Thursday, November 8, 2007

Perspective on Consumer Magazine Circ Levels-First-Half 2007

Perspective on Consumer Magazine Circ Levels-First-Half 2007
By Baird Davis

The industry is once again sending mixed signals with its circ level data. Insight is needed to see beyond the obvious numbers to the underlying trends.

In the first half of 2007 the audited paid circulation of consumer magazines continued its slow, but steady decline. The industry's paid and verified circulation fell 1.2 percent-from 279.5 to 276.2 million. This was not a large decrease, but it was welcome news for an industry that remains in a bloated state of over-circulation.

What's Causing Circ Level Reductions?

As always, the industry transmitted a set of mixed signals. We'll go below the surface to provide a data based analysis that will, hopefully, clear up some of those circ related ambiguities. Our research will show a declining universe of audited consumer magazines, reveal the breadth of both the circ level increase/decrease trends, put in perspective the circ level management impact of large publishing companies and finally take a closer look at the circ effect precipitated by changing verified and sponsored circ usage trends.

Newsstand Contribution to Circ Level

Newsstand to subscription circ ratio is a good, if somewhat crude, guide for measuring the extent of the industry's over-circulated condition.

In the second half of 2006 the industry was treated to a rare occurrence-an unexpectedly higher newsstand contribution to total circulation ratio. But the results from the first half of the year represent a return to reality. In this period, the declining newsstand circ contribution trend resumed its inexorably downward path.

The newsstand circ level declined to 47.4 million and the newsstand to subscription ratio fell to 17.2 percent-another historic low. In the year 2000, the newsstand circulation ratio stood at 20.8 percent. The persistent downward spiral of the newsstand to subscription circ ratio is a fairly good indicator that the paid consumer magazine business remains in an over-circulated condition.

Number of Audited Titles Continues to Fall

The number of audited paid consumer magazines in the first half of 2007 declined to 562-down from 579 a year ago, 592 two years ago and 645 in the first half of 2000. In the last seven years, the number of audited paid consumer titles has fallen nearly 13 percent.

It should be noted, however, that 90 audited publications (reporting 122 million paid/verified circ) with primarily "association" and/or sponsored circ have not been included in this analysis. Also not included in this review are publications with less than 5,000 paid/verified circ and those titles with primarily foreign circ.

During the first half of 2007, a record total of 44 titles discontinued publication or ceased being audited. There were seven principle casualties (more than 400,000 circ) in this group. Those titles and the paid circ they reported the year previous include: Teen People (1,456,000), FHM (1,251,000), Disney Adventures (1,181,000), Jane (706,000), Nick, Jr. (642,000), Elle Girl (513,000) and Kids: Fun Stuff to Do Together (435,000).

The combined circ of these seven titles was 6.2 million, which accounts for a significant portion of the 8.8 million circ decline attributed to all 44 discontinued publications.

On the plus side, there were 27 publications added to the auditing ranks in the last year. The largest circ contributors were: Ok! Weekly (809,000), Cooking with Paula Deen (766,000), Figure (533,000), Cookie (385,000), Siempre Mujer (381,000) and Diabetic Living (370,000). The combined circulation of the new titles was 5.7 million.

The circulation contribution from the new titles was substantial, but they fell 3.1 million short of balancing the circulation loses attributed to departing publications.

Circ Level Adjustments Less Severe

The pace of circ level reductions decelerated in the first half of 2007. There were 97 publications whose circ was decreased by 5 percent or more, compared to 126 a year ago and 146 two years prior. The frequency of circ level increases also slowed-only 74 publications, down from 89 a year ago, had circ level increases of 5 percent or more.

There were 22 titles that reported circ level decreases of 50,000 or more. These included six titles reporting circ level reductions of 150,000 or more. This group was headed by Time's massive 700,000 decrease and TV Guide's 453,000 reduction. Also included were Sunset (-243,000), Mary Engelbreit's Home Companion (-172,000), Home (-155,000) and Playboy (-151,000). In total these 22 publications reported circ level reductions of 3.1 million.

Counter balancing the level reductions were 28 titles that reported paid/verified circ levels that were higher by more than 50,000. This group included extraordinarily large increases from Everyday with Rachael Ray (+476,000), Cooking with Paula Deen (+372,000) and Women's Health (+268,000). This group of publications accounted for an aggregate circ level increase of 3.3 million.

The increases/decreases from publications with more than a 50,000 circ change nearly balanced one another.

Major Companies' Effect on Industry Circ Levels

The four leading circulation companies-Time, Inc, Meredith, Hearst and Conde Nast-accounted for 39 percent of the audited circulation of consumer magazines in the first half of 2007. Over the past decade, these four companies have aggressively pursued circulation level advances, carefully protecting their market positions.

From the year 2000 through first half of 2006, the combined circ level of these companies grew by 19 million (18 percent) and their share of a shrinking circ level market grew from 31 to 41 percent. Then in the second half of last year, Time, Inc reversed course. It sold 13 audited publications (titles with more than 7 million combined circ) to Bonnier and modified its aggressive circ level practices.

Time, Inc remains the industry's circulation leader, with slightly more than 34 million circ. But its aggregate level is now much closer to the three other major circulation leaders-Meredith (26.7 million), Hearst (24.1 million) and Conde Nast (22.0 million).

A closer inspection of the circ level practices of the industry's circ leaders (below) reveals the extent of those differences. But, surprisingly, it doesn't appear to be having a significant aggregate affect on the industry's circ level.

1. Time, Inc - It divested publications with more than 7 million circ, discontinued publication of Teen People (1.4 million circ) and announced the closing of Business 2.0 (550,000 circ). It has also displayed new circ level caution with its mature titles. It made deep (greater than 15 percent) circ level cuts on both Time and Sunset. Circulation reduction is a strange occurrence for a company previously known for its relentless pursuit of circ level growth and its huge appetite for protecting market position.

2. Meredith - It quietly brought three new publications to the auditing ranks in the last year-Figure (533,000), Siempre Mujer (381,000) and Diabetic Living (370,000). It boosted the circ of More (up 99,000) and venerable BH&G (up 61,000). But it also displayed circ caution-it ceased auditing Renovation Style, reduced the number of audited BH&G specials, discontinued Child and lowered Family Circle's circ level. Its approach to circ level management might be described as cautiously aggressive.

3. Hearst - It demonstrated very little interest in circ level reductions. In the aggregate, it increased its circ level 2.6 percent. This included increasing the level of O, The Oprah Magazine (up 100,000) and Good Housekeeping (+131,000), publications whose levels had been reduced in recent years. It is still clearly pressing the circulation pedal to the medal.

4. Conde Nast- In the first half of 2007 it continued to be aggressive in its circ practices, growing its circ level by 2.9 percent, even though it discontinued Jane, a publication that reported 706,000 circ the year previous. It increased the circ of Domino, GQ, H&G and Wired by 50,000 or more and launched Cookie-a publication that reported 385,000 circ. In the last seven years, it has exhibited the largest circ level growth (21 percent) of any major publishing company.

5. Reader's Digest- Its circ level increased 2.9 percent on the strength of the phenomenal growth of Every Day with Rachael Ray. However, its announced intention to lower the circ of Reader's Digest by 2 million will reduce its overall circ in 2008 to a level that will be less than half that of the four market leaders.

6. Hachette and No. 8. Enthusiast Media- Of the market leaders, these two companies have demonstrated the greatest propensity for reducing circ levels. The most vigorous circ level reduction company has been Enthusiast Media. After several years of divestitures, it still publishes an extraordinarily large number of audited special interest publications, plus two Soap Opera titles.

In the first half of 2007 it reduced the circ level on 38 of its 45 special interest titles, resulting in an aggregate circ level reduction of 4.9 percent. Hachette has trimmed its portfolio of audited publications, selling Showboats International and ceasing publication of Elle Girl and Premiere. It also made significant circ level reductions in the first half of this year on Home, Sound & Vision, Metropolitan Home, Flying and Woman's Day. Overall, it reduced its paid/verified circ level 8.3 percent in the last year.

7. Bonnier (previously World Publications)- Late last year it made a dramatic entrance on to the precarious "large circulation" stage with its aforementioned acquisition of Time, Inc titles. Welcome to the big leagues! Its combined circ level of 9.1 million now places it in elite company. We don't yet know much about its circ level strategy, but we know the industry will be closely watching its circulation actions in the year ahead.

9. National Geographic- It is the odd ball among major consumer magazine publishers. It is a company with a large commitment to "association" circulation (92 percent of the circ for its name sake publication), yet it publishes four other audited consumer titles (combined paid/verified circ of 2.7 million) that don't rely on "association" circulation sources.

It is kind of a hybrid consumer magazine publishing company. But the large scale of its circulation operation insures its significant industry influence. In recent years it has trimmed the circ of its flagship publication, National Geographic. But it has maintained or grown the circ of its other four audited publications.

10. Rodale- In a stealth manner, this company has consistently grown its circulation over the last seven years. Even though it sold Backpacker (circ 354,000), its overall circ level still grew 4.1 percent during the period-led by the dynamic growth of Women's Health (up 268,000) and Prevention (up 94,000). Additionally it resurrected Organic Gardening, a publication that had dropped from the auditing ranks in 2004.

Among the industry's circ leaders, an interesting circ strategy dynamic has evolved. The group appears to be equally divided among growth and reduction proponents. On the growth side are Meredith, Hearst, Conde Nast and Rodale. Balancing that circ level assertiveness are the reduction practitioners-Time, Inc, Reader's Digest, Hachette and Enthusiast Media. In neutral positions are National Geographic and unknown Bonnier.

The Impact of Verified Circ and ABC Par. 6 Sources
It doesn't appear as if the advent of verified circ and the accompanying increase in circ source transparency (ABC Statement paragraph 6) have had any appreciable impact on total paid/verified circ levels. But there have been some significant changes in paragraph 6 source distribution.

The amount of verified circ employed by audited consumer magazines in the first half of this year was 10.8 million-3.9 percent of total paid/verified circ. This is almost exactly the amount of verified circ used (10.7 million) in the previous year. But here's the change: it's down substantially from the amount of verified circ employed (12.4 million) in the second half of last year.

What's caused this fluctuation in verified circ usage?
It can only be explained by reviewing verified circ usage in context with all other reported ABC paragraph 6 sources. In order to facilitate this comparison, I've compiled paragraph 6 data for the 22 circulation companies with more than 2 million paid/verified consumer magazine circ (see the attached chart). This data is a representative industry sample, accounting for 74 percent of the industry's total paid/verified circ.

The data reveals an interesting phenomenon. It confirms the verified circ slide (down 16 percent), but curiously it shows that the rise in other paragraph 6 sources-paid sponsored, partnership, loyalty and combination circ -balanced the verified circ decline. The net effect is that the total use of paragraph 6 circ sources in the last two six month periods is nearly equal, with 13.0 percent of total paid/verified circ in the first half of 2007 and 12.8 percent during the second half of 2006.

The sharp increase in verified circ in the second half of last year appears to be largely a result of a change in ABC regulations regarding partnership non-deductible circ. What happened is that partnership non-deductible circ, previously reported as partnership circ in paragraph 6, was re-designated (and reported) as verified circ in the second half of 2006.

However, this change alone does not reveal the entire paragraph 6 source distribution story. In the first half of this year, partnership circ usage sharply rebounded, reporting a 28 percent (1.1 million circ) increase over the previous six month period. It should be noted that "paid sponsored" circ usage also increased, although not as dramatically as partnership circ.

Some of the increases in partnership and paid sponsored circ in the first half of the year can be attributed to publishers anticipating the effect of yet another ABC rule change. This one will take effect with the first half 2008 ABC statements and involves the paid sponsored source.

In short, the consequences of this audit bureau change are that all paid sponsored circ, designated as "public place," will be reported as verified circ. The relatively small portion of paid sponsored circ that is "individually addressed" will remain (for the time being) classified as paid sponsored circ.

The sponsored circ redefinition change could cause another temporary spike in verified circ, similar to the one precipitated by the partnership regulation change. However, the significant increase in other paragraph 6 circ source use in the first half of this year is an indicator that publishers will try to avoid major verified circ increases by replacing a majority of any paid sponsored (public place) circ losses with circ from other paid paragraph 6 sources.

CONCLUSION: What's Really Precipitating the Modest Industry Circ Level Declines?
The industry's aggregate circ level may be bloated, but publishers don't seem overly concerned. They have, more or less, disregarded the warnings of a drooping newsstand to subscription circ ratio. They appear to be balanced in terms of increasing or decreasing circulation.

The differing circ strategies of the major publishers are helping sustain relatively stable industry circ levels. Even the prospect of explaining verified circ to advertisers hasn't diverted publishers from their circ level increase persistence. We'll have to see if the recent redefinition of the paid sponsored circ will have an adverse effect on circ levels.

The only thing that seems to be having a slimming impact on industry circ levels is anthropological in nature. The consumer magazine environment is over-populated-it can no longer adequately support as many titles as it did ten years ago. Of course the industry has always been governed by Darwinian survival rules-the weak succumb, the strong continue.

The difference today is that the weak are being replaced on less than a one for one basis. The decline in audited publications (down 13 percent in the last seven years) accounts for the majority of the industry's circ level decline.

But, interestingly, the average circ of the surviving titles has grown from 467,000 seven years ago to 491,000 in the first half of 2007. This five percent increase in average circ per audited publication partially offsets the level reduction effect of having fewer audited publications.

The Darwinian effect is partially helping relieve an over-circulated industry. However, it's going to require more proactive individual publication circ level reduction efforts if the industry is to expeditiously reach circulation level equilibrium.