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Why Newsweek Magazine Failed

Posted on Monday, July 12, 2010 at 2:58 PM

Are there lessons in what they did wrong that can benefit the rest of us?

By William Dunkerley

"We do not see a path to continuing profitability under our management." Those were the words used by Washington Post Co. chairman Donald Graham. He was announcing intentions to put the venerable newsweekly up for sale. Graham admitted, "We have reported losses in the tens of millions for the last two years."

That sounds like a stark admission of failure to me. Graham's announcement came after a well-publicized, extensive effort to turn things around.

But, a commercial magazine is supposed to be a money making machine. Investors put money in, the publication turns a profit, and investors receive a return on their investment. Apparently not so with Newsweek.

What Went Wrong?

A lot of armchair analysts are chalking up Newsweek's troubles to consumer flight to the Internet. This argument has common sense plausibility. After all, consumer reading habits are clearly
changing -- and at an accelerating pace. But common sense also told us that the earth is flat. And so, when we got into examining Newsweek's predicament more methodically, the consumer flight explanation didn't hold up.

For one thing, Newsweek voluntarily cut its own circulation. Consumers didn't fly away. They were, in effect, deliberately liquidated! The readers didn't leave Newsweek -- Newsweek left the readers.

"Newsweek Plans Makeover to Fit a Smaller Audience," reported the New York Times in early 2009. That "smaller audience" was the effect of a rate base cut. Newsweek earlier had been promising advertisers a rate base of 2.6 million. The makeover plan included dropping that to 1.5 million by January 2010.

Isn't Bigger Better?

Why cut circulation? How is that going to make more money? Was that a bad move? Actually, I believe that in principle it was a smart plan. If they had approached me at my consulting firm, I would have advised them to do exactly that. Bigger is not always better. The reality is that when a magazine over-markets circulation, it's easy to aggregate an audience segment that will have only a weak interest in the publication. They'll be poor renewers, thus making them expensive acquisitions. And, worse, they may be poor prospects for the advertisers.

Apparently, Newsweek realized that gung-ho circulation marketing had gotten them to that spot. Now, they wanted to make things right. Somewhere in that multitude of readers, there was a core group that would be the best fit for the magazine. Newsweek said it was looking to keep readers who are most interested in news, have higher levels of education, and greater affluence.

That's fine, as far as it goes. Unmentioned in that, however, is whether those particular core readers are going to be active purchasers of the particular products and services the advertisers are selling.

The First Fatal Flaw

Smart, wealthy, and educated readers are nice. They may be interesting people to rub elbows with at a social gathering. They can be influential friends. But if they're not good prospective customers for the advertisers, they're of limited strategic value as readers. The prime lever Newsweek should have had its hand on here is the link-up between the buyers and the sellers, the readers and the advertisers. Was there good synergy? Was the magazine bringing together appropriately matched buyers and sellers? There's a formula for getting this right. But it's not clear that Newsweek was using it.

The New Newsweek

Then there's the matter of redesign and repositioning. In early May 2009, Newsweek announced the impending changes. The article, entitled "Reinventing Newsweek," was written by deputy editor Kathleen Deveny. It explained at length that they would in effect be taking the news out of Newsweek. The reasoning was that consumers can find breaking news on the front page of the New York Times. At the same time, the article quoted Newsweek editor John Meacham saying, "We will always be about the news, and we will always break stories that are important to the country and to the world." That all sounds like a confused message to me.

Wouldn't it have been clearer to readers, and perhaps to Newsweek's staff itself, if they simply said they would be cutting back on breaking news and just covering those stories whose impact was the most profound?

By my count, Newsweek used about 350 words to spit out that message.

So if news is coming out of the publication, what was to go in?

Deveny's article announced "a new editorial strategy." She promised that readers will be seeing more "well argued essays." They'll also be hearing more from regular columnists on "some of the most pressing issues of our time." The intent of the new editorial strategy is apparently "to be provocative, but not partisan." Outside observers characterized the move as a shift to opinion journalism.

The final component of the new Newsweek is the graphic redesign. Its goal was to make the magazine "less daunting, more entertaining, and easier to navigate."

The Second Fatal Flaw

Newsweek set out to reinvent itself. Editorially and graphically. They did it. But their invention isn't what the situation called for. What was wrong with it? One thing is how they came to specify what needed to be done. They revealed two considerations:

a. "Some of these changes spring from what we learned from all of you during extensive market research." Does that mean that they asked their readers? They should have asked the prospective customers of the advertisers that they wanted to court. Those are the people they needed to attract as readers. Editorial content is the bait for attracting readers.

b. "Some of [the changes] reflect our own editorial goals and financial needs." I'm not sure exactly what that means. But it sounds like they're saying that some of the changes were made to satisfy themselves. That's certainly a bad strategy if you're looking for success in the marketplace. I wonder how satisfied those managers are feeling right now. I also wonder how satisfied the corporate shareholders are feeling over the self-centered shenanigans of Newsweek's managers.

I didn't specifically evaluate the graphic redesign. Certainly, it's always good to keep one's design attractive and functional. However, I'm not sure that design was an issue in the magazine's poor performance. Newsweek's managers may simply have wanted a fresh new look to signal to readers that things have changed. That's not a bad strategy. But a major redesign is a major undertaking unto itself. It is one that deserves significant management attention and involvement. As such, it also could be viewed as a diversion of management attention from the other critical and more central elements of remediating Newsweek's problems.

Unique website visitors since May 2009 to Newsweek.com (blue) and Time.com (green).

How did the market respond to the new Newsweek? The above chart plots Newsweek's website activity, compared to that of Time magazine. It shows a bump up around the time of the changes. Afterwards, things settled into a steep downward trajectory.

Make the Readers Pay

"Over time, we will increase subscription prices," wrote Deveny. It's hard for me to tell whether or not that's a smart strategy here. Lately there's been a general trend among publishers to grow the percentage of revenue coming from audience/circulation. In fact, that's been a trend in all recent recessions.

When advertising support drops off, publishers try to squeeze more revenue out of readers. Now that greater numbers of readers are online, publishers are experimenting with systems for extracting "micropayments." Our sister publication Editors Only has been running a series of articles on that topic. It seems there's still no consensus on the best way to do this.

The Third Fatal Flaw

While increased revenues from readers can be helpful, there is another side to that. Often I've seen that publishers try to extract more audience revenues, when what they really should be doing is solving the problems responsible for weakened ad sales. Is that a mistake that Newsweek made?

There's usually more to a shortfall in ad sales than just a flagging economy. Typically there are two major in-house causes of declining ad sales in a recession. The first is inadequate sales skills and strategies. They may be alright when the picking is easy and ad spending is at a normal level. But they prove to be totally inadequate when it becomes harder to convince advertisers to spend money with you.

The second cause is the fundamental business strategy of the magazine itself. Is it really efficient at gathering good, active prospects for the advertisers? When the economy is good, a magazine can be sloppy at doing this. But in a recession, when there is greater pressure for advertising expenditures to produce results for the advertisers, those publications that are weak in this regard lose advertisers quickly.

A Richness of Financial Resources

Despite the errors in Newsweek's approach to business, there existed a potentially mitigating factor -- one with the potential for breathing life amidst the assortment of fatal flaws.

That factor is the magazine's owner. Newsweek was indeed fortunate to be owned by the Washington Post Company. It possesses a richness of resources -- at least in terms of the financial resources available. According to the company's recent 10-K report, it had operating revenues of $4,569,731,000.00 for the fiscal year ending January 3, 2010.

We examined a Newsweek financial summary that was represented as coming from the "sale book" that was offered to prospective buyers. It shows that for 2007, Newsweek made about $30 million. But in 2008 and 2009, there were operating losses of $13.5 million and $28.1 million, respectively.

That all caused us to question the business imperative for putting Newsweek up for sale. Last year's $28.1 million loss is certainly nothing to sneeze at. But for a company whose annual revenues total more than $4 billion (that's $4 thousand million!), it is hardly a catastrophe. One wonders whether it is worth the embarrassment of corporate admission that they lack the ability to turn things around. Especially when one could reasonably expect a change for the better as the economy improves, even if Newsweek's business acumen didn't improve.

Adding to that puzzling conundrum is this statement by management at Washington Post Company's May 14, 2009, annual shareholders meeting: "It is not easy to reshape the economics of a magazine, but it's easier to do that than to reshape the economics of a newspaper."

Why does that add to the puzzle? It is because their newspaper operations are incurring losses that are more than 5 times higher than Newsweek's losses! (The company stays afloat with profits from its Kaplan educational services division.)

So, if it is easier to turn around a loss-making magazine than a loss-making newspaper, why wasn't the newspaper the first to go?

There seems to be more afoot here than plain and straightforward business considerations.

Is It Politics?

We were going over this analysis of Newsweek's failure in a staff meeting here at STRAT. At one point we came to the realization that, despite a number of strategic mis-steps, there was no compelling business reason for the Washington Post Company to sell Newsweek. They have the resources to carry it until the economy improves.

Could there be some political consideration compelling the divestment? Editorially, Newsweek had not been antagonistic toward the Obama administration. Nor had it been a good buddy to Bush. There didn't seem to be any obvious reason why Newsweek would be crosswise with the current political establishment. What about Clinton, we wondered? So we googled Bill Clinton and Newsweek. Not too far down the list of results we encountered the name of Michael Isikoff, Newsweek's investigative reporter who dug up the Monica Lewinsky story. Bingo. Was that it?

So for discussion, we floated the theory: When the Obama-Clinton coalition came to power, did someone tell the Newsweek folks to close up shop as revenge for the dirt Isikoff dug up on Bill? It was a highly speculative theory. But we thought to try it out on Michael Isikoff. I wrote him about the theory on June 4, a Friday afternoon. He responded on Saturday morning. He didn't flatly dismiss the theory, but said he thought it was "a stretch." Later on Saturday I explained to Isikoff our analysis that there did not seem to be a compelling business reason for Newsweek to be put up for sale. On Monday morning, Isikoff submitted his resignation to Newsweek. It's certainly interesting to muse over what influenced him.

But, just for the record, we certainly uncovered no evidence that any political considerations coerced Newsweek's sale.

A Trophy for a Billionaire?

Even if there was no apparent business need to sell Newsweek, it is intriguing to see how much interest there's been in buying it. At one point, there were reports of over 70 interested parties. That's quite astonishing when you consider that for prospective owners without Washington Post Company's multibillion dollar cash flow, the idea of losing almost $30 million year could be quite off-putting.

We asked the firm charged with managing the sale whether they were going to do a valuation to peg the nominal value of the property. They weren't. The plan seemed to be to allow the market to set the price.

But who would want this money-losing machine? For a while, Haim Saban's name was prominently mentioned. Forbes pegs his net worth at $2.8 billion. However, he's a mere piker compared to another whose interest was mostly on the q.t. That would be Leonard Blavatnik, a Russian-American businessman whose net worth Forbes puts at $7 billion. Was Newsweek to become literally a trophy for a billionaire? In the end, however, neither party apparently submitted bids.

More recent media speculation narrowed the field to just 3: businessman Sidney Harman (husband of Congresswoman Jane Harman), Avenue Capital, a global investment firm focusing on distressed securities and private equity, and businessman Fred Drasner, formerly of U.S. News and World Report.

But the Washington Post Company remains mum on who the finalists really are. That just adds to the theater of it all!

What Are the Lessons?

The high drama of secret moves to sell a real money loser, including shades of possible political intrigue, may provide us with entertainment. But are there any real lessons publishers can learn from the Newsweek episode?

I think there are.

Study the process recounted above by which Newsweek blundered its attempt to survive. Observe these three mis-steps: (1) They seem to have used a flawed process for identifying what remedial steps should be taken. (2) They may have put personal predilections ahead of business necessities. (3) They apparently diverted management attention to non-essential activities during a crisis period.

But the bottom-line issue here involves the fundamental and essential strategy for any publisher who needs significant advertising revenue to prosper: The publication has to be an efficient tool for collecting good, active prospects for a synergistically-related group of advertisers. There are proven techniques for doing this. The trick is to learn them and use them strategically.

William Dunkerley is principal of William Dunkerley Publishing Consultants, www.publishinghelp.com.

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