Unfortunately for independent, midsize companies, the new year is turning ugly early
It's barely February as I write this, but already 2008 is making brows sweat in Magazineland. Paper prices are skyrocketing, advertising is sluggish, and recessionary fears loom. Wal-Mart (WMT) booted hundreds of magazines out of its stores, which won't help newsstand sales. Nor will magazine wholesalers' ongoing campaign to reduce the volume of copies they distribute, so that they can increase the percentage of copies they actually sell. "Everything that's going up is not supposed to be going up, and everything that's going down is not supposed to be going down," cracks a mordant senior executive. Plus, oh yeah, that Internet thing. Virtually all publishers are racing to invent or buy digital strategies after previously neglecting that part of the business.
This year's stresses are likely to hit the independent, midsize companies of the sector first. These guys are not huge enough to spread challenges across a business notching north of a billion in revenues, nor can they hide within a parent company's multiple companies, as Hearst Magazines or Time Warner's (TWX) Time Inc. can. But they rely on titles big enough to be exposed to macro advertising trends, to which small, niche companies are relatively immune. Rodale and American Media, which post annual revenues around $625 million and $475 million, respectively, are very different companies in very different situations. But they're both still likely to feel the changes in this year's barometric pressures earlier than their bigger brethren.
LITTLE ROOM FOR ERROR
American Media is heavily dependent on supermarket tabloids like the National Enquirer and Star. Rodale bet early on what we now call "wellness," in a move that proved fortuitous, and has hit big with the magazines Men's Health and Prevention, which it founded in 1950; it's also had the fortune to publish The South Beach Diet book. Rodale is a family-owned company, run by President and CEO Steven Murphy. American Media, backed by Thomas H. Lee and Evercore Partners (EVR), has been run since 1999 by magazine veteran David Pecker. American Media's financial results are solid on the surface, but it's been rocked by earnings restatements. It has also, quite simply, not delivered for its investors, and underperformed many of Pecker's promises of revenue and profit levels, even while its fiscal year, which ends March 31, looks notably better than the previous one. Rodale's profit was less than $25 million in 2007, according to two executives who viewed financial data, a low figure for a company whose overall ad pages last year surged around 15%. They are thus two companies without much apparent margin for additional spending at a time when competitive vicissitudes require just that.
Murphy disputes this, saying '08 will be a year in which newish, in-the-red magazines Women's Health and Best Life will turn toward profitability. "I would be more worried if our investments were not working," he says. That three high-level executives have departed since December—one remains a part-time adviser—has raised concerns about cost cuts. But Murphy denies the moves were motivated by such concerns, and a spokeswoman says new hires are imminent. (Pecker's spokesman declined an interview request.)
American Media and Rodale both sought buyers in 2007, although Rodale truncated the process abruptly, say executives who were involved. A long-discussed deal between American Media and Source Interlink (SORC), a Ron Burkle concern that owns a major distribution arm and a set of enthusiast magazines, appears dormant. Pecker's five-year contract, which expires in April, will be extended a year, says a spokesman, a vote of confidence that, given industry chatter, may surprise observers. (Two senior executives employed elsewhere report knowledge of conversations in which American Media's owners discussed replacing Pecker around a year ago.)
These observers may search for other clues from these companies that the outlook for magazines is souring faster in '08. Look for a quick, quiet round of layoffs. Look for small-bore magazine or asset sales. Look for sudden ad dips at cornerstones such as American Media's Shape or Rodale's Men's Health. Look, in sum, for 2008 to decide whether the midsize, privately held players can still thrive as standalones in a stagnant or shrinking world.
For Jon Fine's blog on media and advertising, go to www.businessweek.com/innovate/FineOnMedia