How The Digital Revolution Has Been Disruptive for Publishers’ Major Vendors
Psst, wanna buy a paper mill?
You could buy controlling interest in the U.S.’s largest maker of magazine-quality paper, Verso Corporation, for about $6 million. That’s up from less than $1.3 million a few weeks ago, which comes out to about $160,000 for each of Verso’s eight mills.
The good news: Even a small Verso mill produces enough paper to produce 1 billion (that’s billion, with a B) half-pound magazines per year. The bad news: With heavy debts, declining demand, and a strong U.S. dollar that puts it at a competitive disadvantage, Verso is in such a precarious state that Wall Street assumes a bankruptcy reorganization is just around the corner.
The magazine industry has weathered the Digital Revolution by diversifying revenue, pivoting away from print and becoming the “magazine media” industry. But other industries on which publishers depend have not fared so well. Here’s a look at how four key members of the U.S. print-media ecosystem are faring and how their struggles are affecting publishers. (Note: The digital side of our business is not immune from ecosystem disturbances. Some digital-edition vendors have had to morph or die, and many experts warn of a coming shakeout in the ad-tech industry.)
There’s an old saying that the best way to make a small fortune in the paper business is to start with a large fortune. That’s never been truer than now. As Verso’s saga demonstrates, you would be hard pressed to find a worse business model than making magazine paper in the U.S. -- unless maybe it’s manufacturing newsprint in the U.S.
Sure, we’re seeing lots of new magazines starting up. But, from the standpoint of the paper industry, it takes maybe 100 new, sustainable niche titles to make up for the volume lost when a single giant like Ladies Home Journal ceases publication. And the reductions in page counts and newsstand copies by industry leaders like People magazine hurt even worse. Meanwhile, catalogs, the other big user of magazine-quality paper, are also in long-term decline.
Even if they don’t realize it, publishers are already paying the price for the paper industry’s struggles. The choice of papers and suppliers is shrinking, especially if you want to buy American. And there’s also a subtle impact on prices.
Paper prices tend to rise and fall with the economy, but until recently they seemed immune to inflation: For a couple of decades, the high and low points of each pricing cycle tended to be nearly identical to those of previous cycles. Someone was always coming along with a big new machine that would grab market share with lower prices, often resulting in the closure of an older machine that could no longer compete.
But investment in the magazine-paper industry has stopped in the developed world and drastically slowed elsewhere. There are no new entrants to drive down prices, and efficiency gains are minimal. Few mills have sufficient margins to withstand inflationary cost increases for long without passing them along to their customers. That means weak demand can push prices down only so far before the highest-cost machines are shut down, bringing the market into balance or even into a temporary shortage.
Publication printers have suffered through the Digital Revolution along with their customers. The industry has seen more than its share of bankruptcies and plant closings. Big publishers complain that industry consolidation has left them few choices -- for some, only two -- that can handle high-volume magazines.
Unlike their brethren in the paper industry, printers have diversified, morphing into “marketing service providers” that can create, produce, and distribute various kinds of printed and digital content. They are doing less printing for publishers but are doing more to serve their publishing customers in other ways -- from co-mailing to creating digital editions to managing data.
But here’s a sign that not all is rosy for the industry: Printing giant R.R. Donnelley plans to split into three separate companies, hoping to unlock the hidden value of its high-tech ventures by separating them from its old-iron printing businesses.
The U.S. Postal Service
The much-predicted collapse of the Postal Service never materialized. Massive downsizing and the growth of package deliveries have enabled the USPS to remain afloat.
But delivery of magazines and other mail have suffered. A wave of distribution-center closures in the past year turned out to be one cut too many -- or perhaps a sensible cut that was poorly implemented. In any case, what was supposed to be a minor slow-down in delivery times turned into chaos, with mail piling up in some of the remaining plants.
Legislators in rural states, which are seeing especially long delays in deliveries, are pushing to restore previous service levels, but the genie will not go back into the bottle so easily.
And don’t expect any breaks on postal rates. The 4.3% “exigent” surcharge is scheduled to expire next year, but moves are afoot in Washington to make the charge permanent. USPS’s attempts to overhaul its handling of “flat” mail has been largely disappointing, which means we’ll continue to see proposals to slap publishers with extra-special rate increases.
(Check out my post “Get Ready for Roller-Coaster Postage Rates” for more on the impact of USPS rates on magazine distribution.)
For the past decade or more, there’s been nothing but bad news about the “newsstand” system -- rapidly declining sales, wholesaler bankruptcies, and supply disruptions. But, in some ways, the newsstand ecosystem is healthier than it’s been in two decades.
All three of the remaining large wholesalers are parts of even larger, financially secure companies. They seem to have viable business models that don’t depend solely on magazines, making them better able to withstand continuing declines in magazine sales. We’re unlikely to see the kind of disruption we experienced in the summer of 2014 when a major wholesaler went belly up, leaving some stores’ magazine racks empty for weeks.
And despite several years of the digerati proclaiming it to be dead, stability has also come to Barnes and Noble, a crucial retail outlet for the new and niche publications that represent our industry’s future. Though not exactly thriving, the big bookseller is surviving by shedding its disastrous NOOK venture and diversifying its product line. And unlike grocery and discount stores, it doesn’t seem to be cutting back on the space devoted to magazines.
There’s also anecdotal evidence that publishers are bypassing the traditional newsstand system to get their publications into retail stores. For example, regional magazines are distributing to local stores, and enthusiast titles are working directly with relevant chains of specialty stores