Friday, February 20, 2009

A Brief, Incomplete, and Slightly Revisionist, History of the Publishing Crisis

By the mid 90's publishing was becoming a corporate venture. Time Inc was swept up into Time Warner. Conde Nast and Hearst, while still privately held, were expanding their holdings. The economy was growing. Advertising dollars were plentiful. In general publications looked like a good investment. Publishing is a mature industry with a proven track record and steady revenue.

Then came the tech craze.

Suddenly the business rules seemed to evaporate overnight. Long term steady, predictable, modest growth looked positively lame. Everyone knew someone who quit their job, went to a tech firm, took their salary in stock, and cashed out in a year to live a life of leisure, retiring at 32. It was intoxicating. Money seemed to be falling out of the sky. When Cisco was returning 30% growth annually, a magazine company's very respectable 3-5% growth was ignored.

With the tech growth also came an upsurge in advertising dollars. And here is where the industry starts to go off track. In publishing there are three basic sources of revenue. Advertising, newsstand sales and subscription rates. In balance, these create a reasonably stable platform. But they don't, can't and won't generate the kind of growth that the tech sector was showing.

Since ad money was flooding the market, publications who wanted rapid growth were willing to lower subscription rates to get it. Ad sale costs are calculated based on the advertising rate base, which is a promised number of readers that the publication can deliver to the advertiser. If you have 1 million subscribers, you can sell them to the advertiser, guaranteeing that 1 million people will receive their ad. If you have 1.5 million subscribers, you can charge a lot more for that same piece of paper in the publication. Newsstand sales are not as predictable as subscriptions, and so they don't factor in as strongly to the rate base.

The fastest way that you can increase your profitability is to raise your rate base. Each ad page goes up in price and you become a more desirable publication to advertisers who want to reach your demographic.

So, the choice seemed to lie between the modest incomes coming in from subscribers versus the large potential from advertising. One industry response was to drop subscription rates and sell subscriptions dirt-cheap in order to drive up the rate base. Those publications that did this brought down the overall market sense of what a subscription should cost. Soon almost everyone was dumping subscription revenue to generate higher ad revenue. And it worked. With a cost.

Selling subscriptions cheap meant that consumers were buying them casually and without much loyalty. The readership was becoming diluted and publications had to appeal to broader audiences to keep the rate bases up. Who cared? Ad money seemed to be everywhere. Magazines were launching like sailboats at a regatta.

Then the party ended, suddenly and hard. The tech bubble burst.

In 2001, at the height of the tech bubble, Steve Chase at AOL bluffed his way into buying Time Warner with AOL stock in what would become the single largest erasure of corporate wealth to that date in history. On the morning that the merger announcement was made, Time Warner stock peaked at well over $100 a share. Long time staffers who had been paid bonuses with company stock deposited into their 401K accounts were millionaires on paper. But they couldn't sell the stock. By the time the merger went through a few months later, the tech bubble had burst. The deal looked bad before it was even finished. Within a year AOL Time Warner stock bottomed out at just over $8 per share.

On the ride down, all across the industry the pressure was on to continue to generate increased revenue. Since subscription rates had already been slashed, raising them wasn't much of an option. Newsstand sales are what they are. Not a great source for growth. So again, ad sales are the place to find it. But ad dollars were harder to get. Much harder.

Now the pressure seemed to increase on the content side of things. Publications were handed financial growth targets and told that if they missed them, heads would roll. When you are looking at quarterly targets, you have only a few months to get results. You have to act fast and in the short term.

Subtle pressure on the content side of the publishing world resulted in content catered to attract advertising--not content catered to the consumer. The magazines were generally seeing the consumer as a means to an ad sale, not as a customer. If you were heading up a magazine at a large company, kudos at the corporate retreats came from being profitable, not from experimenting with amazing content and satisfied consumers.

Recent memories of the dot com craze kept up hopes for an economic resurgence that might restore the ad driven logic that now dominated the industry. And soon the housing boom started to take over where the tech craze left off.

As this was happening, the Internet was growing rapidly too, pulling advertisers away from the publications and pushing publications online into an environment where the logic said that content should be free to the user and all revenue should be from advertising.

There were some magazines who resisted the pressure to dilute their subscriber base in pursuit of ad profits. And they will survive this intact. The two at the top of the list are People Magazine and The Economist. Not coincidentally, they are the two most expensive consumer magazine subscriptions available. They also have some of the most passionately devoted readers and they spend a lot of money and energy to know their readers and to deliver exactly what they want. People is also the most profitable publication in history.

What is being worked through in this current crisis is a basic orientation towards content. Is content a kind of bait, to lure consumers to the publication in order to make ad sales? Or is content a marketable product in its own right, worth the price and worth charging for? The first view of content is dying a very painful death. And with it a lot of economic blood is being and will be shed. The second view of content is very boring and old, but it is the future of the industry--again.

1 comment:

Walter Dufresne said...

A tiny quibble: tech stocks and the dot com bubble's peak (and Steve Case's sensational timing when pricing the AOL/TW merger) all took place in early 2000 (not 2001), right after the fizzle of Y2K. By early 2001, when the SEC finally signed off on the merger, the sickening downward slide was already six months under way, and Case was clearly the genius who leveraged out at the market's peak.