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A conversation with David Rose, little magazine veteran and publisher of Lapham’s Quarterly
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June 13, 2013, 3:02 a.m.
Hearst magazines

The newsonomics of Hearst Magazines’ one million new customers

Most publishers are concentrating on milking more revenue out of existing customers. Hearst is focused on building a new native-to-digital audience.

Take this quiz. The era of paying for digital access (a.k.a. digital circulation or paywalls) is about:

  1. Getting more money out of core subscribers;
  2. Getting new money out of new subscribers; or
  3. Getting money any way you can.

Okay, 3 is a gimme. But 1 and 2 are very different strategies. While most newspaper publishers are leaning heavily on their long-time core bases by promising and delivering all-access, Hearst Magazines is taking a contrarian turn in the market. It’s a strategy that is largely at odds with peers Condé Nast, Time Inc., and Meredith, as well as most newspaper publishers. It’s betting almost wholly on new customers.

“We want unique paying digital customers,” says Chris Wilkes, VP for audience development and digital editions for Hearst Magazines. “We’re not primarily interested in people reading print and digital together. We want people who are engaging with our digital products, and we’re attracting people who want to read in the digital format.” The company has experimented with a little bundling — at “fair” (higher) and not “ride-along” prices — Wilkes says, but that’s a minor part of the business.

He can now offer up one big seven-digit number to back up that strategy: One million paid digital subscribers. That’s the number of new subscribers Hearst Magazines was able to announce in May. Hearst Magazines president David Carey met that magic number just a few months behind his target. At one million, it’s still only about 3-4 percent of Hearst’s total print circulation — but it’s a milestone. The company is aiming to make 10 percent of its total circulation digital by 2016.

It’s not that Hearst is saying it won’t do all-access ever. But its reason for zagging while others zig is clear.

“It’s easier for us to pivot out of a paid model to authenticated than it would be for others to go the other way,” Carey explained to me earlier this year. In other words, Hearst can go all-access, but would do it at higher prices, reflecting dual value.

Those million subscribers are spread unevenly among 21 digital magazines. The biggest title is Cosmopolitan, with 175,000 paying digital subscribers, or 6 percent of its total circ. O, Oprah’s mag, is second at 108,000. The Food Network’s is third.

Carey’s big digital push encompasses a lot more than digital editions. The Hearst Tower is seeing lots of shake ups, new hires, and new projects. At the top, longtime COO Steve Swartz has finally moved into the CEO’s suite as Frank Bennack’s remarkable three-decade tenure has drawn to a close. He now heads a well-diversified private media company reaching into magazines, TV, newspapers and business media.

Hearst just hired digital native Troy Young as president of Hearst Magazines Digital Media. Young’s digital business associations — xoJane, ReadWrite, Refinery29, Spinmedia, and CrowdSurge — lead to this job where he’ll be responsible for “digital content, technology, operations, revenue, product, and business development strategies.” The company has now made it possible for advertisers to buy across its digital titles through Totally Global Media. Its two-year-old App Lab is home to 40 staffers. Its embrace of native advertising is recent, warm, and wide; it has just announced five new products in the field, and raised some editorial eyebrows as its magazine staff is writing commercial copy as part of their jobs.

Hearst’s strategy here is one to watch. There are good reasons (more on that below) why daily newspapers have opted to go for door number one and get more money from long-time subscribers while making new subs a largely second priority. But they know that’s a two- to three-year strategy. As 10,000 baby boomers turn 65 every single day through 2031, the older-reader market inevitably winnows and must be refreshed with new, paying customers. For daily newspapers, getting younger (yes, younger means under 55) readers to pay is mostly phase two.

So let’s see what Hearst learning, as it leads both newspaper companies in that quest and its fellow magazine chains as well.

There’s a lot to like about the demographics of the digital audience. According to the company’s data, the readers are 10-20 percent more affluent, 10 years younger, and more educated. Wilkes acknowledges that those good demographics may be skewed by early tablet demographics themselves, but they are directionally vital.

Make no mistake: The tablet is the linchpin here. How much of the reading of these magazines happens on the tablet? An amazing 98 percent. For many, the tablet is a truly becoming a replacement for the print magazine.

Wide distribution is key to gaining numbers; subscriber growth is now moving at about 10 percent a month. Hearst uses all the platforms out there, from the Apple, Amazon, and Android stores and beyond. It is also testing magazine aggregation: It’s an owner of Next Issue (“The newsonomics of Next Issue magazine future”), which offers dozens of titles at two price points, and it partners with Zinio (which just debuted its first multi-title offer).

The tablet, of course, has become the lifeline of the magazine, a bequest of Steve Jobs, soon to be refreshed by the changes coming in iOS 7. While the horizontal web page always proved an awkward fit for vertical magazines, the tablet is oh-so magazine like.

“It was a small novelty business [on the pre-tablet web],” Wilkes says. “We knew when the iPad came out, we would finally be able to build our business.” The iPad revolution completely changed the magazine industry’s potential trajectory.

Newsstand sales continue to crash — down 8.2 percent in the second half of 2012, in part, of course, because of the millions of tablets that readers are carrying into airports and on trains. (And soon, when the FAA finally relaxes tablet reading on takeoff and landing, the necessity of having a print piece packed away will lessen further.)

Hearst, while arguably leading the magazine pack, certainly has its own challenges. Its single copy sales lost 1.9 percent in 2012, even though its 2.3 percent overall circulation increase to 30.7 million stands out among its peers.

For the first quarter, print ad pages were down 4.9 percent for U.S. consumer magazines, though only 0.1 percent in revenue due to price increases. Hearst Magazines was up 6.6 percent.

Given the across-the-spectrum drop in print advertising, both Time Inc. and Meredith have recently laid off hundreds of employees. Time Inc. is, of course, in turnaround — yet again. First up for sale and now to be spun off from Time Warner, it let CEO Laura Lang go after but a year of ongoing strategic review and seems significantly behind Hearst in digital innovation. It is now playing catch-up with notable hires for Time.com, but is climbing out of its indecisive recent past; ad pages were down 12.2 percent in 2012, though up 0.6 percent for Q1 2013.

It’s intriguing that Hearst has — so far — embraced a double-edged bundling philosophy. While it won’t, largely, bundle print and digital subscriptions, advertising is mostly bundled. If you buy an ad in House Beautiful or HGTV Magazine, you are paying for the whole rate base, including that three percent of the readership that’s tablet, says Wilkes. At this point, a buy is a buy, though, Hearst, like so many others, is going to town on all the new possibilities of customizing advertising for top brands. It’s not just those latest buzzwords, content marketing. It’s interactive ad creation. Advertisers who buy print can tweak their tablet ad to use its capabilities.

Wilkes notes a real movement in the ad creation business. Last year, he says, 85 percent of the ad customization done for the e-edition ads were done by his App Lab staff, with only 15 percent of advertisers, or their agencies, doing the tweaking. This year, brands or their agencies have assumed the work in about 40 percent of the cases, with the App Labbers doing the rest.

Wilkes anticipates the work will continue to migrate back to the advertiser. That’s a big lesson for all the publishers jumping into the agency business: As traditional agencies step up, increasingly fearing their own obsolescence, the custom/content marketing units of publishers will get more competition. Many inevitably will fall back to doing what they’ve long done: sell space. Those — nationally or locally — who see riches in becoming agencies — may find the going a lot tougher than it may be in 2013.

The pricing of the digital magazines is a big question and still a work in progress.

Magazines, which long used token reader payments just to print hundreds of pages of lucrative advertising, have a price problem. As John Loughlin, GM of Hearst Magazines, recently put it at MPA Swipe 2.0, “a magazine subscription needs to be valued at more than two venti cappuccinos.” Magazine publishers realize, just as their newspaper brethren do, that the challenges of digital advertising will only grow, as print ad pages decline — and that readers must pay more of the freight going forward.

On average, Hearst’s digital mags cost 30 percent more than their print equivalents, Typically, they are $19.99 for a year, $1.99 for a month. Buyers can pay for a single issue or per year, depending on the title. A majority opt for the annual sub.

“It’s not pricing up — it’s pricing back,” says Wilkes, meaning magazines need to regain value lost in the heavily discounted print subscriptions that can now be found in seconds simply by Googling.

It’s true that most of that 30 percent in higher prices never reaches Hearst, as it deals with Apple and others of its more than a dozen distribution points, many of whom take cuts in the 15-30 percent range as commission. Wilkes says that’s not the reason for the 30 percent upcharge — it’s meant to convey a new value for the tablet age.

Might the price go higher? Early data says it could. A magazine’s price isn’t among the top reasons readers buy — or don’t. As Hearst interacts with consumers and reads app reviews, it sees that customer satisfaction with the product is by far the key driver in gaining and keeping subscribers. “We’re not seeing much price sensitivity,” says Wilkes.

The pricing conundrum is at least two-sided. Magazines have a greater ability to draw in new subscribers. Getting someone to one-click for $20 is one thing. Getting them to commit — after cheap trial subs — to $200 to $300 for a year’s newspaper subscription is another.

So here magazines may have an edge at gaining new customers — unless newspapers can figure out cheaper subset products that may provide more saleable price points. The Wall Street Journal’s test with Pulse, on three cheaper products, may not be producing big results, but expect to see more such tests; The New York Times’ first-quarter earnings announcement about new niche paid products is one to watch here.

Yet newspapers’ weakness is also their strength. Their all-access plans have been front and center for a reason. On average, those putting all-access plans into place have increased subscription prices 40 percent, according to Press+, the leading supplier of paywall technology to the U.S. industry. Forty percent of $250 is $100. Newspaper publishers will tell you they’d rather increase rates for readers across the board than expect “onesie or twosie” new sales to propel their businesses and make up for ad loss.

The New York Times, now getting close to 700,000 digital subscribers and offering all-access to print readers is the best example of a daily having it both ways.

The bigger money that newspaper publishers are taking in makes magazine publishers envious. It’s important to acknowledge the differing cost bases of the newspaper and magazine industries — but still, the ability to yield significant new reader revenue has largely been a newspaper advantage.

Hearst Magazines, in reaching the golden million number, is the leader in new consumer magazine reader revenue. It has added, we can extrapolate, about three to four percent of new reader revenue to the mix. That’s impressive, but not world-beating. Literally, at $20 price points, or even $30 prices, they need millions of new readers — which is David Carey’s plan — to fundamentally alter publisher economics.

One further hope may be niche paid products. Hearst Magazines’ own experience with those may be cautionary. It has produced numerous standalone apps out of its shelter, food, and health properties, but is now de-emphasizing that development. Why? Too much noise in the marketplace, so too little return for the investment. Rather, it will concentrate on improving its digital editions.

There’s one more long-term business strategy playing out here. It’s hard to see in 2013, but it will enjoy high visibility by 2020. Hearst’s cost in printing and distributing magazines are 30-40 percent of its overall cost base, on a par with newspapers. As its readers cross over (“The newsonomics of crossover”), paying as much or more for digital as they do for print, profit increases markedly. At three percent of circulation today, or 10 percent in 2016, Hearst won’t be at crossover. Expect, though, that crossover to move more quickly for Hearst than for other publishers.

As it reaches 50 percent and more, it’s a new business, and strategies, like Hearst’s, may make even more sense in the rear-view mirror.

POSTED     June 13, 2013, 3:02 a.m.
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