Consolidation Could Ease Magazines' Struggles

A weakening economy and the transition to digital media pose significant challenges to consumer magazines, but their outlook is better than for newspapers, and stronger players may benefit from consolidation of stronger brands.

In a new report, Fitch Ratings says that while not as dramatically affected as the newspaper industry, consumer magazines are feeling the adverse impact of the digital transition. Advertisers are consolidating and shifting their advertising budget mix. Revenue growth has stagnated in recent years and has been under pressure in 2008, as publishers struggle to offset circulation pressure and declining advertising page volume in many categories with price increases.

As a result of the volume of corporate actions, (including Ziff-Davis Media’s (ZFDH.PK) election to file a voluntary Chapter 11 petition, U.S. News & World Report’s recent announcement that it would cease weekly publication, and announcements this week from Hearst and Conde Nast of the closures of Quick & Simple and Golf for Women, respectively) Fitch has fielded a number of inquires from investors regarding the magazine subsector’s prospects.

Fitch says lower-quality, lower-circulation titles were launched and attracted advertising dollars during the past few years due to ready access to capital and the health of the overall economy. For both cyclical and secular reasons, Fitch anticipates there will be fewer new entrants as the economics of launching new product become unattractive.

It is likely that the larger players will seek to rationalize available print advertising inventory. This shake-out could be painful for certain titles and companies.”

 

If consolidation can be achieved without over leveraging their balance sheets, Fitch believes the remaining players could benefit from scale through portfolios of top brands in demographics that are attractive to advertisers.

Fitch believes the magazine industry will have to continue to evolve in order to adapt to the changing advertising environment. Magazines will cede share of the overall advertising pie and will be challenged to capture and monetize online audience and advertising dollars. As advertisers shift dollars out of the medium, the lower-quality magazines will cede a disproportionate share.

 

Even if they decline slowly over time, the category leaders should be able to retain circulation levels that are attractive for major advertisers. Magazine companies with strong brands, scale, diversification, and which are well capitalized, digitally advanced and remain sharply focused on advertiser solutions, will be in the best position to navigate the changing landscape.