How the Quad-LSC Megadeal Will Impact Publishers
Major U.S. publishers got a big surprise last week when they learned there might be only one printer able to produce their magazines and catalogs.
With the blockbuster announcement that the country’s largest publication printer, Quad/Graphics, has a deal to acquire the number two printer, LSC Communications, publishers are going to encounter a less competitive market, and therefore, the likelihood of higher prices for magazine printing and shipping.
Here are some takeaways from Quad/Graphics acquisition of LSC.
No competition: When print orders are in the millions, U.S. publishers currently have only two viable printing options, Quad and LSC, because those are the only two companies that operate rotogravure presses. At those volumes, huge “roto” presses are far more economical than the smaller offset presses that most magazines use. And roto’s superior photo reproduction is a key feature of glossy magazines like National Geographic and the leading fashion titles.
Some smaller publishers probably also got nervous when they heard the news about Quad and LSC. The two companies probably own most of the U.S. printing plants that are best suited for print runs in the 200,000 to 1 million range, and they are the dominant suppliers for smaller-circulation titles as well. They have the largest co-mail operations, which are especially crucial for small and medium-sized titles in minimizing postal costs.
And then there’s distribution: A couple of years ago, I knew of four major magazine freight and logistics providers: Quad, R.R. Donnelley Logistics, Fairrington Transportation, and The Clark Group. Then LSC bought Fairrington, Clark, and the print-logistics component of RRD. So even Quad’s printing competitors may have to use a Quad company to ship what they produce.
It ain’t a done deal. “I think you probably have to be living under a rock in the last decade if you don't see that our real competition is other channels,” scoffed Quad CEO Joel Quadracci when the antitrust subject came up Wednesday during a conference call with investment analysts.
Federal regulators may not buy that argument, but history suggests their ignorance of the printing business will be a boon for Quad: They tend to view it as a single highly fragmented market rather than as a collection of diverse markets. But there are likely to be objections from publishers or trade associations pointing out that mom-and-pop printers of business cards and T-shirts don’t compete with Quad or LSC.
It’s not an either-or decision. The Justice Department could allow the deal to go through on condition that LSC first divest or spin off some of its plants.
Creative alternatives: If the deal goes through unscathed, look for publishers to get creative about where they print to protect themselves from monopoly pricing. Canadian printers have been known to produce U.S. magazines, and at least one investor has considered creating a Mexican printing plant focused on publications for the U.S. The rising cost of freight could make distributed printing more viable; that is, instead of producing a title in one big Quad/LSC plant, use three smaller companies to print on the East Coast, in the Midwest, and in the West. Some of these smaller printers could join together in a consortium -- or a merger of their own.
Look out, book industry! “We intend to redefine the entire book supply chain, providing book publishers with increased customization and versioning capabilities, faster time to market, and reduced waste in inventories and obsolescence,” Quadracci said Wednesday. “For book publishers . . . the strength of our combined platforms will create a truly end-to-end service offering that includes front-end workflow solutions, a large-scale state-of-the-art digital printing platform complemented by an extensive offset platform, and back-end integrated systems for finishing, distribution and fulfillment.”
The LSC acquisition would quintuple the size of Quad’s book-printing business, but Quadracci’s vision for books seems to be about more than market share. The combined company would be able to offer such varied functions as photography, book design, ebook creation, inventory management, fulfillment, and shipping under one roof in a seamless process for publishers.
And, building on the companies’ expertise in direct mail and magazine production, it could develop automated processes for creating multiple versions (e.g. for specific geographies, school systems, interest groups, or languages) or even personalized books.
It could be worse. Unlike the arrogant, ignorant hedge-fund boys who made a mess of some magazine-paper producers, Quad knows the publishing business. It cut its teeth on magazines and will still be controlled by the founding Quadracci family.
Quad has thrived by out-investing the competition and by pioneering ways for publishers to cut their distribution costs. Even Thomas Quinlan, LSC’s chairman and CEO, admitted Wednesday that “We are not as automated, probably, as Quad is, and that leads to lower productivity.”
And the vision for growth Quadracci presented to investment analysts wasn’t based on gouging customers but on expanding the services it offers to customers – such as “converting customers who used to only do catalogues to direct mail . . . where all the content is completely variable based on what just happened yesterday online.”
Quad as savior?: A combined Quad/LSC might have the size, breadth of expertise, and reliance on printed magazines to become a sort of champion for the publishing industry. What would happen if this giant company focused on streamlining the process of buying and selling print advertising? Or on creating a technology and ecosystem for digital magazines that worked as well as Kindle does for ebooks?
A Quad representative once told me that the company had looked into becoming a magazine wholesaler but that Quad executives grew concerned that they might “lose their kneecaps.” If organized crime was ever involved in the newsstand system, it no doubt left long ago to pursue more lucrative ventures.
The archaic, convoluted system has been in a downward spiral for more than a decade, with all the participants seemingly looking for someone to step in and fix it. Could the dominant printer and shipper of U.S. magazines, with its extensive process-automation experience, become that “someone”?
The combined company would also handle such massive amounts of flat mail that it could help publishing and catalog clients achieve greater postal discounts, such as by creating high-density carrier-route bundles and delivering to postal delivery units. It would also be in a unique position to work with postal officials on additional ways to reduce costs for flat mail.