Apple, Google and the Publishers: Here’s How to Make Subscriptions Work

In recent weeks, we’ve heard growing concern from magazine and newspaper publishers regarding the challenge of providing content for mobile media while preserving their print franchises. The concern is nothing new, but it’s apparent that content providers are at risk of losing track of their customers like toddlers in a shopping mall.

Apple’s iPad success and the imminent release of new application distribution platforms from Google and other software companies threaten another seismic shift for publishers that may have far greater impact on their business models than the growth of free media on the web. Devices like the iPad offer consumers a rich reading experience and offer publishers even more targeted advertising, but the revenue tradeoff as publishers navigate the path from print to this new world is lopsided–and not in a good way.

While we all enjoy browsing publications at newsstands, over 90 percent of the circulation of U.S. magazines is delivered directly to consumers through the mail. The data and cross-marketing opportunities that these direct customer relationships provide to publishers is the fundamental underpinning of their business model.

Data informs advertising in magazines and allows for better targeting. It provides for the sale of ancillary products like books, videos and special issues. It allows multi-title publishers to solicit new readers across their enterprise. Even competitors agree to exchange lists because it benefits the industry by building more magazine readers from a pool of customers who already enjoy receiving their publications through subscription rather than by single copy purchase.

Without direct access to customers, publisher revenue will decline sharply and the publications that we depend on for in-depth reporting, news and entertainment will risk a final digital Armageddon.

Should we care? Why can’t the publishing industry just leave the world of messy ink and rural route delivery? Can’t it pivot to a less costly distribution model where customer ownership isn’t as critical?

Unfortunately, even if we assume that publishers retain their customers, there are extraordinary business challenges in transforming today’s print consumers into exclusively digital readers. And publishers can’t afford to relinquish their direct connection to readers without a more attractive economic model than the digital publishing world presents today.

Here’s why:

1. The Advertising Model Won’t Pay.

   Magazines are a wonderful advertising medium. Among the top fifty publications ranked by advertising revenues, each copy of paid circulation generates a pass-along audience that averages seven readers. Those seven readers factor heavily into advertising rates, and provide a significant revenue multiple to be weighed against the editorial, marketing, printing and distribution costs of delivering a copy to the consumer.

   What happens to this audience with a digital magazine? If a publisher wishes to be paid for its distribution, it will likely set entitlement requirements that discourage free circulation of its products. Even with integration of social networking tools to enable article sharing, publishers won’t generate more than 1.5 or two readers per copy. So the advertising revenue per circulation unit will fall due to the fact that fewer people see the ads. Even to remain constant, advertising effectiveness per copy would have to increase over four times to make up for the audience decline from seven to 1.5 readers per copy.

   Of course, most publishers believe these new digital magazines will have wonderful consumer engagement qualities that will result in a higher value being placed on their advertising. They believe digital ads will be better targeted and more efficient than print at delivering the right message to the right reader. But will that value be four times the value of print today? Not likely.

   Some argue publishers must cast their lot with free content and endeavor to survive with an exclusively ad driven model. But we need to remember the lessons of the web for most publishers. Even with the powerful reach the web provides, The Economist, The New York Times, The Wall Street Journal, Sports Illustrated and Vanity Fair would fail without the significant vote their consumers make every month by making a direct payment to the publisher.

   So editors and consumer marketers will bear a larger burden in this new mobile reading world. They’ll need to increase the revenue from consumers. And one could argue that this is a good thing, redressing the imbalance of an industry that has been too highly leveraged on advertising. But for the consumer stream to become more valuable, one of two things must happen: either the demand for magazines must rise, or the cost of distribution must fall.

2. A 30 percent Cut to the Store Isn’t a Great Deal.

   Isn’t selling your magazine through an app store and receiving 70 percent of the revenues a great deal? After all, magazine subscription agents and newsstands don’t return anywhere near that amount to publishers. But this is argument misses an important point. In iTunes and the Android Marketplace, there’s virtually no merchandising of magazine products. A magazine app must swim to the top of several hundred thousand other applications. And even in the context of a dedicated magazine store, the publisher won’t control featuring. The value of the brand must pull the consumer through to the purchase. And brands are expensive to build and nurture. So the publisher will continue to bear a high marketing cost to ensure enough sales for a stable level of circulation, just as they do today in the offline world. These marketing costs would certainly erase any advantage that a 70 percent cut would provide over the conventional agent model, particularly if the publisher cannot capture information on the customer and determine an effective ROI against their marketing expenditures.

3. Margin Must Come Before Marginal Cost.

   What about the fact that there is virtually zero distribution cost? Well despite the problems of the U.S. Postal Service, the cost of printing and distribution represents a relatively low percentage of publisher expenses–somewhere on the order of 20 to 25 percent today. Of course there are significant creative and technical costs in publishing a beautiful new magazine in tablet form. Just adapting to the variety of screen sizes, screen resolutions and operating systems requires significant new investments. These costs, together with the aforementioned ad revenue decline, more than eclipse the savings from eliminating paper and postage.

So where will this margin come from if not from the consumer?

Tablets provide publishers a wonderful opportunity to rethink their products and add more value. But no manner of reinvention will be possible if they can’t mine their customer relationships to merchandise these new products. If the relationship between the magazine publisher and customer is broken, the industry will end up like music and book publishers–removed from customers, wedded to old habits and powerless as digital delivery inevitably overtakes and diminishes the value of their physical distribution.

Lastly, let’s consider the argument from a consumer’s perspective. Nearly one out of every two Americans subscribes to a magazine today. Many will purchase iPads and other tablets over the next year. When they do, Apple and others suggest that 150 million consumers ignore their existing relationships with publishers.

In this battle over ownership consumers are the losers. They will not be able to direct publishers as they wish, choose to get both a print and digital version of the magazine, or move to digital only delivery. They won’t be afforded the opportunity to get a better value by bundling their print and digital delivery together. They won’t be able to align their print and digital purchases so that expirations synchronize and billing is simplified. They won’t be able to move their experience to the device that suits them–irrespective of the platform–and read on phones, laptops, tablets or anywhere they like. Nothing in the transition will remove friction or frustration. Is this an experience we will be proud of?

There will be a transition from print to digital delivery that publishers and software providers must manage for consumers, and not solely for the advantage of their business interests. A print magazine is informative, beautiful, portable and easy to navigate. It’s also inexpensive. There will certainly be a long period when consumers will wish to try out new forms of reading on tablets but not give up their trusted print brands.

Businesses that make these transitions easy for consumers will flourish. Consider the long path to electronic billing for the banking industry, the Netflix shift from DVDs to video streaming, or even Apple’s introduction of Macs that run Windows software. In each case, the transition strategy provided for significant long-term advantage. And most would agree that there’s a significant long-term advantage for the software industry to make friends with 150 million magazine consumers.

Here’s how they do it:

1. Allow the customer to buy access to print, digital or bundle both together with one-click convenience.
2. Create simple APIs that connect the handful of major print fulfillment houses to application storefronts so existing print accounts can be harmonized with digital access.
3. Provide for critical customer data to flow to publishers so they can refine their products and find new ways to merchandise them to consumers.
4. Build opportunities for publishers to cross-merchandise products from within their applications and utilize one-click checkout.
5. Don’t thwart retailers like Amazon and Barnes and Noble who have existing relationships with publishers. They know how to merchandize magazines and will be a positive force for competitive pricing and product development.

With these measures I think very few publishers would object to the 30 percent cut these stores wish to collect or have any significant concerns about the stores retaining the direct billing relationship with their customers. In the end, publishers would build more unique magazine products, sell more related products and encourage their consumers to buy more devices.

Of course, without such cooperation publishers will always have a choice where to play. Tablets are not made of stone and publishers are not called upon by a higher power to work with distribution platforms that are fundamentally destructive to their consumer relationships and business interests.

John Squires is a former EVP of Time Inc., and founder of Next Issue Media