Just a Bit of BUDGET RELIEF

Folio: The Magazine for Magazine Management, August 1, 2003

In the middle of a building and publishing recession in the early 1990s, Hanley-Wood made a key strategic decision. While other b-to-b publishers in the construction business were slashing budgets and hunkering down to survive, the privately held, Washington, D.C.-based company invested about $3 million on new product development.

"Our competition was really confused by what we were doing," says Hanley-Wood's president, Frank Anton. "Usually, bigger companies are not expecting a smaller company to really attack. But we did, and, happily, it seemed to work."

Indeed it did. Hanley-Wood launched four new magazines, stealing market share from companies such as Reed Business Information and Cygnus Business Media. Between 1990 and 1994, Hanley-Wood's revenues jumped from $25 million to $40 million, and its share of the construction publishing market increased from 50 percent to 60 percent. This year, the company is on track to hit its revenue target of $165 million, an 18 percent increase from 2002. And as other b-to-b publishers continue to scour their spreadsheets for nickels and pennies to save, Hanley-Wood once again has double-digit growth plans. It is budgeting for 20 percent earnings growth, a quarter of which it expects to derive from new acquisitions.

As in the last recession, Hanley-Wood's glass-half-full view stands in stark contrast to the vision that most other magazine publishers see. As they get ready for the fall budget season and lay plans for 2004, publishing executives remain wary. Despite signs of a recovery from the biggest ad recession the magazine industry has seen since the 1930s, few publishers are ready to count on a true turnaround. They are preparing to loosen up just a bit on the draconian cost controls they have imposed over the past three years, but most are not placing any big bets yet.

"We're hopeful, but we're projecting - I hate to use the word 'flat' - so I'll say 'consistent' ad volume," says VNU Business Media COO Howard Lander. Business-to-business publishers such as VNU have reason to be leery: Ad revenues plunged 34 percent from 2000 to 2002 and are just now climbing back: American Business Media is forecasting 3 percent growth for 2003. Consumer publishers suffered less pain (an 11.2 percent drop) and have seen larger increases in 2003, with ad spending up 9.7 percent for the first half of the year, according to Publishers Information Bureau.

But on both sides of the business, publishers are keeping an eye on rising costs that could quickly erase any bottom-line gains from a resurgence in ad spending. The costs of printing, paper, and salaries - all of which have been pared or negotiated down over the past three years - have nowhere to go but up. And, like the rest of Corporate America, publishers are bracing for double-digit increases in health-care costs.

So most publishing executives are reluctant to budget for new products, equipment, or significant raises in 2004. "My guess is that the budget will probably grow slightly because of factors out of our control," says Lander. "Benefits go up, rents go up. I'm a little bit worried about paper."

Across the industry, publishers interviewed by Folio: estimate that their budgets for 2004 will come in marginally higher than this year's. Typically, they're anticipating spending increases of 2 percent to 6 percent. A few say they will allocate some increases to long-deferred capital improvements and technology upgrades. But most predict that their spending increases will be consumed by personnel, postage, and paper costs.

Complicating the budgeting process, of course, is the hazy outlook for ad spending. While there is growing confidence among publishers that 2004 may bring economic recovery in the U.S. and bigger ad budgets, advertisers remain commitment-phobic. Dealing with their own financial insecurities, advertisers are buying later and committing to less.

"Fall used to be the big season for contracts," says Newsweek publisher Greg Osberg. "But we're finding advertisers are waiting until January. It's not unusual to do a contract with a client a couple of months into the year." Newsweek's response has been to design a flexible budgeting process that makes allowances for greater uncertainty and fluctuations in revenue flow (see sidebar on facing page).

Overall, ad spending in magazines is expected to be up by 4 percent in 2004-4.8 percent for b-to-b titles and 3.5 percent for consumer, according to Pricewaterhouse Coopers. And there are signs of life in some of the most depressed advertising categories, such as technology, manufacturing, and travel.

But as publishers commit actual dollars to 2004, they're mindful that for the past two years, visions of recovery have turned out to be mirages. Going into 2003, for example, many b-to-b executives assumed that the worst was over. But the slow economic recovery killed off the expected rebound in advertising, and more budget cuts ensued. "I have, more so than at any other time in my career, had to recut the budgets," says Brian Foos, CFO of ST Media Group International, a Cincinnati-based publisher of magazines on the screen printing business.