Expanding your consumer franchise

Folio: The Magazine for Magazine Management, Annual, 1992 by Reed Phillips, Chris Fodor

Product            Start-up cost
Single book        $10,000-$20,000
Continuity
book series        $100,000-$200,000
Spin-off
magazines          $250,000-$3 million

These costs are much lower, however, than they would be for a company entering these businesses anew.

How to structure

the deal

After developing and testing the new concept, the publisher must decide how to implement the project. The most common methods are:

* Internal development, using available staff or freelance help.

* Joint ventures, in particular with partners having expertise in specific target areas (e.g., videos, seminars).

* Licenses, granted to third parties for a flat fee or royalty payment (typically a percentage of net revenue).

* Acquisitions of firms possessing the required expertise.

Of the four methods, internal development remains the preferred. It minimizes the up-front investment and maximizes the yield.

Although a license or joint venture partner cannot be expected to bring the publisher's degree of insight and motivation, he may nonetheless make other significant contributions, namely to the bottom line. That, for instance, has been Gutman's experience at Playboy. "Playboy has more than 60 product licensees around the world, and 14 licensed foreign editions," she says. "Product licensing has traditionally been a key revenue stream for us." Moreover, a licensee has a limited claim on the licensor's resources. But while a license agreement limits responsibility, it also tends to limit profits.

By contrast, a joint venture partner shares in the up-front risk and may provide marketing and other skill. As its products become increasingly complex, the National Geographic Society is turning to co-ventures with partners who supply expertise in unfamiliar fields. "Some of our products, namely software or interactive videos, are developed with expert partners. For example, Lucas-film (producers of Star Wars) helped produce a videodisc on American history designed to educate while entertaining," explains Michela English, a senior vice president at the Society.

A joint venture arrangement broadens responsibility and thereby opens the venture to either greater profit or greater loss.

Finally, outright acquisitions enable publishers with the required commitment to gain full control of the assets or expertise necessary for the project. Acquisitions are particularly appropriate for publishers who are entering unfamiliar areas, such as book publishing or trade shows.

Evaluating the results

The final step in creating a product extension is evaluating the results. In general, the evaluation process is guided by each company's internal benchmarks. For some publishers, finding a new business that contributes $100,000 would be like striking oil. For others, a profit contribution of this size would be too small to sustain the business.

To help you evaluate the results of a new product extension, answer three questions.

* What is the return on investment? Compared with the resources allocated to this product, how did it perform? Remember, investments must be evaluated over different time horizons. For example, a spin-off magazine may take three years to reach profitability, whereas a desk diary may take only two or three months.