SUMNERD WHOPAYER 93 MAG Who Pays the Piper: Consumers or Advertisers?
Who Pays the Magazine Piper: Consumers or Advertisers?
David E. Sumner
Ball State University
Deptartment of Journalism
Muncie, Indiana 47306
Mail address:
2204 N. Ivanhoe St.
Muncie, IN 47304
(317) 288-3208
ABSTRACT
One of the most publicized trends in magazine publishing has
been that consumers are paying more and advertisers are paying less.
This trend has been reported in newspapers, magazines, and even
textbooks. Yet it tells only a small and misleading part of the
story. The purpose of this study is to analyze costs and revenues for
circulation and advertising, focusing primarily on data from
1985-1991. Although magazine circulation revenue was about 52 percent
of total revenue in 1991, a closer analysis of the data revealed that
advertising rates increased approximately 50 percent or about twice
the rate of inflation during this time. The average one-year
subscription price increased 16 percent during this same period. The
data showed that magazines with circulation declines and those with a
lower percentage of single-copy sales were more likely to have high
advertising rate increases. The study concludes that consumers are
paying relatively less today than they did in 1985 while advertisers
are paying considerably more.
TEXT OF PAPER
Introduction and Literature Review
One of the most publicized trends in magazine publishing has
been that consumers are paying more and advertisers are paying less.
A 1989 _New York Times_ article reported that in 1987, "For the first
time in the modern history of general-interest magazine publishing,
revenues from subscriptions and newsstand-copy sales exceeded revenues
from advertisers." According to figures quoted from the Magazine
Publishers of America, circulation revenue reached $6 billion that
year, while advertising revenue totaled only $5.5 billion. <1>
"Circulation is on the verge of becoming the major portion of
the equation as ad dollars dwindle," said Patricia Campbell, executive
vice president of Times Mirror Magazines at the 1990 American Magazine
Conference.<2> A 1992 article in Advertising Age said, "Magazines can
trace their meager gains in 1991 to readers willing to meet higher
newsstand prices and subscription rates."<3>
This trend has been reported in newspapers, magazines, and even
textbooks. Yet it tells only part of the story--and a small and
misleading part. An analysis of the data reveals that enormous
advertising rate increases have surpassed the inflation rate in
recent years, while subscription rate increases have failed to keep
pace with inflation.
The purpose of this study is to analyze costs and revenues for
circulation and advertising, focusing primarily on 1985-1991 data.
It will demonstrate the claim that subscribers are paying most of the
bill inaccurately represents the facts. While revenue from
subscription sales has increased slightly, the increase is accounted
for mainly by an overall circulation increase, not because individual
subscribers are paying more.
Few academic studies examine magazine circulation trends and
fewer still look at financial aspects of circulation and advertising.
Two, however, are notable. Krishnan and Soley examined the
relationship between circulation, advertising rates, and costs per
thousand (CPMs) in their 1987 study of 100 major consumer magazines.
(Note: CPM or cost per thousand is the cost of a full-page ad per
1,000 readers of a magazine. It is determined by dividing the full
page ad cost by the number of subscribers and multiplying by 1,000.
It is a common way of comparing the relative cost of advertising for
small and large-circulation magazines.)
Among other findings, they discovered a negative correlation
between circulation and advertising CPM. The negative correlation
showed that the CPM charged by magazine publishers fell as circulation
increased. They concluded that the strong negative, non-linear
correlation is "consistent with the conclusion that ad rates increase
by decreasing marginal amounts when circulation increases."<4>
Hall used historical data from 1938-1960 to trace the rise and
fall of the old _Saturday Evening Post_. Using a systems dynamic model,
Hall examined complex relationships between subscription rates,
advertising CPMs, circulation figures, production costs, and
advertising and circulation revenues. He said that one factor that
led to the magazine's eventual demise was an increased CPM rate that
advertisers were unwilling to pay. For example, between 1951-60 while
circulation increased from 4 to 6.3 million, "The real price of
advertising rose from an average of $4.61 to $5.74 constant dollars
per page per thousand readers and the advertisers purchased fewer
pages in the magazine. The best management strategy, therefore, is
to maintain a constant CPM. Hall said, "The conclusion is that
continually adjusting the advertising rate in order to maintain a
constant advertising rate per thousand readers leads to an increasing
profit margin and constant revenue and readership growth."<5>
Methodology and Sources
The sources for this investigation include data supplied by the
Magazine Publishers of America, the Publishers Information Bureau, and
the annual _Magazine Trend Reports_ published by the Audit Bureau of
Circulations. To be included in these reports, a magazine must have
an audited paid circulation of at least 100,000 and an annual
advertising revenue of at least $1 million. Complete data for the
years 1985-1991 was available for 145 ABC-audited magazines, which
were included in this analysis.
The Magazine Publishers of America and Publishers Information
Bureau provided data on total advertising and circulation revenue.
The _Magazine Trend Reports_ provided paid circulation figures, black
and white and color CPM figures, percentage subscription and
single-copy sales, single-copy and one-year subscription price for
each of the 145 magazines included in this study.
It should be noted that ABC and Publishers Information Bureau
figures represent data from less than 10 percent of more than 2,200
consumer magazines, and in some cases only the top 50 consumer
magazines. These figures, therefore, are not necessarily
representative or generalizable to all consumer magazines.
While this is primarily a descriptive study, various comparisons
were made between these factors using advertising rate as a dependent
variable and circulation trends, percentage of single-copy and
subscription sales, and single copy and one-year prices as independent
variables.
Results
First, Table 1 reveals total circulation and advertising revenue
for 1989, 1990, and 1991. It indicates that in 1991, total circulation
revenue represented 54 percent of all revenue, while advertising
revenue accounted for 52 percent among these 160 magazines. This
represents approximately a one percent increase for circulation
revenue from the 1989 figure of 53 percent. If there is any
statistical verification to the claim that magazine consumers are
paying more and advertisers are paying less, then these figures
provide it.
____________________________________________________________
Table 1 here
____________________________________________________________
What these figures do not reveal is the 50 percent increase in
advertising rates that occurred between 1985 and 1991. For the 145
major magazines for which 1985-91 data is available, Table 2 reveals
that page rates increased an average of 50 percent while CPM rates
increased an average of 40 percent during these years. The average
price of a single copy increased from $2.15 to $2.64--a 22.8 percent
increase--while the average subscription price increased from $20.39
to $23.66--a 16.0 percent increase.
____________________________________________________________
Table 2 here
____________________________________________________________
The Bureau of Labor Statistics Consumer Price Index was 107.6
for 1985 and 136.2 for 1991, indicating a 26.7% inflation rate during
these same years. That means that page rate increases were almost
twice the inflation rate, while single-copy and one-year subscription
price increases did not even keep up with inflation. Are consumers
paying "more and more" of the bill? These figures suggest not.
What led many to predict doom-and-gloom for advertising revenue
was that total ad pages peaked at 177,000 in 1989 and then suffered
consecutive declines in 1990 and 1991. Table 3 points out that total
ad pages declined 3.0 percent between 1989-90 and a whopping 8.8
percent between 1990-91 before striking back with a 4.4 percent
increase in 1992.
____________________________________________________________
Table 3 here
____________________________________________________________
The same table, however, reveals a curious phenomenon. While
total pages decreased more than 11 percent between 1989 and 1991,
advertising revenue suffered only a net 1.5 percent decline during
that same two-year period. And then while pages increased 4.4 percent
between 1991 and 1992, revenue increased by more than twice as much
9.2 percent.
This leads to only one conclusion: advertisers are paying more
per page. And that is what the data from the 145 ABC-audited
magazine has already revealed. Another way of looking at the same
information is to divide the 145 magazines into those whose price
increases surpassed the inflation rates and those whose prices didn't.
Table 4 reveals this information, while Table 5 gives percentage
figures for the same data.
____________________________________________________________
Table 4 here
____________________________________________________________
____________________________________________________________
Table 5 here
____________________________________________________________
This data indicates that 83 percent of these magazines raised
advertising rates more than 26.7 percent, while 56 percent raised
single-copy prices more than 26.7 percent. Only 39 percent raised
their subscription rates more than 26.7 percent.
What are the variables that could have affected which
magazines raised prices the most? Circulation increase or decrease is
one. Those magazines that experienced increases in circulation may
have raised or lowered rates more than those who lost readers.
Since black and white CPM rate changes and color rate changes
generally paralleled each other for each of the 145 magazines in this
study, they were combined to form one variable for advertising rate.
The 145 magazines were then divided into two groups: Group 1 (>
Inflation) increased their advertising CPM more than 26.7 percent
while Group 2 (< inflation) increased their advertising CPM less than
26.7 percent.
____________________________________________________________
Table 6 here
____________________________________________________________
Table 6 indicates that the 116 magazines that
increased their advertising CPM rates more than 26.7 percent from
1985-91 had an average increase in circulation of only 5.9% for those
same years. The 29 magazines that increased their ad rates lessthan
26.7 percent had an average increase in circulation of 44.2 percent.
Another way of looking at the same information is through a
cross-tabulation, as displayed in Table 7 on the next page. The table
indicates that magazines with circulation decreases were significantly
more likely to raise advertising CPM rates more than the inflation
level. Fifty-two (52) out of 55 of those magazines that decreased in
circulation between 1985-91 raised mean advertising CPM rates more
than 26.7 percent.
____________________________________________________________
Table 7 here
____________________________________________________________
While circulation increase or decrease is a significant factor
affecting the level of advertising CPM increase, another significant
factor is percentage of single-copy sales.
Table 8 indicates that magazines that increased their
advertising rates more than the inflation rate were much more likely
to have a high percentage of single-copy or newsstand sales. (Note:
The term "newsstand sales" and "single-copy sales" are considered
synonymous, although "single-copy sales" is the more modern and
preferred term.) A t-value of -3.97 is significant at the p=.01 level.
Magazines that did not increase their advertising rates significantly
were more likely to have a higher dependence on subscriptions.
____________________________________________________________
Table 8 here
____________________________________________________________
Similar comparisons in Table 9 for 1991 total circulation,
single-copy price, and subscription price reveal statistically
insignificant differences between the two groups.
____________________________________________________________
Table 9 here
____________________________________________________________
Discussion
Although circulation revenue is higher than advertising
revenue, that situation won't last forever if current trends continue.
Between 1985-91, advertising rates increased at three times the rate
of subscription price increases. Inflation increased at an average
annual rate of 4.5 percent, subscription prices increased at an
average annual rate of 2.7 percent, and per page advertising prices
increased at an average annual rate of 8.3 percent. The CPM rate,
which accounts for increases caused by circulation increases , also
increased at an average annual rate of 6.7 percent.
The fact that magazines are charging advertisers more and
getting it speaks well of the value that advertisers place on
magazine readers. The past year of 1992 was a healthy one for the
magazine industry with 80 percent of the top 100 consumer magazines
experiencing an increase in advertising revenue, according to
Advertising Age.<6> Magazine share of the total advertising dollar
increased in 1992 at the expense of television, newspapers, and radio.
Magazine ad revenues improved more than eight percent, while other
media experienced a three percent rise over 1991.<7>
At the same time, one cannot help but suspect that magazine
publishers are singing the "consumers are paying more" song in order
to convince the advertisers to accept these higher rates. John M.
Thorton, circulation director of _Forbes_, was quoted in a New York
Times article as saying: "We have always thought that the fact that a
subscriber pays a fair share of the cost for the magazine helps us
sell an advertiser on the idea that he wants it and is reading it."<8>
It's a nice message and it does help sell advertisements.
Previously cited research indicates that CPM rates that
increase at a higher rate than the consumer price index (or inflation)
set a dangerous trend. As Hall discovered with the Saturday Evening
Post, higher CPMs could lead to fewer advertisers, which could lead to
smaller magazines and poorer editorial quality, which could lead to
fewer subscribers, which could lead to fewer advertisers--and so
forth. As Hall said of the _Saturday Evening Post_ of the 1950s, "The
real price of advertising rose from an average of $4.61 to $5.74
constant dollars per page per thousand readers and the advertisers
purchased fewer pages in the magazine."<9> The findings of this study
could indicate the beginning of a downward spiral for some magazines,
although the empirical evidence doesn't suggest that is happening
yet.
Both research articles that were cited in the literature
review (Krishnan and Soley; Hall) discovered a negative relationship
between circulation and costs-per-thousand for periods of steady or
increasing circulation. They discovered that as circulation size
increased, the CPM decreased. This study revealed that magazines with
circulation decreases were significantly more likely than those with
circulation increases to raise advertising CPM rates more than 26.7
percent. That indicates that these magazines with a declining number
of readers are turning to advertisers as a way to make up for lost
circulation revenue. By contravening widely accepted practices in the
magazine industry, these magazines are running a dangerous risk of
endangering advertisers, revenues, and ultimately their own existence.
A second major finding is worthy of comment. Although
single-copy (newsstand)* sales have been declining in recent years,
these readers remain an important target audience for advertisers.
Newsstand sales are a critical indication to advertisers of how much
consumers value a publication. "The theory is that readers who travel
to a newsstand and pay full price are far more interested than those
who get a magazine in the mail," said Kim Foltz in a New York Times
article.<10> However, Krishnan and Soley had a contradictory finding
in their _Journal of Advertising Research_ article. They said: "As
marginal readers, newsstand buyers have less interest in the
magazine's editorial and advertising content. This makes the newsstand
buyer less attractive to advertisers, pushing downward the magazine's
advertising rate."<11>
The data from this investigation supports the New York Times
theory. It indicates magazines that increased their advertising CPM
more than 26.7 percent in the six year period had an average
single-copy sales percentage of 20 percent. Those that increased
advertising rates less than 26.7 percent had a single-copy sales
percentage of 11.5 percent, which was a statistically significant
difference. It appears that magazines with a higher percentage of
newsstand sales are more likely to significantly raise their
advertising rates.
An obvious factor that begs for comment is the widespread
industry practice of discounting advertising rates and selling for
less, sometimes considerably less, than the rate card prices. That
fact in itself would obviate the ostensibly high price increases
documented in this study. On the other hand, the number of magazines
engaging in under-selling their rate cards, or the extent to which
prices are cut, is impossible to document.
The past six years have been turbulent and cyclical ones for
the magazine industry. It rushed through the booming eighties into
the slumping nineties only to encounter a somewhat surprising upswing
in 1992. It would be premature, if not dangerous, to base long-term
theory on these six-year findings. The jury is still out. But one
answer is clear: it's too soon to say that consumers have a
long-term contract to pay the piper. As long as advertisers are
doling out the dollars, then consumers will enjoy the music as long as
possible.
ENDNOTES
1. Albert Scardino, "Magazines Raise Reliance on Circulation,"
_New York Times_ (8 May 1989): D11.
2. Scott Donaton, "Circulation is Key Issues for '90s,"
_Advertising Age_ (15 October 1990): 16.
3. R. Craig Endicott, "Ad Age 300: Ad Age Ranks the Nation's
Largest Magazines," _Advertising Age_ (15 June 1992):S-1.
4. R. Krishnan and Lawrence Soley, "Controlling Magazine
Circulation," _Journal of Advertising Research_ (August/September 1987):
17-23.
5. Roger I. Hall, "A System Pathology of an Organization: The
Rise and Fall of the Old Saturday Evening Post," _Administrative
Science Quarterly_ 21 (June 1976):185-210.
6. "Magazine Ad Page Leaders," _Advertising Age_ (19 Oct. 1992): nn.
7. Marc Boisclair, "Finally, a Little Sunshine," _Magazine Week_
(2 November 1992): 24-27.
8. Scardino, "Magazines Raise Reliance on Circulation," p. D11.
9. Hall, "A System Pathology of an Organization," 201.
10. Kim Foltz, "New Tactics by Magazine Publishers," (28 August
1990): D17.
11. Krishnan and Soley, "Controlling Magazine Circulation," 22.
TABLES
Note: For the complete dataset OF Tables, pleaese contact the author,
Prof. David E. Sumner, Deptartment of Journalism Muncie, Indiana
47306.
Presented at the Association for Education in Journalism and Mass Communi-
cation (Magazine Div.) Annual Convention, Kansas City MO, 11-14 Aug 1993
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