as paid circulation.

Teresa Ennis: Have circulation economics reached a crisis stage? If so, what would turn the situation around?

Tom Slater: I wouldn't use the word crisis. It's making us re-evaluate business practices of the past. We have to become innovative and really understand all our different sources. On most magazines the economics are going south, but I think it just means we have to be smarter and come up with new ideas. It's a matter of really understanding your audience and finding new avenues to reach them. We're finding ways to go into high schools and colleges and get to the athletes or sports enthusiasts right in the locker room or the gym. We're using coaches as a conduit for that, and this new source is growing significantly. A couple of years ago, would we have even thought of going into that avenue?

Jim Borth: I'd say we're about to fac3e even more difficulty--I don't think we've felt the full ramifications of all the changes. Now we've also got the paper increase, which people have had to absorb, and we're looking at a postal rate increase that is higher than the MPA expected. So the people who are deciding whether or not their products are profitable may be in serious trouble. I think you may see some magazines disappear.

Slater: It's really survival of the fittest. Maybe it's time to thin the herd. There are a lot of products out there that don't really deserve to be on the newsstand. And some of those titles belong to big publishers. If the ad sales do go south, then it will be a crisis. Circulation is not all of a sudden going to be able to make up the revenue.

Simon Aronin: The primary problem is competing objectives. Ratebase objectives and circulation profitability are in competition. Right now, with a healthy ad climate, it's not a big problem--but it will become one at some point. And when this happens, people who have been abandoning circulation profitability are going to be in big trouble. They'll have to relearn their business. The things that are driving ratebase issues right now are things that we don't have control over-agent business and the newsstand. Circulation profitability we have control over. It doesn't have to erode, but it does because we keep dropping price to meet ratebase.

Randy Jones: This has always been a cyclical business on the ad side, and we've been riding a positive cycle for a very long time. One of the responses we used to be guilty of in the down cycles was driving circulation price up to make up the profitability. We made the numbers up on agent business and sacrificed the direct-to-publisher business--our most loyal subscribers. We pushed the price increases on them because it dressed up the P&L.

I wouldn't say the economics are in a crisis, but a confluence of many factors hitting us at the same time is forcing us to use as many levers as possible. At times I think we like to look for one lever to fix everything--because it's easy, straightforward and the rest of the organization can understand it. Now we have to operate on all fronts. We have to rethink definitions of paid, we have to look at controlled circulation, think about whether titles belong on the newsstand, and we have to search out creative new partnerships for marketing magazines.

Ennis: If ad sales soften, do you believe we'll see any ratebase cuts?

Susan Allyn: In the past 15 years, only a handful of titles have ever made massive ratebase reductions, and those were huge titles. In the early 1990s we really got hammered in ad sales--and still it didn't happen. I'm not saying there's been tremendous growth, but we've maintained circulation levels. You might see titles with ratebases in excess of five million take a hit, but that's it.