US consumer magazine circulation: a tale of two business models

Despite its fundamental importance, circulation had a low profile within the US consumer magazine publishing business for many years.

But in the past decade, shifting publishing and advertising dynamics have pushed circulation into the spotlight. Circulators – now termed consumer marketers – are wrestling with unprecedented challenges. Media buyers are parsing circulation statements as never before. Publishers who long viewed circulation mainly as a platform for advertising growth are now taking a hard look at their circulation economics and policies.

What brought all of this about? What solutions are being brought to bear to create a healthier, more profitable circulation environment? What lessons might UK publishers perhaps glean for their own marketing efforts within the US?

These are big, complex questions, to put it mildly. However, at InCirculation’s request, I’ve endeavored to provide an overview of the US consumer marketing scenario, in two parts. This first installment focuses on overall circulation dynamics and the subscription arena. The second, to be published in the next issue, will focus on the newsstand arena.

Web of factors depresses circ revenue, profitability

In broad terms, US consumer magazines fall into two business models – circulation-driven and advertising-driven.

About two-thirds of all US consumer titles have circulations under 500,000. Most of these titles are vertically oriented, special interest magazines, which tend to derive more of their total revenue from circulation than from advertising.

Not surprisingly, however, the larger-circulation magazines of a more mass editorial nature (which are mostly owned by the larger publishers) represent a disproportionate slice of overall industry revenue, and tend to skew the industry’s statistics. These magazines are generally advertising-driven, and have been far more affected by events of recent years than their more circulation-driven cohorts.

Magazine Publishers of America’s (MPA) membership includes nearly all of the large publishers, as well as many mid-size and smaller publishers. PriceWaterhouseCoopers financial surveys conducted for MPA show that, over this range of member titles, circulation’s average contribution to total revenue rose from 48% to 50% between 1998 and 2001, and declined to 46% in 2002. However, it is no secret that, at publishers with heavily advertising-driven models, it’s not unusual for titles to derive 60% or 70% of total revenue from advertising. And even in 2001, when its member survey put the average advertising / circulation ratio at 50/50, PWC estimated circulation revenue at just under $10 billion, versus $16 billion for advertising.

Circulation revenue flat

Essentially, circulation revenue has been flat, at best. The numbers tell the story. Between 1993 and 2003, the total numbers of subscriptions and newsstand copies sold for audited titles declined by more than 3%, to about 353 million. Most of this drop came on the newsstand side, where units plummeted by nearly 19%, to 51 million. This translated to a drop in the newsstand’s portion of total circulation units, from 19% to 14%. As a result, although average cover price jumped by more than 50% over the decade (from $2.75 to slightly over $4), the newsstand’s contribution to total circulation revenue for audited titles was just 14% as of 2002. At its peak in the late 1970’s, the newsstand contributed over 20% of circulation revenue among these magazines.

Meanwhile, on the heavily dominant subscription side, prices have barely budged. The average one-year "basic" or "suggested" subscription price was $26.17 in 1993; today, it is $26.55. Moreover, "suggested" prices are by no means the same as actual prices paid. For instance, a recent Capell’s Circulation Report analysis of audited data comparing the second halves of 2003 and 2001 showed that, although the average "suggested" one-year sub price rose by about $2, the average discount off suggested price jumped from 40% to 51%. The result: the average price actually paid rose by just 5 cents, to $20.81. (These averages include magazines with weekly frequencies. The average price paid for monthlies only would be considerably lower.)

What about circulation’s contribution to the bottom line? While line-item financials are kept close to the vest, even at public companies, executives who see such financials regularly confirm that the picture is not rosy. "Circulation profitability at most major publishers has been declining for 10 to 15 years," sums up Chip Block, a veteran publisher and consumer marketer who is now a consultant, as well as vice chairman of the large subscription agency USAPubs.

The ongoing "Stampsheet" fall-out

Declining circulation profitability at ad-driven publishers is the result of this business model colliding with a series of unanticipated developments.

Major US magazines began shifting to a more advertising-driven economic formula as far back as the 50’s and 60’s. With the advent of competition for advertising from network television and its huge audiences, large-circulation titles got larger. The bigger the circulation, the more publishers could charge for ad pages.

As publishers pushed magazine rate bases higher, their own prospect lists and direct mail promotions were no longer sufficient to meet their circulation promises, and incentives such as pricing discounts and premiums also came into wider use. The sweepstakes-driven "stampsheet agents"—Publishers Clearinghouse (PCH) and, later, American Family Publishers, (AFP) – were launched to meet the greater volume needs.

From an overall profitability standpoint, raising rate bases and advertising rates worked like a charm for decades for many major publishers. Publishers’ own direct mail programs were still very cost-effective, and the stampsheet agents could be relied on to produce a constant stream of many millions of reasonably renewable new subscribers. If circulation profit margins were beginning to erode, the advertising revenue and profits generated by higher rate bases far outweighed any loss in circulation profitability.

But these long-lucrative dynamics were dealt a severe blow in the mid-90’s, as a result of much-publicized investigations of the stampsheet agents’ direct mail marketing by US state and federal authorities. These were triggered by consumer complaints of being misled into believing that they had indeed "already won" the sweepstakes promoted along with the magazine subscriptions. While the agents and the publishing industry maintained that these instances were isolated, they set off a snowball effect that ended in stringent legal restrictions on the content of these promotions, loss of consumer confidence in the sweepstakes, huge drops in subscription volume and, ultimately, the demise of AFP. (PCH remains in business, although its magazine volumes are far below its former levels.)

The many publishers who were highly dependent on the stampsheet agents – which, at their height in the mid-90’s, were estimated to have been generating in excess of 70 million subscriptions per year, or about 25% of all new subscriptions – found that they had no ready back-up sources that could begin to replace these volumes.

Reliance on agents

With their rate bases, and very revenue foundations, at stake, publishers turned to agents. The Synapse Group emerged in the wake of the stampsheet crisis and quickly grew to become the largest agent, through programs such as partnering with credit card issuers to promote subscriptions on card-holder statements, exchanging frequent flyer miles for subscriptions, and selling magazines to consumers who call in to order merchandise from catalogues.

In the short term, the agent sources are often the most cost-effective means of meeting rate base – particularly if a magazine’s rate base has been pushed over its "natural" level, to the point where it would be very costly to generate the last 10% to 15% of subscribers through direct mail or other traditional sources.

"The sudden loss of so much of this stampsheet agent volume was a huge blow that the publishing industry is still struggling to overcome," says Baird Davis, a long-time consumer marketing executive who is now a publishing consultant. "Circulation economics were impacted not only in the short term, but in the long term. While the smart agency entrepreneurs who have helped fill the gap with new types of sources deserve great credit, few if any of these sources can match the renewability of the stampsheets, never mind publishers’ own direct mail or other direct-to-publisher [DTP] sources. And renewability is, of course, the key to minimizing new-business costs and enhancing circulation profitability."

With time and money short, rather than making large investments in testing and rolling out huge DTP direct mail campaigns, or developing other new DTP sources, publishers became increasingly reliant on agents. Indeed, while DTP direct mail had remained the largest source of subscriptions even through the peak years of the stampsheets, subscription agents have now become the dominant source. According to Circ Track, which conducts an annual survey of consumer marketers managing publications audited by BPA Worldwide and ABC US, various types of agents collectively accounted for 45% of new subscriptions last year, compared to 36% in 1998. DTP direct mail generated just 19% of new subscriptions in 2003, compared to 30% in 1998.

(To maintain perspective, it should be stressed that the source testing and innovations of agents, in conjunction with publishers, are reaching new consumer prospects in an increasingly difficult list and media climate, and that the most successful programs are based on interest affinities that generate reasonably renewable, and ultimately profitable, subscribers.)

The quandary of declining circulation profitability has been exacerbated by the ongoing decline in newsstand sales, the decreasing cost-effectiveness of DTP direct mail (due to rising postal costs and declining response rates) and, perhaps most seriously, the previously noted difficulty of raising subscription prices.

The pricing problem

Publishers acknowledge that the pricing problem is in large part of their own making. After many years of heavy discounting and credit-based promotions touting free issues, consumers have been taught that they needn’t pay much for many of the nation’s most renowned magazine brands, however high the editorial quality or production costs.

A consumer marketing executive for one of the country’s largest publishers recently noted that the sub price of one of its magazines has been essentially stuck at $12 since 1990. Even in a simple comparison against the rise in the US Consumer Price Index over that time, the price should be at $17.

"Consumers have become cynical about magazine offers," confirmed Brian Wolfe, president of Time Consumer Marketing Inc., during this year’s Circulation Management Conference. "People just expect a lot of free issues now."

Consumer marketers also confirm that the Internet has added to pricing problems. Free Net information is making consumers unwilling to pay for some media. Unauthorized "agents" are selling subs on the Web for outrageously low prices, and publishers are finding it more difficult to charge higher prices for renewals than for new subscriptions, because subscribers are likely to see the low intro prices on the Web. (Consumer marketers know that charging existing readers more flies in the face of customer loyalty, but this has been standard in the US, and circulation is under intense pressure to produce revenue through any means possible.)

Lessons learned?

Circulation-driven magazines have by no means entirely escaped the growing challenges of recent years. In fact, smaller magazines have in some respects been harder-hit by newsstand distribution problems, which have greatly raised costs and reduced access to supermarkets and other traditional, mass retail magazine outlets. In addition, the devastation of the stampsheet agents has created an industrywide dearth of cost-effective new names for subscription promotion.

However, special interest titles with strong editorial and strong reader bases have weathered the storms nicely. Some are employing efficient networks of nontraditional retail outlets with affinity to their audiences (crafts magazines sold in crafts stores, for example) in lieu of the mass single-copy distribution system. Because they are not greatly dependent on advertising, and are often dealing with category-indigenous rather than major national advertisers, many of these titles do not even declare a rate base. And the ones that do are conservative in setting these guarantees, so as not to be forced to discount their subscription prices or otherwise undermine circulation economics by having to go after costly, marginal subscribers.

In other words, quality special interest publishers have continued to demonstrate that it is indeed possible to ask consumers to pay a fair price for information that is of genuine value to them.

But are advertising-driven magazines changing their practices to improve their own circulation economics? To some extent.

Rate base reductions would be by far the most effective way to enable higher subscription prices and reduce reliance on agents. But very few major magazines have been willing to do this, fearing that it will give media buyers even more rate negotiating power in an already extraordinarily competitive advertising environment. (Today, magazines are not only competing with each other, TV and the growing threat of the Internet, but facing media buyers who are scrutinizing every line of the circulation statement in attempts to gauge a magazine’s ‘wantedness’ by readers and true ROI for their clients.)

Constructive steps

What many magazines have done, however, is eliminate the large numbers of "bonus" (over rate base) copies that they were delivering to win points with advertisers.

Other constructive steps being taken by publishers include:

* Developing partnerships with outside marketers and affinity retailers. Time Inc., whose business model is more circulation-driven than most other large publishers’ (circulation accounts for between 40% and 60% of total revenue for a given title) has been a leader in this arena and others. Examples are its highly successful program in which Sports Illustrated and Entertainment Weekly subscriptions are sold to Ticketron customers purchasing sports and entertainment event tickets, and sales of Parenting subs in a maternity store chain.
* Developing "continuous service" subscriptions. Practiced responsibly, CS or "automatic renewal" is a convenience for loyal subscribers and, especially when possible on a credit card basis, a cost-reducer / profit-enhancer for publishers.
* Moving from "soft" to "hard" offers. Free-issue, credit-based offers with low pay-up dominated DTP direct mail until a few years ago. Widespread adoption of the invoice-like "voucher" direct mail format—which is based on heavy price discounting, but at least gets the new subscriber to pay up front—has improved economics. Better yet, a few large magazines have shown that an in-demand editorial product can refuse to discount (example: People Weekly, at over $100 per year).
* Investing in the editorial product, as well as subscription source and offer testing. There is a significant surge in ongoing research (much of it Internet-based), including reader surveys and cover tests, to continually hone editorial content / design. Publishers are also investing in developing circulation sources such as the Internet (which now accounts for 5% to 10% of Time Inc. subs) and strategic free-to-paid sampling programs and "combination offers" (buy People at full price and get a free trial sub to Teen People).

As for those of you looking to market subscriptions in the US, the main lesson here may be to not assume that you must lower your margins to succeed. If your special interest magazine delivers high quality and unique information or viewpoints, serious enthusiasts here will be willing to pay serious money for it. At this juncture, many US publishers may feel that they have more to learn from the UK’s traditional circulation-driven, cash-on-the-barrelhead model than the reverse.