Magazines vs digital startups

October 22, 2012
Simon Dumenco has a question: would you rather own a magazine, or a digital startup?

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Simon Dumenco has a question: would you rather own a magazine, or a digital startup? He notes that some magazines are making real money these days, including Marie Claire, even as most digital startups fail. Old Media isn’t sexy, he says, but “a lot of magazines continue to be not only damn good businesses, but are doing better than ever.”

I don’t know about the better-than-ever thing: I’d need to see some numbers before I was persuaded on that front. At any given point in time, statistically speaking, some small set of magazines is going to be having a record year. But in aggregate, ad-supported magazines — which are the magazines Dumenco’s talking about — are ultimately in the business of attracting the attention of readers, and then selling that attention to advertisers. These days, there are more demands on our attention than ever, and they are more convenient than ever. If you have some time to while away , you can still read a magazine. Or, you can pick up your phone, and play Angry Birds, or check your email, or Twitter, or Facebook, or, well, I’m not telling you anything new here.

As a long-term investment, then, I’d be worried about owning a magazine, no matter how profitable it might be today. The fashion books will probably last longer than most, although as their audience spends less time with magazines and more time on Pinterest, inevitably they won’t be able to charge quite as much as they used to for that audience’s attention.

In terms of short-term cashflow, on the other hand, it’s no contest. Digital startups are designed to burn all of their revenues and then some: if you’re making money every quarter, you’re doing something wrong. So if, like Dumenco, you’re looking primarily at current profitability, the choice is clear: magazines will always win that fight, even unto their dying day.

If you’re the kind of owner who likes old-fashioned things like owning a profitable enterprise, then, there’s a decent case for sticking with ink on paper. If you own a digital startup, the chances are that it will lose money either until it goes bust, or until you sell it. But at that point, of course, you could make a fortune.

There are a handful of people who have turned digital media properties into steady money-spinners; Nick Denton springs to mind, and the reason that the Bleacher Report sold for $180 million is just that it was extremely profitable. But Dumenco’s talking about how the press likes to “treat venture capitalists like rock stars”, and venture capitalists aren’t in the business of cashing quarterly dividend checks. The big difference between VC owners and the rest of us is that VC owners expect their companies to lose money. That, in many ways, is their big competitive advantage: they’re sitting on enormous amounts of money entrusted to them by their investors, and it’s their job to spend that money in a no-holds-barred attempt to build the most valuable companies they can. Until, after five or ten years, they have that glorious exit.

What happens after the exit? Well, the company isn’t a startup any more, that’s for sure. And by that point the VC owners are on to their next thing. It’s not their job to build some great eternal franchise like, say, Vogue: they don’t have that kind of time horizon. In any case, the digital world moves so fast that there’s really no such thing as an eternal franchise any more.

The simple answer to Dumenco’s question, then, is this: what kind of owner are you? Do you mark your holdings to market, and reckon that you’ve made money if your company is worth more this year than it was worth last year? Or do you instead want to own a property which makes a lot of money, and which can continue to support your lavish lifestyle indefinitely, just by dint of the profits it makes? Similarly, do you like to take risks, or is it more important to you that the assets you own preserve their value over time?

But of course things aren’t as simple as that. Just look at Variety, which Reed Elsevier recently sold for $25 million, after previously turning down offers as high as $350 million. Or look at TV Guide, which went from being worth billions to being worth nothing at all over the course of two tumultuous decades. Newsweek is not alone in “going to zero”, as the financial types have it: Dumenco might be happily handing out awards to Food Network Magazine, but he sure isn’t giving out any gongs to Gourmet, which was unceremoniously shuttered in 2009, along with a magazine — Modern Bride — which was pretty much nothing but ads. And I myself worked for Condé Nast Portfolio for nearly all its two-year existence, during which time it managed to burn through something on the order of $100 million. Even digital startups don’t generally lose money that quickly.

The fact is that owning a magazine is a risky proposition. It might not be as risky as owning a single digital startup, but by the same token owning a stable of magazines could well be riskier than owning a portfolio of startups. Silicon Valley types love to moan about how difficult and expensive it is to hire good engineers these days, but the cost of running, printing, and distributing a national magazine dwarfs the costs of any startup not called Color. And what’s more, most of those costs are fixed, not variable. The economics of magazine publishing are ruthless: if your revenues exceed your costs, then any marginal money you bring in is almost pure profit. Which is why profitable magazines tend to be very profitable. But if your revenues are lower than your costs, it’s incredibly difficult to cut back, and you’re probably doomed.

My answer to Dumenco, then, is that given the choice, I’ll choose the startup. Just look at his winners, this year: they’re all worthy awardees, I’m sure, but there’s no one on the planet who could have predicted even a few years ago that Harper’s Bazaar, Allure, and Traditional Home were particularly well positioned for this kind of glory. There’s something scary and random about the magazine industry — and in the world of magazines, failure hurts, much more than it does in Silicon Valley, where it’s a veritable badge of pride.

I’m not saying that print is dead: it isn’t. That said, it’s definitely showing symptoms of old age and decline — and all those high-tech pill bottles labeled “mobile strategy” or “native advertising” aren’t going to change the underlying diagnosis. Venture capitalists don’t mind pouring money into digital startups, because the value of those startups, if things go well, will rise ten dollars for every dollar the VC spends. That’s an attractive business to chase. In the magazine industry, by contrast, it’s still very much possible to make profits. But how much is your magazine worth? If you make $10 million a year, but the value of your magazine is $40 million lower each year than it was the previous year, you’re not in a good position.

Moreover, what happens if you do fail? The failed magazine publisher has a dim future indeed; the failed digital-startup visionary is immediately showered with new opportunities.

I’m no great fan of VCs, while I’ve been a lover of magazines all my life. But the overwhelming majority of my media consumption these days is digital, and magazines in general are beginning to seem a bit slow and uninspired. I go to the airport newsstand because I know I’ll be asked to turn my electronic devices off — and even then, more often than not, I end up buying nothing.

All the magazines I’ve had over the years have had some kind of “wow” factor — something which made them seem a few steps ahead of wherever I happened to be. I still get that “wow” factor today — but I get it almost entirely online. The age of the magazine is coming to an end, slowly; the age of digital is only in its infancy. And that is why, Simon, the uncertainties of digital ultimately trump the storied legacy of print.


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