Tuesday, November 27, 2007
CONSUMER MAGAZINE FULFILLMENT:
WHERE IT IS AND WHERE IT'S GOING
By Steve Strickman
The past few years have seen major changes in the consumer magazine fulfillment industry. These changes, especially industry consolidation, have reduced the number of major vendors and the number of alternatives available to publishers. One additional consequence may be a reduction in the competitive intensity among the remaining vendors. Since the start of 2007 there have also been changes in the leadership of two of the larger fulfillment vendors and one of the smaller ones.
Much has been written about the challenges faced by traditional print magazines and newspapers. Fueled by internet growth and new giants such as Google and Yahoo, digital and on-line products are becoming more and more important. Fulfillment vendors are now facing the need to diversify their mix of services to meet the changing demands of their clients and prospects. The future health and growth of these companies may be determined by how successful they are in meeting this diversification challenge.
Mergers and acquisitions, both in the fulfillment industry and in publishing, have reduced historical stability and have created more uncertainty. There are now only three remaining major surviving vendors, down from five only four years ago. Two of the three survivors are owned by media companies. Also, one of the smaller vendors in California closed down a few years ago.
Not all of the news is discouraging. At least one new small vendor has entered the market and others are surviving and may even be prospering.
Two of the remaining large "in-house" fulfillment operations are also joining other major publishers in outsourcing. TV Guide recently converted their fulfillment to CDS and Guideposts is scheduled to do the same in early in 2008. As recently as ten or twelve years ago, major publishers such as Newsweek, Business Week, Meredith, National Geographic and Southern Living maintained in house operations. They are now all gone with only one or two others still surviving. There are, of course, a number of small to medium size publishers who maintain in-house operations using licensed fulfillment systems supplied by companies such as Advantage Computing Systems (ACS).
These recent industry changes, and their impact on alternatives available to publishers, are probably the most the most significant in last 35 years. This article attempts to describe the current situation and to look ahead to what may happen in the future.
The most recent significant industry event, prior to this year, occurred in 2003 when Kable Fulfillment Services acquired the EDS subscription fulfillment business in Louisville, Colorado (formerly Neodata). Early in 2007 Kable completed the acquisition of Palm Coast Data (PCD), creating the second largest fulfillment services company.
Kable Fulfillment Services operates in four separate facilities: Louisville, Colorado; Palm Coast, Florida; Mount Morris, Illinois; and Marion, Ohio. They also operate a number of different fulfillment systems. The new management, mostly comprised of senior managers from Palm Coast Data led by John Meneough, the former CEO of PCD, is faced with major integration challenges. They must deal with integrating people, operations and systems, while keeping hundreds of clients happy, and at the same time achieving the benefits of cost reduction through consolidation and elimination of duplicate or overlapping functions. This is a daunting task.
During the summer of 2007 they announced cutbacks affecting 75 employees in three of the four facilities (excluding Florida). More recently they announced that the Marion, Ohio facility will shut down by September, 2008 with the work transferred to their other facilities. They are also in the process planning the conversion of clients who are on NPS, the old Neodata system, to the Palm Coast fulfillment system while also converting a major addition, the Time for Media publications recently acquired by Bonnier.
The magnitude of these activities could either enhance their relationship with existing clients, if the service levels are maintained or improved, or could damage these relationships if service levels deteriorate in any significant way. It is clear that many Kable clients are watching closely.
CDS, a unit of the Hearst Corporation, is also undergoing major changes. Malcolm Netburn was hired as the new Chairman and CEO of CDS in February. The former CDS President left the company a few months later and CDS recently announce a major reorganization. They seem to be taking the lead in implementing a new long term direction that depends on a more diversified mix of services oriented to the changing business models of media companies with a stated focus on the expanded use of technology to meet these new requirements. CDS has exhibited a high energy level during this period of change and is investing in a number of enhanced services.
As part of its change in direction, CDS has changed its name to CDS Global. This name change is more reflective of the international scope of CDS activities. CDS acquired Tower Publishing Services in the United Kingdom a number of years ago followed by the acquisition of Indas, a Canadian company. A new Australian business unit was created within the past two years.
In addition to the recent conversion of TV Guide and the pending conversion of Guideposts, CDS has shown new aggressiveness in pursuing other potential new business. This has helped to sustain a competitive environment, at least temporarily, despite the reduction in the number of competitors.
One new aspect of the CDS reorganization is a temporary modification of the independence of CDS from the Hearst Magazine Division. CDS' IT organization is temporarily reporting directly to an executive at the parent company, which raises the possibility of a conflict of priorities. Ever since being acquired by Hearst 25 years ago, CDS has made an extra effort to avoid the perception of being tied too closely to Hearst Magazines, and this latest step has changed that practice. This closer affiliation could, however, provide CDS with additional resources that enable them to add value for their clients.
Time Customer Service
Time Customer Service (TCS), a Time business unit in Tampa, Florida, has made few major changes in its senior management. Tim Adams has been the President of TCS for many years, and seems committed to programs of growth and diversification. TCS has recently demonstrated a new willingness to compete with the other major fulfillment service providers. Given their size and resources, they could have a major impact on the competitive landscape if they should decide to seek new clients.
TCS now offers two reporting products: Circulation Manager (for report generation) and TPOT (for web based report distribution) that some consider to be the best in the industry. These packages were developed by Time, Inc in New York and demonstrate the advantage of a close relationship with the parent company with access to larger resources made available by the parent.
Among the smaller fulfillment service companies, the Strategic Fulfillment Group of Big Sandy, Texas, (SFG) also made a change at the top management level. Tony Pytlak was brought in within the past year as the new President and COO. Shirrel Rhoades, a respected veteran in the publishing and consumer marketing industries, and a long time consultant to the parent company, DRG, has also been active in supporting SFG's development. They could offer a serious alternative for publishers in the future.
ARGI, another smaller services company, has also had recent changes in senior management. They are positioned as a company that provides database marketing and web services in addition to subscription fulfillment.
There are several other smaller companies in California, including ESP Computer Services and Publisher's Creative Systems (PCS), each of whom has their own niche base of clients. Smaller east coast companies include Fulco and Cambey & West. Changes at these companies, if any, have not been publicized.
Finally, a new player has come upon the fulfillment scene. National Community Services (NCS), an active school plan and field agency for many years, based in Memphis, Tennessee, is offering subscription fulfillment services for smaller circulation publishers. They now have a small, but visible client base, and are seeking growth. They have demonstrated their commitment to the business by recently hiring Glyn Standen, formerly of Kable Fulfillment Services, to lead their fulfillment sales and marketing effort. They are being guided by Jeff Capwell and his associates, a group that has a track record of success in circulation and subscription marketing. NCS could also provide another fulfillment alternative for their niche segment of the consumer magazine market.
Recent Service Enhancements
The major service companies have been making an effort to add new services and offer enhancements to existing services. This was especially true of Palm Coast Data in the period preceding their acquisition by Kable. These service improvements are now being offered by the merged companies.
With its new energy and direction, CDS also is enhancing its services, but some of these enhancements must yet be implemented.
TCS has also been investing in such enhancements, which have been available to their clients for some time. They have been relatively quiet about these improvements - presumably because they have chosen to avoid the head to head competition that occurs elsewhere in the industry.
Palm Coast Data (now Kable) has implemented two major initiatives: a new reporting platform called PCD Inform, and a new database facility called PCD Insight, which is based on the use of advanced database software used by the major database marketing companies.
PCD Inform provides the user with flexibility in defining the content and format of reports and export files. It has many features that make it easy to use. The most unique characteristic of the system is the ability to add and maintain cost data so that full P&L reporting can be utilized.
PCD Insight offers complete count and selection facilities with very fast response times. Kable provides the capability needed to update the database from the fulfillment database. The tool is used for list selections for clients that have their list rental processing done by Kable. It also provides marketing database capabilities, including data overlays, for analysis and target marketing.
Kable clients using the Palm Coast Data system can take advantage of PCD Inform and PCD Insight. Those clients using the NPS system and the K-Data system (the "old" Kable systems) may be required to use other tools.
CDS is also developing a new reporting platform based developments at their UK company. They are revamping the UK system so as to meet U.S. requirements, but the date this new system will be available is uncertain.
CDS' major initiative appears to be in the expansion of its on-line and internet capabilities. This component of their business is growing rapidly and they have joined forces with the new media group at Hearst to accelerate their development efforts. They are currently implementing a new on-line marketing tool called Circules, which was developed at Hearst, for their clients. It seems that CDS intends to use these enhanced internet facilities as a competitive weapon that will also support their efforts to support new media business models.
They are also expanding their use of analytical software that "learns" based on transaction history to help target specific offers to customers on the telephone and on-line. CDS calls this the "SMART" system.
CDS has also upgraded their product fulfillment services over the past year or two. For those clients who have the need, CDS now offers high level services covering order processing, customer service, shopping carts, warehousing and pick and pack. Their product fulfillment system, SERV pf, is interactive, utilizes a relational database, and interfaces with strong internet services. The only major task they have not yet accomplished is to integrate the product customer database with the subscriber database to provide a truly integrated capability.
TCS offers a higher level of postal and distribution support than is available from the two major competitors. They also offer the advanced reporting tools mentioned earlier in this article. As with many industry reporting tools, power usage of the Circulation Management reporting system probably requires extra client training.
One of TCS' most unique services is an itegrated print management system called "OMS". OMS is geared toward larger circulation magazines with multiple editions. Among other functions, the system provides for the "qualification" of geographic and demographic editions, with the ability to prioritize characteristics and to generate edition counts prior to actual selection of main file labels. For publications with this need, OMS offers a unique ability to plan and control edition print orders and counts.
TCS also has a very pro-active Marketing Services group that takes responsibility for much of the workload that, with other fulfillment vendors, must normally be performed by client Circulation staffs.
Larger circulation consumer magazine publishers who are seeking more than basic fulfillment services will generally limit their focus to the three large vendors. This could change in the future if one or more of the smaller companies makes the investment necessary to create the depth and breadth of services sought by this major segment of the market.
Smaller publishers who are concerned about fundamentals - i.e., fast and accurate cashiering and transaction processing, telephone and on-line customer service, audit support, adequate reporting, and reliable lettershop services, have a much wider choice.
SFG would be a leading candidate for these publishers. They manage full service operations in one location in Big Sandy, Texas, including all fulfillment operational activities, telephone customer service, lettershop and full product fulfillment. Under their new President, they have exhibited a strong desire for growth and are in the process of expanding their capabilities.
Other good choices could be NCS (the new entry to the business), ESP, PCS, and, perhaps, some of the other smaller companies.
The biggest advantage a publisher has in doing business with one of the smaller companies could be to achieve a higher level of attention and support. Smaller clients sometimes suffer from what they perceive as a lack of attention from the large vendors, especially in account management and from senior management.
In assessing these alternative vendors, publishers should consider cost factors other than fulfillment service prices. For example, the larger service companies have higher levels of automation and can perform image processing and, ultimately archiving of the transaction images. This is harder for the smaller companies to justify. More important may be the ability to obtain larger postal discounts for clients. For standard class these discounts are dependent on the volumes of co-mingled mailings, and the larger companies can normally achieve high discount levels without using a pre-sort house.
Where is the consumer magazine fulfillment industry going from here? The likelihood is that there will be many more changes coming. It is almost certain that all of the fulfillment companies will add capabilities to increase their support of multi-media businesses. This will be essential if these companies are to survive over the long term.
Most immediately, we should expect systems to be modified as necessary to support fulfillment of electronic publications, including content delivery. This will also include delivery of on-demand content, with or without gatekeeping and with or without additional collection of payments. These facilities should be relatively easy to implement, depending on the age and architecture of the underlying fulfillment system.
Batch update systems are already obsolete and may, in the near future, be unacceptable. As the world evolves to more of an on-line mode, it will be very important to process in a real-time environment. Those fulfillment companies that seize on this as an opportunity are likely to prosper. Those that resist are setting themselves up for failure.
None of these changes will reduce the need for effective fundamental fulfillment processing. We may see a continued decline in mail transaction volumes offset by an increase in internet based transactions. Similarly, telephone customer service call volumes could decline with a corresponding increase in on-line customer service volumes. In at least one case, more than 50% of customer service transactions are now on-line. As electronic products increase in volume, with almost all of their orders coming in electronically, the trend toward electronic transactions will accelerate.
Real-time credit card processing will become more common while direct billing could decline. The percentage of credit card purchases will increase.
With respect to industry stability, this is much harder to forecast. The three large vendors all appear to be financially healthy, although Kable Fulfillment Services reported a loss in their most recent fiscal quarter.
As part of the privately owned Hearst Corporation, CDS would appear to be completely secure and stable. Hearst rarely sells companies, so an ownership change is highly unlikely, especially a company that is tightly tied to their core business. Through Hearst, CDS has large financial resources to draw on. They have been and should continue to be solid over any foreseeable future timeframe.
CDS may not be likely to expand their business via acquisitions. With a dominant market share, they could be at risk of anti-trust questions if they acquire within the fulfillment industry. Non-fulfillment and foreign companies, however, could certainly be candidates.
Kable is the largest business unit of its parent company, Amrep Corporation. As a public company, Amrep, and because of its dominance within Amrep, Kable could be subject to the pressures faced by many public companies for short term earnings. Amrep has completed the acquisition of four fulfillment companies over the past years starting with Publishers Aide and FCA in the 1990's followed by EDS in 2003 and Palm Coast Data in 2007. The integration issues they face, including the carryovers from prior acquisitions, could have an impact on near term performance. Once they get past this transitional period, however, they are likely to resume their programs of innovation and diversification that characterized their past, especially at Palm Coast Data.
TCS, as part of Time, could be affected by the future of the parent company, which has been the subject of much speculation and rumors recently. The TCS history as an in-house supplier for the largest magazine publishing company in the U.S. certainly gives it the credentials to continue to be a major long term player in the industry. They are working on growth and diversification plans that involve: market penetration in the core subscription fulfillment business; diversification through extension of core skills to expanded markets; and the "spin off" or "bundling" of services to create new products. They seem intent on these efforts and could soon be a force to be reckoned with in the industry.
It's very difficult to speculate about the future of the smaller companies. If the trend toward industry consolidation continues, one or more of them could be candidates for merger or acquisition. It seems likely, however, that they will face the need to modify their businesses to meet the changing requirements of the media industry. Pooling the needed investments over a larger base could provide some incentive for further consolidation.
Steve Strickman is president of SES & Company, a consulting company with many major publishing clients. He was the founder of CDS where he was president and chairman for 16 years. He has also been president of Palm Coast Data and Chairman of the Executive Committee of Kable Fulfillment Services. He has a masters degree from New York University and served on the visiting faculty of Stevens Institute of Technology.