As advertising spend migrates from print to online, the magazine publishing industry in some markets is seeing slower growth, with many magazine titles now needing to diversify into cross-platform editorial and advertising products that integrate the traditional print title with online and mobile product offerings. However, in many developing markets and also in markets where a premium is placed on scholastics, a glossy, printed title is still very much regarded as a collectible and keepsake of knowledge or remembrance.
Financial analysts should be aware of the dynamics that are driving the magazine publishing industry and in doing so build robust financial models that are able to strategically analyze the challenges that the industry is facing, and help quantify key growth opportunities and challenges.
Sources of Revenue To Consider For A Magazine Publishing Financial Model
A magazine publishing business derives the bulk of its revenue from 2 main sources: advertising sales revenue and subscription revenue.
A magazine publishing may sell customized advertising content pages in the magazine to advertisers wishing to reach out to the magazine’s readers with relevant products and services:
- Advertising revenue is normally calculated using a standard advertising rate card, where different rates are priced based on the advertising space & placement required (full page, ½ page, back cover, etc) as well as whether the advertisement is printed in the range of options between full, glossy color or plain black or white.
- The standard advertising rates are then multiplied with the number of advertising pages sold to derive the gross print advertising revenue for each issue of the title.
- The magazine publisher may also package customized advertising solutions for their customers, where a made to order advertorial is inserted or bound into the print title.
- Examples include fold outs, pages with adjusted thickness levels or print quality, special printing effects, etc. Revenue derived from this source is normally on a case by case basis, but normally limited to 1 or 2 instances in each issue of the title.
The biggest customers of advertising space in magazines, as in most other major media categories, are normally media buyers who are acting on behalf of clients to secure advertising inventory across multiple media platforms. Hence, it is normal that a commission is paid to these media buyers to procure advertising inventory in the title, and must be factored into any financial model.
In some cases, discounts off the standard advertising rate card are also provided to large and / or loyal advertisers, as are free advertising pages sometimes thrown into the mix of a sales package to make the advertising opportunity in the magazine more compelling.
In a financial modeling exercise, gross advertising revenue should therefore net off the payment of commissions, discounts and free advertising pages, to arrive at a net advertising revenue line which is normally regarded as a more accurate indicator of a magazine publisher’s advertising sales.
Limiting factors to consider when building a financial model on the amount of advertising sales and the number of advertising pages a magazine publisher is able to sell include:
- The capacity of the market (i.e. number of ready buyers) to absorb advertising space in their particular subject niche / readership, and the competition for the advertising dollars of these buyers.
- The magazine’s editorial policy with regards to the number of advertising pages versus content pages.
- The magazine’s editorial policy with respect to the nature, quality and type of advertisers that the publisher is comfortable associating their magazine’s brand and content with.
- Cost of printing is also a consideration, however, mostly insignificant as advertising rates normally build in sufficient margins that far exceed the cost of printing.
A magazine publisher may derive revenues by selling issues of its magazine, normally to individual readers who are interested in the magazine’s editorial content, and also to businesses that wish to provide the magazine for onward resale to their customers, such as book stores and news stand distributors.
Subscription sales to individual customers are normally in the form of a long term subscription contract, which helps secure revenue on a forward basis for the magazine publisher. Such revenues are typically calculated based by multiplying the news stand retail price, with the number of issues in the subscription contract period, with a bulk discount (to incentivize the customer to subscribe to a long term deal instead of to buy on an individual issue basis).
Subscription sales to businesses are normally also in the form of a long term subscription contract, but may involve multiple issues and steeper discounts for the business to profit from the difference between the buying price and news stand retail price.
Some times, subscription sales may also involve selling to businesses who wish to provide the magazine for free to their readers, such as hotels and airlines. However these revenues are mostly smaller, unless the deal is a bulk deal to, for instance, a few tens of thousands of rooms across an international hotel chain.
Limiting factors to consider when building a financial model on the amount of subscription sales and the number of printed magazine copies a publisher is able to sell include:
- The addressable market of readers who are interested in the editorial content of the magazine. For instance, a magazine focused on fly fishing would appeal to a smaller number of readers than a magazine focused on general news and entertainment.
- The news stand retail price, which is normally dictated by the quality of editorial content, magazine paper quality, and intangible brand factors that lends credibility or a sense of luxury / style to the title.
- Location and geographic distribution of the subscriber base, and the appeal of subscribing to a non-local / foreign magazine in terms of editorial content and the cost of subscription.
Main Operating Costs To Consider For A Magazine Publishing Financial Model
- Staff cost, which normally forms the largest component of a magazine publishing business, given that it is typically an asset light business (assuming it does not operate its own printing press).
- Licensing cost, payable for the right to use a 3rd party brand for the magazine title, if the magazine publisher does own or wishes to leverage the strength of an established brand to build the title.
- Printing cost, although normally this cost goes down on a per copy basis as volumes increase, on an absolute basis, it will still rise and should be kept in view.
- Distribution cost, which may vary significantly depending on the nature of the distribution system in the specific target geography of the title, and the power which these distributors may yield which correlates with their distribution service fee charged.
- In addition, the magazine is after-all a physical product and air freight of small quantities (e.g. 1 or 2 copies) of a magazine title to a reader situated a long distance away from the location of printing will eat into the margins for the title.
- Circulation cost, which may also vary depending on the cost of acquiring potential new subscriber lists for direct marketing of the title, and the cost of administration for maintaining a circulation database.
- Production and editing cost, which involves the employment of full-time staff or contractors / freelancers to write new content, edit or repackage syndicated content and / or production of graphics and design to enhance the attractiveness of the magazine reading process.
- Content cost, the cost of acquiring 3rd party content.
- Marketing and publicity cost, for general brand building and development of the magazine title, to increase its awareness and attractiveness to both readers and advertisers.
- General and administrative cost, standard business operation costs such as office rental, office equipment and services, travel and entertainment, professional fees, etc.
Key Investments, Depreciation & Amortization Issues To Consider For A Magazine Publishing Financial Model
As an asset light business (assuming they do not own and operate a printing press), a magazine publisher typically has very little requirement to purchase physical assets. However, some may still be incurred, such as computers and photographic equipment.
Also, if a magazine publisher also publishes cross platform products for the internet and mobile devices, additional investment in computer hardware (i.e. servers, routers, etc), software and services may be required to enable the operation of this business.
As a content producer, besides being able to depreciate capital expenditure like most other businesses, a magazine publisher may also be allowed to amortize the cost of producing their original content as well as the cost of acquisition of content purchased from 3rd parties.
Key Metrics To Consider When Building A Magazine Publishing Financial Model
Key metrics used to analyze a magazine publishing business in a financial model include:
- Advertising rates, where a higher than market average rate normally reflects the strength of the magazines readership and overall quality.
- # of advertising pages, which is normally a reflection of the effectiveness of the magazine’s advertising sales force.
- Advertising yield, the amount of dollars generated per advertising page in the magazine.
- Advertising to Editorial ratio, which reflects the editorial policy of the magazine on the amount of advertisements that they are willing to publish in each issue of the magazine.
- Circulation and copies printed are a reflection of the popularity of the magazine title and the most tangible measure of the amounts of actual product produced.
- Readership, the number and amount of time that the magazine is read by individuals.
- Pass On Rate, the number of readers that the magazine is actually read, which may be significantly higher than the actual number of copies printed as readers share magazines.
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