Newsweek is for Sale; The Economist and The Week are Not

The Washington Post Company has announced it will sell Newsweek. CEO Donald Graham, who did not go to auctioneer school, said "we don't see a sustained path to profitability for Newsweek." The destruction of Newsweek's profitability, notes the article, is part of a larger trend: TV Guide, Businessweek, and Reader's Digest all met a similar fate.

Meanwhile, the article implies, The Economist and The Week, the latter founded by Felix Dennis (if I remember correctly, it was the only title he kept when he sold off his publishing empire), are profitable, as are popular titles like US Weekly and People. Obvious question: why?

The article gives the standard qualitative answers for the decline of publications like Newsweek: the fragmentation of audiences, the rise of cable and internet news and the speeding up of the news cycle, increasing political polarization, loss of advertising rate base, etc.

My project for myself, however, is to try to answer these questions more quantitatively, the way our BMMT Dream Team would do it. I would construct historical income statements for each of the magazines mentioned, both the failures and the successes, and figure out why specific line items went south and how. The name of the game in evaluating magazines is predicting operating margins (leverage and asset turnover don't mean that much), which means predicting the return on investment of a given investment in expenses. In other words, don't think of income statement expenses as expenses; think of them as capital expenditures, as investments undertaken to produce a return, in the form of revenues. The higher the gap between operating expenses and the revenues they produce, the higher your return on investment.

As always, figuring our the right metrics would be key. My gut feeling is that, for all the talk about dead trees and trucks, printing and distribution costs do not play a huge role in determining which magazines succeed and which ones fail. In fact, I would speculate that the general interest publications--the ones that are failing--pay less per unit to print and distribute because of economies of scale. My sense is that the main cost differentiator is the labor involved in putting the thing together in the first place.

Therefore, my sense is that the relevant metrics for these publications is:

a) circulation revenue per journalist/editor man-hour, and

b) advertising revenue per journalist/editor man-hour.

Figuring out which magazines do well on those two metrics and why is the key to evaluating magazines. Remember, Newsweek is not failing because of lack of revenue: $165.5 million is a lot of money. It's failing because its cost structure is too high for its revenue.

In this framework, a magazine can succeed either by keeping the numerator high or the denominator low. Some educated guesses:

The Week does not gross anywhere near Newsweek's $165.5 million; its subscription price is not high and its advertising pages don't command a premium. But it is so inexpensive to produce that its revenue per man-hour is high enough to produce profitability.

The Economist probably pays its editors and journalists a premium (not a huge one though;  remember they are not allowed to have bylines, so they never acquire brand value of their own. They can't influence policy at their organizations the way, say, Thomas Friedman and Maureen Dowd did when they complained about their op-eds being put behind a paywall), but because of its enviable demographics and its niche audience of business subscribers, those journalists and editors are extremely productive: they combine to produce more revenue per man-hour than any other magazine.

People Magazine and US Weekly are like The Week: they are just extremely cheap to produce relative to the revenue they earn. The labor involved in putting them together is just very productive.

Newsweek is failing because it's stuck in the middle: its subscription price is comparable to that of US Weekly or People, its advertising rates are comparable--but it just costs way more to produce than US Weekly and People. It probably costs about as much per unit to produce as The Economist, but cannot command the same per-unit subscription and advertising revenues as The Economist. Stuck in the middle.

All of this begs two questions:

1) Before the general interest weeklies got stuck in the middle, they were extremely profitable. Why was that? Maybe a topic for another post.

2) Taking Richard Stengel at his word, why has Time Magazine managed to remain profitable even as it's subject to the same forces affecting Newsweek. Maybe there is only enough circulation and ad revenue to go around for one general interest weekly magazine to prosper, and Time is slowly draining it away from Newsweek.

The only problem with my little project is that it's extremely difficult to create an income statement for an individual magazine. The information is very hard to come by. If anyone has any insight into getting this information, please let me know.

Comments

[Nick Gogerty]

um.. don't forget the business drivers. Finance metrics are outputs. To really understand a media business one has to get at the human behavioural inputs. Why does a person invest time in this and why will they do so in the future?

cities with 1-2 major papers reflected a desire for a shared voice and "relationship" with readers, editorial function in a limited media world. Newsweek doesn't have a unified voice or clear quality differentiator, it has hard for a reader to form a relationship with it.

I would look at average time a user invests in engaging with a piece of media and what they get out of it. That relationship lock-in will tell you about stickiness and the behavioral business moat. It will also tell you when it is time to move on due to someone or something performing that function better. Using only financials misses a lot of the picture in the value creation and moatishness of a business.

I have read the economist for 17 years, will hopefully do so for 50 more. :)

[Wide Moat]

Very interesting topic and original analysis--thank you.

I suspect that the revs/journalist man-hour is a better tool for predicting the business success of a periodical than user time. In the case of "US Weekly," I perceive that the user time is quite low, particularly compared to "Time." Does anyone spend more than 30 minutes on an issue of "US Weekly?"

Yet apparently, both are profitable.

I suspect the audiences of each don't overlap much. If the US Weekly reader wants celebrity gossip, the Time reader wants a narrative, longer form, and some mildly counter-intuitive worldly insights. A mag can sate the former in less than five minutes, the latter less so.

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