cent of total revenue in 1977 or three and a half times their 1971 share. This would dwarf the assumed gain in revenue. To keep things in perspective it is also well to note that beginning in the late 1960's the profit position of the magazine industry began to deteriorate. Statistics compiled by Price Waterhouse and Co. for MPA show that the responding magazines experienced a noticeable decline in the margin of profits on sales. According to the MPA survey, in 1966 4.8 cents of each dollar of revenue was translated into after-tax profit. By 1971, however, this margin had fallen to only 1.6 per cent. Such a steep decline is greater than that of any other major industry for which data are available, exceeding that, for instance, of the 40 industry groups regularly surveyed by the First National City Bank of New York. The Bank's statistics show that in 1971 the percentage of magazine profits on sales, as shown in the Price Waterhouse tabulation, would place the industry next to 1 the bottom among manufacturing industries. As a point of comparison, it is useful to note that the after-tax profits of television stations as a margin on sales have averaged 20 per cent in the last five years." From a broader perspective the City Bank's figures show that the Printing & Publishing Industry (of which magazines are a major constituent) recorded an increase in profits in 1971 of only two per cent compared with 1970. By contrast the profits of all manufacturing industries increased 13 per cent, with even larger gains 1 2 First National City Bank Corporate Profits Report, 1972 T.V. Dimensions 1971, National Association of Broadcasters 19 93-910 O- 73 - 21 in certain sectors (auto industry profits rose 159 per cent, for Given a shrinking share of the national ad market and a falling margin of profits on sales, there is no sound economic or financial reason to think that the magazine industry could absorb the $425 mil lion in second class postage that it looks to in 1977. 1 First National City Bank Corporate Profits Report, 1972 20 III. GIVEN THE HIGHLY COMPETITIVE ADVERTISING MARKET A STEEP HIKE IN POSTAL RATES WOULD PLACE MAGAZINES AT A PRONOUNCED COMPETITIVE DISADVANTAGE To appreciate the far-reaching impact increased postal rates will have on the magazine industry one must keep several points clearly in mind *Magazine publishers typically derive most of their revenue, and the dominant share of their profits, from advertising, not from the sale of their periodicals. Advertising is vital to magazines, but if it were not for their content appeal to readers, there would be nothing to sell to advertisers. *Magazines must contest with TV and other media in the intensely competitive advertising market, where the yardstick is one of relative prices. The "cost" of a magazine ad is expressed in terms of the number of people reached (the CPM or cost-per-thousand). If the CPM ad rate goes up significantly relative to the other media magazines will find themselves seriously disadvantaged. *Upcoming second class postal rate increases are of such magnitude and will be imposed over such a short period of time that the magazine industry cannot absorb or digest them through gradual price adjustments. Subscription prices will have to be raised substantially and this will reduce circulation, lead to increased ad rates relative to the other media, and narrow the magazine audience. As will be explained below in somewhat greater detail, the anticipated increased in postal rates thus will have serious effects on the magazine industry, reflecting the complex but intensely practical interrelationships that govern the economics of publishing. The heart of the matter, though, is simply that the forecast postal rates are going up so much and so quickly that magazines will have to raise their prices. This will inhibit circulation by pricing a sizable number of existing magazine readers out of the market and making it difficult to attract new subscribers. The distinct probability is that as subscription prices are forced upward, magazines will sustain a loss in net circulation revenue. Moreover, and of crucial importance, as the magazine audience becomes smaller and more concentrated on a higher-income audience, publishers will find themselves handicapped in their search for advertising. And any slackening in advertising revenue can create serious problems for the entire industry. Magazines Face Intense Intermedia Advertising Competition Magazines typically get most of their revenue - and the bulk of their profits - from advertising. So intense is competition in the ad market that any cost development that suddenly impacts only on magazines and forces an increase in their ad rates relative to those of the other media will markedly affect the industry. The ferocity of this competition is partially revealed in figures which show changes in the way advertisers have been allocating their spending. In 1955 magazines, for example, accounted for 29 per cent of national advertising. By 1972 their share was down to 24 per cent, a decline of about 20 per cent. Most of this loss went to TV, whose share of national advertising increased from 32 per cent in 1955 to 49 per cent |