Saturday, December 14, 2019

Dawn of the Undead: A Recap of U.S. Magazine Publishing in 2019

If you think 2019 was a good year for magazine publishing, you're ignoring the many iconic publications that died or became "zombies."

And if you think 2019 was a bad year for magazine publishing, you're ignoring the many big-money mutant publishers who have joined the magazine world. Along with the zombie that's coming back from the undead.

These strange doings are covered in my recent article for Publishing Executive: Zombies, Mutants & Resurrection: Magazine Publishing in 2019.

(Editor's Note: If he had written the headline, Mr. Tree would have put a comma after "Mutants". He strongly believes in bringing the Oxford comma back from the dead.)

Thursday, October 31, 2019

Quad's Stock Price Drops 60% in Two Days -- and Now the Lawyers Are Circling

Cliff diving: Quad stock price on Yahoo!
First Meredith, now Quad.

The nation's largest magazine printer just entered the same shark-infested water that the country's largest magazine publisher found itself in less than two months ago.

In the past two days, at least seven law firms have announced that they are investigating whether to file a class-action lawsuit against Quad (aka Quad/Graphics) and its leadership on behalf of Quad's investors. That follows a gloomy earnings announcement Tuesday evening that caused the big printer's stock price to drop from $11.28 to $4.53 in just two days.

"On October 29, 2019, after the market closed, the Company slashed its quarterly dividend to $0.15 per share, announced plans to divest its book business, and reported third quarter 2019 financial results," says a press release from the Law Offices of Howard G. Smith. "Analysts were “absolutely shocked by these developments given the confidence management had just three months ago.”

"The investigation focuses on whether Quad issued false and misleading statements regarding its business practices and prospects," says another law firm's announcement. "Specifically, Quad was experiencing dramatically lowered sales than projected due to ongoing print industry volume and pricing pressures."

The Smith firm is also behind the pending class-action litigation against Meredith Corporation on behalf of the big publisher's stockholders.

That was spurred by Meredith's own downbeat quarterly earnings announcement Sept. 5 in which it lowered its forecasts and revealed that it had taken on a bigger mess than expected with its 2018 purchase of Time Inc.

Quad's Oct. 29 re-forecast
Quad issued a 10-Q quarterly report yesterday explaining (on page 25) that terms of its major loan package forced it to cut its dividend in half.

Loan covenants cap how much Quad can shell out to stockholders when its "total leverage ratio" goes above 2.75. Quad said the ratio was 3.18 on September 30, at the close of a quarter in which the company swung from a $23 million profit a year ago to a $126 million loss.

One reason for the disappointing quarter, Quad CEO Joel Quadracci said yesterday, is that Quad raised many employees' pay last year to improve productivity, but the productivity gains won't offset the higher wages until next year.

Quadracci's comments are worth quoting at length, especially because of what I heard just a few weeks ago about a rival printer suffering from labor shortages and missed deadlines. And also because I'm about to ask my boss for a pay raise:

“When you look back to 2018, we suffered from a productivity standpoint because of the changing labor market, and so our productivity actually was worse than we had in the past . . . 

“So we made the tough decision to really bite the bullet and increase significantly the starting wage. Then you have to deal with compression as a result. And we did that in concentrated areas where we had the biggest problems. 

“What I find interesting these days is that with the known entity of the labor market, everyone is talking about wage pressure. But it seems, as I talk to industry after industry, everyone is putting off the inevitable as long as possible. 

“In our case, if you put that off, you get hurt pretty hard. And the problem when you do this, and you do it in the way we did, is all the cost is a light switch. It comes on right away. The productivity improvements come later… 

“I'd say that from 2018 to 2019, it's actually significant, the productivity improvements we've had year-to-date. We've seen an incredible increase in productivity wherever we've been able to impact the labor rates because we've definitely seen a higher-quality employee as well as less turnover. 

“And remember, when you have the turnover because of the tight labor market, the training side gets hurt pretty hard because you're spending that money but then you have to start over again. And you don't train someone in one day.

"So we saw the increase in productivity happening throughout the year. But . . . we haven't gotten to the point of totally offsetting it. But we feel good about 2020, continuing that trend upward in terms of productivity improvements."
Related articles:

Tuesday, October 29, 2019

Quad/Graphics Exiting the Book Business

UPDATE: Quad's stock price lost more than half its value at the opening bell on October 30 and was still down 53% nearly three hours later.
The second largest printer of books in the United States announced late today that it plans to exit the business.

Quad, AKA Quad/Graphics, stated in a news release that it "plans to divest book business that generates annual sales of $200 million as part of ongoing portfolio optimization."

The announcement comes barely three months after Quad called off a merger with rival megaprinter LSC Communications, the nation's largest book printer. The U.S. Justice Department objected to the proposed merger because LSC and Quad are "the only two significant providers of magazine, catalog, and book printing services."

In the same news release, the big printing company announced a 50% reduction of its dividend, to 15 cents per share, as well as $50 million in cost cuts and a $126 million 3rd Quarter loss.

"We have made the strategic decision to divest our book business, which follows our recent sale of our non-core industrial wood crating business, Transpak," Joel Quadracci, Quad's CEO, said in the news release.

No details were offered about when the book business will be sold or to whom. Quad will have its quarterly-earnings conference call with investors tomorrow morning.

"Our Quad 3.0 transformation strategy is working as evidenced by $125 million of expected organic incremental sales growth in 2019, which helps offset over three percentage points of annual print sales decline," Quadracci said.

The Quad 3.0 strategy seeks to turn Quad from being primarily a printer into a multimedia provider of a broad array of marketing services. Book publishers may not fit the 3.0 strategy because, unlike retailers and magazine publishers, they are likely to have little use for Quad's non-printing offerings.

Tuesday, September 24, 2019

Need a Loan? Subscribe to a Magazine

Thanks to the big-data revolution, subscribing to a magazine may help you overcome a weak credit score.

Many lenders are looking beyond credit scores to determine the credit-worthiness of consumers who have limited or somewhat checkered credit histories, according to a recent article in The Wall Street Journal.

About 53 million U.S. adults have no credit scores and another 56 million have sub-prime scores, writes the Journal’s AnnaMaria Andriotis.

“Now, revenue-hungry companies are considering metrics both mundane and peculiar, like whether applicants shop at discount stores, subscribe to magazines or pay their phone bills on time.”

That’s the power of data analytics at work – identifying more people who can be loaned money to buy stuff they can’t afford.

Think big! Live large! File Chapter 11!
“TransUnion says it sells alternative data to U.S. lenders that can include whether consumers subscribe to and pay for magazines. ‘It’s an indicator of stability,’ said Mike Mondelli, senior vice president of global data strategy.”

Now you may be wondering, “Do my favorite magazines really sell information about me that helps the banks poke into my spending habits?” Mr. Tree pleads the Fifth.

There’s no indication whether only print subscriptions count as an indicator of stability. But it doesn’t really matter because no one buys digital magazines.

(Editor’s note: Mr. Tree, as usual, is exaggerating. After all, Meredith Corporation, the largest magazine publisher in the U.S. and a leader in the shift to digital magazines, recently reported that subscriptions and single-copy sales for its digital editions represent a whopping “4.5% of our total rate base.” So there actually are a few people who buy digital magazines.)

Quiz: Which of these titles are still in print?
If you're hoping that signing up for a magazine will help you get your hands on that Jaguar you’ve been eyeing, act fast. This gravy train will screech to a halt once the big-data analysts realize that magazine subscription lists have been invaded by the unstable, phone-reading, print-is-dead, ad-blocking, paywall-hopping hordes.

So quick, subscribe to five print magazines (before they shut down), pay your phone bill, and run to the dollar store.

Pop quiz: Of the 11 magazines depicted in this article, which five are no longer in print? Leave a comment with your answer.

Dead Tree Edition's off-the-wall, slightly more offensive commentary on the magazine-media business includes:

Monday, September 16, 2019

Meredith's Time-Management Problem: The Largest Magazine Publisher Has Some Explaining To Do

Tom Harty sounds like a guy who thought he’d bought a shiny new car, only to find out the engine had been removed right before he wrote the check. And who then failed to report the theft to his insurance company in a timely manner.

Earlier this month, the Meredith CEO made some revealing statements about the mess Meredith inherited when it acquired fellow publisher Time Inc. (My article for Publishing Executive, Meredith Stumbles with Time Inc. Purchase, provides additional explanation and insights about Meredith’s announcements.):
  • “They were holding cash and not investing in the business.” 
  • “We had two years before we acquired it with their mismanagement, the business was down 25% year-over-year in print advertising,” Harty said. “And so the base of that advertising business is much lower than what we had expected at the acquisition.” 
  • “It has taken longer than we initially expected to elevate the print and digital performance of the Time Inc. assets.” 
  • “We acknowledge the challenges we face that resulted in a reset of EBITDA expectations for fiscal 2019 and going forward. Foremost, it took longer than expected to turn around advertising performance with the legacy Time Inc. brands.”
The trouble is that these revelations and acknowledgements came more than 18 months after Meredith plunked down $2.8 billion to buy Time Inc. and become the U.S.’s largest magazine publisher.

When Meredith released a revised forecast on Sept. 5 that announced the Time-acquisition troubles, its stock price dropped more than 26% in a matter of minutes, Wall Street cried foul, and trial lawyers started circling like sharks.

Meredith headquarters
“The Company made false and misleading statements to the market,” charges one of the many law firms that have announced or are considering class-action stock-fraud lawsuits. “Meredith overinflated the profitability of the Time Inc. merger. In fact, the Company was forced to make significant investments in the Time business to improve it. These investments negatively impacted the Company’s earnings.”

Most of Meredith's previous comments about the Time deal were far rosier. Ten months ago, Harty said, “We continue to expect to achieve our goals of reducing debt by $1 billion by the end of fiscal 2019 and generating $1 billion of adjusted EBITDA in fiscal 2020, meaningfully contributing to total shareholder return.” In the Sept. 5 announcements, Meredith dialed down its FY2020 EBITDA (earnings) forecast to the $640 million to $675 million range.

Just seven months ago, Meredith’s CEO said, “We are off to a strong start in fiscal 2019, delivering results that exceeded expectations. He added that, “We delivered significantly improved year-over-year adjusted EBITDA and margins, which we expect will continue through fiscal 2019.” There was no breakout of the former Time Inc. properties’ money-losing performance or references to the sad state of their ad-sales efforts and magazine-subscription lists.

Meredith now faces a few key questions about the Time Inc. acquisition:

Savings delayed or savings lost?
Meredith had projected $550 million in “synergy” cost savings from combining the two companies. Have those gains gone “poof,” as one stock analyst charged last week, or is it just that they will come later than originally projected?

Did Meredith understand what it was buying?
Some stock analysts now question whether Meredith conducted proper due diligence. I suspect much of the trouble happened after Time realized its sale was imminent, causing it to focus on short-term gains (by shrinking its sales staff and shifting to a cash-upfront subscription strategy, for example) rather than the long-term health of its titles.

Could it have prevented Time Inc.’s deterioration? 
Because it was purchasing Time with cash and not stock, it should have realized that Time no longer had an incentive to manage for long-term sustainability. But could it have built safeguards or incentives into the deal to ensure the Time titles didn’t deteriorate while awaiting new ownership?

What did it know about Time Inc.’s troubles, and when did it know it? 
Meredith dropped the first hints of trouble with the Time deal just three months ago, when Harty said, “We believe it will take longer than originally anticipated to achieve the remainder of the synergies.” But even then he added, “we remain confident we will achieve our $550 million cost synergy goal by the end of fiscal 2020.”

In hindsight, it’s easy to say that Meredith should have realized, and revealed, months ago that there was trouble in paradise. But the acquisition was massive and complex – Time Inc. after all was bigger than Meredith – and there was the difficult matter of splitting off the operations of titles like Time and Sports Illustrated for sale to other parties.

Could Meredith have been so consumed simply with keeping the newly acquired titles running that it didn't at first notice that in Time's last days advertising sales had been neglected and many multi-year, low-profit subscriptions had been sold?

Meredith’s Fiscal Year 2019 annual report, released Friday, said that it recently discovered “incorrect coding of certain magazine subscriptions by Time” – more than a year after it acquired Time. That gives you some idea of the challenges it faces in combining the two companies’ operations, systems, and data.

Did Time cheat Meredith?
Meredith has referred to Time as a sick “patient” that was mismanaged, but it hasn’t given any indication that Time violated the terms of the acquisition deal. Still, you have to wonder whether there will be claims that Time failed to disclose information or violated terms of the deal by allowing its business to deteriorate.

Stay tuned in the coming months (and years?) as high-powered lawyers for Meredith and its investors attempt to answer these questions.

Other Dead Tree Edition articles on Meredith and the magazine industry in general include: 

Tuesday, July 23, 2019

'Weak' Quad and LSC Offered to Shed Assets, But Feds Said No
"A printing press is a printing press."
Update: About two hours after this article was published, Quad and LSC announced they were calling the deal off. More to come.

Quad and LSC Communications offered to divest assets to win approval of their proposed merger but were unable to reach a deal with the U.S. Justice Department.

Quad (AKA Quad/Graphics) revealed the offer last week in its response to Justice’s lawsuit that seeks to block the merger of the two large printing companies on antitrust grounds.

Quad’s response denies that the deal would be anti-competitive, stating that “Quad and LSC are currently, and in the future will increasingly become, weaker competitors than they have been in the past.” And even if the deal would violate antitrust laws, Quad argues, it should not be killed.

U.S. District Court Judge Charles R. Norgle “instead should allow the proposed transaction to close, subject to the divestiture package that the Quad Defendants have proposed to the Division,” Quad’s filing says. A list of the properties that the printing companies offered to sell or spin off has not been revealed publicly.

Quad argues that printing is a single market because “a printing press is a printing press; in other words, the same equipment that is used to print the pages in a magazine can also be used to print the pages in a catalog, the pages in a trade book, and the pages in an education book. And the same equipment can also be used to print newspaper inserts, direct mail, phone books, professional books, children’s books, calendars, and commercial brochures, along with many other forms of printed products.”

That contrasts to Justice’s view that the production of magazines, catalogs, black-and-white “trade” books, and textbooks are all distinct markets – in which a combined Quad-LSC would have near monopolies.

It also ignores the reality that such factors as press configurations, paper selection, color requirements, bindery equipment, and distribution networks generally make it impractical to produce, for example, textbooks in a printing plant that specializes in magazines or to print catalogs in a directory operation.

Objecting to a dramatic chart included in Justice’s complaint (See "How the Feds Used Quad's and LSC's Own Words Against Them".), Quad claims “there is no such thing as ‘magazine and catalog presses’ and that “the chart excludes at least 140 commercial printers in the United States that also own web offset presses.”

Among other notable comments in Quad’s filing:

• “Quad and LSC Communications, Inc. (“LSC”) together represent less than 10% of the overall U.S. commercial printing industry. This industry is under assault. Between 2010 and 2018, print advertising—a category that includes magazine ads, catalogs, direct mail, and newspaper inserts—fell from a $55 billion industry to just a $19 billion one, a decline of over 65%.”

• “The Complaint . . . ignores that any attempt to raise print prices above competitive levels would only accelerate the movement of customers and products from print version to an online or digital format.” (Justice argues that, with a Quad-LSC merger, there would be no longer be “competitive levels” of pricing for some printing customers because there would be no viable competition.)

• Quad claims Justice is overly focused on multi-year printing contracts with large customers: “In actuality, the vast majority of Quad’s (and, on information and belief, its print competitors’) magazine, catalog, and book customers are relatively small customers that only buy print services on a transactional, or ‘spot’ basis, as opposed to doing so with multi-year contracts.”

• The “small number of ‘major’ customers are readily able and incentivized to protect themselves, among other ways, by sponsoring (or threatening to sponsor) competitors’ entry or expansion; by integrating (or threatening to integrate) vertically; and/or by moving (or threatening to move) all or part of their print work to other print formats or to alternative channels like digital formats.”

• Countering Justice’s claim that there are high barriers to entry for some printing markets: “To the contrary, high-quality printing and binding equipment is readily available for purchase on either a new or used basis, and can be purchased and installed in a matter of months.”

• It points out an apparent omission in Justice’s case: “Rotogravure presses are largely used for printing products like newspaper inserts.” Although a combined Quad-LSC would own every publication rotogravure press in the country, Justice failed to point out that the company would have a virtual monopoly for printing some types of newspaper and free-standing inserts.

• “Catalog customers are increasingly employing advanced personalization strategies where different versions of a catalog are customized for particular customers or customer segments or the catalog customer elects to use a direct mail product instead of a catalog . . . . This trend is driving catalog printing away from the presses traditionally used for longer-run print jobs and instead driving it towards digital presses.”

• “As more and more print customers have shifted to digital channels, Quad and LSC both have significant excess capacity; Quad therefore plans to use the acquisition of LSC to effect the orderly reduction of excess capacity in a way that (i) achieves more cost savings for customers than the two companies could achieve on their own; (ii) minimizes the burdens imposed on customers; and (iii) ensures that the best and most efficient capacity remains in operation after closing.”

• “Competing printers currently have excess capacity as well. . . . . This excess capacity in the industry will not only continue to exist after the transaction closes but will only grow as demand for printed products continues to decline.”

• “Many customers have expressed their support for the proposed acquisition.”

Related articles: 

Sunday, July 14, 2019

Judge Delays Quad-LSC Merger

Printers' request for expedited trial is rejected.

In another sign that Quad’s proposed acquisition of rival printer LSC Communications isn't going as planned, a federal judge has rejected the printers' request for an expedited trial.

That could delay the deal’s closing until next year, months after the “mid-2019” date the companies’ leaders projected when they announced the deal on October 31, 2018. And it apparently means Quad will have to pay a $45 million “reverse termination fee” to LSC regardless of whether the deal is consummated.

Last week, Judge Charles R. Norgle set the trial date for November 14. It might actually start even later.

“The Court notes that there are multiple criminal cases involving incarcerated defendants scheduled for jury trial during the fall of 2019; in the event of a scheduling conflict, these criminal trials may take priority over the bench trial in this matter,” he wrote.

Quad and LSC had asked the court for an expedited process, pointing out that the U.S. Justice Department’s antitrust division had been investigating the deal for almost eight months before filing a lawsuit last month in opposition. They also noted that their agreement requires Quad to make the $45 million payment to LSC if the deal isn’t closed before October 30 of this year.

Justice objected, saying that “Investigations are not the same as preparing a case for trial. Investigations are focused on deciding whether to bring an enforcement action and, if so, the scope of the lawsuit.”

It also pointed out that the October 30 deadline is entirely within the control of Quad and LSC: They can renegotiate it without the court’s intervention. (But LSC may not be eager to budge.)

“Defendants’ proposal to short-circuit the ordinary judicial process and rush to a “mini trial” to accommodate their preferred schedule would deprive the United States, the Court, and the American public of a full and fair presentation of the factual and economic evidence, which will demonstrate that the proposed merger eliminates important competition,” Justice wrote.

The two megaprinters, as well as some analysts, had expected the deal to get easy antitrust approval because the Justice Department has previously viewed printing as a fragmented industry with thousands of competitors.

Justice, however, took a groundbreaking approach in this case, focusing on markets rather than an industry. It objects to the deal because the combined company would have a virtual monopoly in four U.S. printing (and distribution) markets – medium- to long-run magazines, catalogs, “trade” books (such as best sellers), and textbooks.

Related articles:

Tuesday, June 25, 2019

How the Feds Used Quad's and LSC's Own Words Against Them

The U.S. Justice Department's lawsuit seeking to block Quad's purchase of printing rival LSC Communications relies heavily on comments from the two companies themselves.

"As LSC CEO Tom Quinlan remarked to investors mere months before the current deal was announced, combining LSC and Quad would eliminate ‘battle[s]’ between the two and could help lead to ‘[p]ricing stability,’” Justice’s lawsuit says.

The lawsuit argues that the combined company would indeed have the power to stifle price competition in four markets – the production (and in some cases distribution) of magazines, catalogs, single-color trade books, and textbooks. The deal would “significantly increase concentration in already concentrated markets,” the lawsuit says.

“As Quad executives explained in an internal presentation, ‘we are the only printer other than LSC that can offer the largest [book] Publishers a complete solution,’” according to the lawsuit.

LSC has a similar view of the book business: “When LSC sales staff learned that one of the next largest printers might bid on a major account, they described that competitor as a ‘band of bandits’ and concluded, ‘it’s all about [Q]uad, nobody else.’”

A two-horse race
“Catalog printing services is a ‘two-horse race between LSC and Quad,’ with the two firms holding a combined 69% share of the market according to a Quad Board of Directors deck,” says the lawsuit. It also claims that the two companies “control ‘more than half of all publication printing’ for magazines, with LSC the apparent source of that claim.

“LSC dismissed the next largest catalog printer (behind Quad and LSC itself) as a niche firm that merely ‘lives off our scraps,’” says the lawsuit, without stating who at LSC made the “scraps” comment.

Justice says the two companies dominate the production of medium-run and long-run magazines and catalogs because “they control a particularly high percentage of web offset presses and all rotogravure presses in the United States.” The lawsuit includes an especially dramatic “Magazine & Catalog Presses” chart showing that Quad and LSC have a combined total of more than 270 web offset and rotogravure presses, while the next largest competitor has about 20 offset presses.

(Justice doesn’t define what it means by “publication printing” or “web offset presses.” Based on the context, it seems to include only presses that can print on coated paper and deliver product suitable for binding – excluding presses that produce such products as newspapers, brochures, or direct-mail inserts.)

One thing Justice definitely didn’t claim is that there’s any collusion between the two giant printers. The lawsuit cites several examples of Quad and LSC slashing prices or offering multimillion-dollar signing bonuses to steal or retain major publishing customers from the other printing giant.

"The intensity of competition has concerned many at Quad, including one senior executive who remarked, 'We’ve been in a price war with them for some time. Don’t see that changing.'”

Such price wars have benefited publishers, Justice points out. Allowing Quad and LSC to combine would not only end the price wars, it would enable Quad to raise prices in the four markets where it would have a dominant share, the lawsuit contends.

“We believe the acquisition of LSC will result in time- and cost-saving opportunities for clients while protecting jobs for employees," Quad countered in a press release last week. “The DOJ’s position ignores the dynamic conditions in the U.S. commercial printing industry, which consists of nearly 50,000 companies," it added -- as if every screen print shop and invitations printer competes with Quad and LSC.

On the contrary, Justice's opposition is right on target, ignoring the printing business as a whole and focusing on four print-related markets in which Quad and LSC have virtual duopolies.

Related articles:


Thursday, June 20, 2019

Justice Department Tries to Block Quad-LSC Deal

The U.S. Department of Justice asked a federal court late this afternoon to block Quad's proposed acquisition of fellow megaprinter LSC Communications.

JUNE 21 UPDATE: Quad says it will "vigorously defend" the proposed acquisition despite Justice's objections. It also said it won't predict when the court will issue a ruling. LSC, whose stock price started today down 19%, also expressed continued support for the deal.

"The combination of Quad and LSC—the two most significant magazine, catalog, and book printers in the United States—threatens to increase prices, reduce quality, and limit availability of printed material that millions of Americans rely on to receive and disseminate information and ideas," reads the first paragraph of Justice's complaint, filed in the U.S. District Court for the Northern District of Illinois.

The move is counter to Justice's usual laissez faire approach to mergers in the printing industry, which it had previously viewed as highly fragmented and therefore not subject to antitrust regulations. (There's No Such Thing as a Printing Industry explains that, in fact, printing is a collection of disparate marketplaces.)

Justice isn't even suggesting any divestitures or other moves that would make the combination of Quad (AKA Quad/Graphics) and LSC acceptable. Here's the conclusion of its filing:

The United States requests: 
(a) that Quad’s proposed acquisition of LSC be adjudged to violate Section 7 of the Clayton Act, 15 U.S.C. § 18; 
(b) that the Defendants be permanently enjoined and restrained from carrying out the proposed acquisition of LSC by Quad or any other transaction that would combine the two companies; 
(c) that the United States be awarded costs of this action; and 
(d) that the United States be awarded such other relief as the Court may deem just and proper.

Justice issued a press release that nicely summarizes its 40-page filing, including this statement, "The Antitrust Division’s lawsuit alleges that the transaction would combine the only two significant providers of magazine, catalog, and book printing services, denying publishers and retailers throughout the country the benefits of competition that has spurred lower prices, improved quality, and greater printing output."

Related articles:

Monday, May 13, 2019

Study Refutes Trump's Claim That USPS Loses Money on Amazon

An independent government watchdog today seemingly refuted President Trump’s claims that the U.S. Postal Service loses “a fortune” on a sweetheart deal with Amazon.

The USPS Office of Inspector General released a study indicating that the Postal Service’s growing practice of entering into customized contracts with package shippers is paying off.

“The number of these 'Negotiated Service Agreements' (NSAs) has increased from 66 in fiscal year (FY) 2012 to more than 1,000 in FY 2018,” the report says. “In FY 2017, only five contracts lost money, down from 14 the previous year.”

“The Postal Service’s largest NSAs contribute the most financially.” The few money-losing contracts have been “mostly low-volume NSAs,” the report says, and the USPS and Postal Regulatory Commission typically take action to fix or terminate those deals.

NSAs are “solidly profitable” and “perform strongly for the Postal Service,” the Inspector General’s report states. The watchdog agency has often criticized the Postal Service severely on other matters.

The report was heavily redacted – enough to put even Attorney General William Barr to shame – to avoid any public mention of specific customers or any revelations that would help the USPS’s private-sector competitors.

But it clearly suggests that the Postal Service is making a profit on such major “Parcel Select” customers as Amazon, FedEx, and UPS.

Though there are only 24 Parcel Select NSAs, the report indicates that they have as much volume and generate more revenue and profit than any of the other four types of domestic-shipping NSAs.

“Parcel Select is generally used by consolidators and large shippers who can presort packages and drop them off by the truckload at postal facilities that are close to the final destination, paying a lower rate based on how close they get the packages to their delivery point. The Postal Service takes the packages the ‘last mile’ and delivers them to their ultimate destination,” the report explains.

In other words, because these shippers handle everything except for the last mile, they are profitable for the Postal Service even though they pay less than does someone who drops off packages at her local post office for delivery in another state.

Parts of the report were heavily redacted.
“NSAs are a tool to better meet customer needs when some aspect of the Postal Service’s off-the-shelf offerings does not,” the report says. Private-sector competitors have similar practices:

“Most carriers offer discounts to certain classes of clients, such as new customers or high-volume shippers. As a result, carriers can charge very different prices for delivering the same package to the same destination.”

“Many NSAs bring in new customers that were previously shipping with another carrier,” the report says. “So long as those deals cover their costs, any product-level profits they generate would improve the Postal Service’s bottom line because the profit is based on new volume.”

But when a customer already does most of its shipping with the Postal Service, an NSA may reduce prices in a way that makes the customer less profitable, the report notes.

The report doesn't address whether the Postal Service's cost-accounting practices are keeping pace with the rapid growth in package delivery or are accurately measuring the cost of such deliveries.

Related articles:

Tuesday, May 7, 2019

Justice Department Seems "Open-Minded" on Quad-LSC Deal

A printing-industry expert believes the federal officials who questioned him about the proposed merger of printing giants Quad and LSC Communications are unlikely to “rubberstamp” the deal.

“They were pretty open-minded,” said the expert, who was recently interviewed by a team from the U.S. Justice’s antitrust division. Although they kept their cards close to the vest, he says, they seemed genuinely interested in understanding claims that the two companies would have several monopolies or near-monopolies in what at first blush looks like a highly fragmented industry.

The printing expert, whom I know to be a reliable and knowledgeable source, spoke to Dead Tree Edition on condition of anonymity.

Silent publishers
Justice’s apparent open-mindedness comes despite no public opposition from publishers or other printing customers.

A publishing company executive tells me that a paper company contacted him in March as part of an effort to get publishers to object to the deal. It found that publishers were reluctant to speak up for fear of angering two key suppliers, he was told. (Also, it’s hard to get senior executives at magazine-media companies these days to even think about printing or anything else that’s not new and shiny.)

The printing expert mentioned to the Justice team the case of Verso and NewPage, two paper giants that Justice allowed to merge in 2015 on condition that NewPage first divest two mills.

At least one member of the Justice team was familiar with that case and indicated the same tactic had not been ruled out in the Quad-LSC case, the expert said.

The expert’s observations are in contrast to recent speculation from Peter Schaefer, a veteran of printing-industry mergers and acquisitions.

“My best estimate is I don’t think there’s going to be an antitrust issue” because the regulators tend to see printing as a single market, he told Printing Impressions last month. “Combined, they [Quad and LSC] are still going to be a small percentage” of the entire U.S. printing industry.

The only formal, public objection to the merger has come from a coalition of two authors’ organizations and an anti-monopoly advocacy group that pointed out how Quad (known until recently as Quad/Graphics) and LSC already dominate the long-run publication market.

The two companies reportedly have 100% share of the U.S. market for the printing of best sellers and certain other types of books. They also own all of the country's rotogravure presses that are typically used to produce catalogs, magazines, and free-standing inserts that have print orders of 1 million or more.

In addition, the two companies dominate the transport of magazines, do the vast majority of co-mailing of magazines and catalogs (to gain hefty postal discounts), and probably own a sizable majority of the large publication presses in the U.S. that are best suited for print orders in the hundreds of thousands.

Related articles:

Sunday, March 24, 2019

Fitting the Pigeonholes: The Challenge of Selling Print Advertising in the Age of Hypertargeting

The choices are constrained.

That’s the trouble with print advertising these days. Pigeonholes.

Judging from reader feedback, I apparently hit a nerve recently in a Publishing Executive article by stating that many magazine-media advertising reps don’t seem to know how to sell print ads these days.

Younger sales reps were hired for their digital knowledge, but their clients are increasingly asking for multimedia proposals that include print. And some of the print veterans haven’t adjusted to the age of targeted marketing.

(Some commenters noted that the issue arises in selling any kind of print-based marketing.)

Choice A or Choice B

When mass media dominated, brands that wanted to target their print-media ads were forced into a limited number of pigeonholes: To reach men, put the ad in the sports or business section. For women, use the lifestyle section. The choices offered by major magazine publishers often boiled down to buying ad pages in Title A or ad pages in Title B.

That doesn’t cut it any more – not when digital ads can be behaviorally targeted based on what someone has searched for, what stores she has visited, or what side he dresses on.

Now it’s the ad buyers who have the pigeonholes – narrow descriptions of their target prospects. They want to get their message in front of families who are “in market” for a minivan, patients with a specific medical condition, or, in the half-joking words of the The Ad Contrarian, “left-handed women golfers over 35.”

You can't just sell ad pages to such a buyer, no matter how much you discount your rate per page. You have to show how you'll reach those pigeonholed prospects.

The challenge for many magazine publishers is that they split their operations into a print team and a digital team.

Glasgow University Magazine, 1892
That worked when advertisers and agencies likewise bought into the print-versus-digital foolishness and had separate buyers for each medium.

But with so much evidence indicating that multimedia campaigns are more effective than single-medium efforts, the advertising world seems increasingly to be asking publishers for integrated, multimedia plans.

That’s an opportunity for multimedia publishers, but also a challenge: The digital reps know how to present advertising solutions that fit into their clients’ pigeonholes, but are clueless when it’s time to translate that knowledge to a print proposal.

And many of the veteran print reps are still trying just to sell pages rather than finding a way to get the advertiser's message into its desired pigeonholes.

Let's get prigital, prigital . . .

The Publishing Executive article presents eight tools that both kinds of sales reps can use to fit their print offerings to an advertiser’s pigeonholes. (Omitted was a ninth idea: Check your magazine’s editorial calendar to see whether any of the upcoming issue themes or special sections would resonate with the advertiser’s intended audience.)

Another thought: Don’t respond to a multimedia RFP  by having some people work on the print portion and others on the digital part. Coordinate, so that everyone involved is looking for the best media choices to fit each of the advertiser's pigeonholes.

Make sure you consider all possible media – magazines, custom print, web, social media, email, ebooks, live events, and webinars. And stuff that blurs the lines: If you turn excerpts from your magazine into a sponsored, downloadable PDF, is that print or digital? Who cares? Just call it prigital.

Other Dead Tree Edition articles about print advertising include:

Monday, March 4, 2019

There’s No Such Thing as a Printing Industry

How can a marketplace with 28,000 companies have shortages of both capacity and competition?

Book printing at a Walsworth plant
The United States has more than 28,000 printing businesses.

So how did printing backlogs cause many highly acclaimed new books to be unavailable for weeks at a time during the recent Christmas shopping season? Were American printing plants really so busy late last year that none of them had available capacity to cover a small increase in demand for printed books?

Those seem like reasonable questions – if you don’t understand one of the most basic characteristics about the printing business. People who should know better – including government regulators (I’ll come back to that.) and even some people who work in printing – often don’t grasp the importance of this characteristic.

Ford, Uber, Maersk, and Union Pacific are all in the transportation business, yet no one asks why they didn’t step up over the holidays when the airlines were turning passengers away. Getting paid to help move things from Point A to Point B doesn’t make you a competitor or potential replacement for every other company involved in moving stuff.

Likewise, manufacturers of books, business cards, brochures, bridal invitations, business forms, boxes, and building wraps are all printers, but they’re each in completely different lines of business. From a practical standpoint, there’s no such thing as a printing industry -- just a multitude of individual markets that all involve applying something to a substrate.

Mainstream-media journalists often refer to printing as a dying industry because, to them, “print” means publications. But the same Internet that has cratered daily newspapers has also spawned e-commerce – and with it a dramatic rise in package printing.

Command Companies book printing
Textile printing, which had become nearly extinct in the U.S., is undergoing a renaissance  in this country, thanks to the combination of sewbots and digital printing that are enabling just-in-time clothing manufacturing.

So you can say that print is withering away, holding its own, or booming -- depending upon which printing industry you're referring to.

This concept of calling the printing business a collection of separate industries is not exactly an original insight. Yet it’s apparently news to most of the printing-company sales reps who contact me. I’m a print buyer and they sell printing, so of course I should be happy to have them come by and meet me.

The First Rule of Print Buying
But they don’t know my First Rule of Print Buying: There’s no such thing as a printing company.

For my purposes, there are companies that excel at producing magazines, those that are good at printing special inserts, and those that produce the few other printed product my employer needs. The rest are irrelevant.

Like most “print buyers” in the publishing business, I spend far more time planning print projects and wearing non-print hats than I do actually meeting or negotiating with printers. I can’t talk to, or entertain quotes form, even 1% of the 28,000.

Rule #2 is like unto the first: Avoid any printing company with slogans or sales reps who claim “we can meet all your printing needs.” They’re a waste of time. I’ll end up in an argument with Mr. Let-Me-Quote-Something trying to explain that, no matter how much he discounts his printing prices, he can’t possibly compete to produce a 500,000-circulation magazine with a 16-page web press and no co-mail capability.

Back to that recent book shortage
Command Companies book binding
Think about a print buyer at a book publishing house that suddenly needs 250,000 more hardcover copies of a title that was just released to favorable reviews and lots of buzz.

The vast majority of the nation’s 28,000 printers don’t have web presses, which automatically puts them out of the running for a print order of that size. And many of those with web-offset presses can’t print typical book-format page sizes or don’t keep much book paper in stock.

During the crunch, Quad/Graphics printed some titles on presses that don’t normally produce books. But that tactic only goes so far: Hard-cover books can only be bound on equipment that is dedicated to book binding.

Adding to the challenge is the way digital printing is disrupting book publishing – and not just because it’s taking market share from offset. Publishers are reducing the size of their offset print orders, now that digital has reduced the upfront costs and turnaround time to print additional copies.

They are printing fewer “just-in-case” copies that end up sitting in a warehouse for months or even years before being sold or scrapped. So even though U.S. sales of printed books have been growing by a few percentage points annually, demand and therefore capacity for offset book printing has been shrinking.

The Quad-LSC deal
Now about those government regulators: I don’t think a single merger or acquisition of U.S. printing companies has faced significant hurdles from the federal antitrust folks. The regulators’ view seems to be that with so many printing companies, there’s no lack of competition.

But there are only two U.S. printers with the sort of rotogravure presses that are especially well suited to producing a million-plus copies of a magazine or catalog: Quad/Graphics and LSC Communications. And now those two are trying to merge.

Even at publication print orders of 200,000, the two giants have few competitors. And in book printing, LSC is already the dominant #1, with four times the market share of the #2 book printer – Quad/Graphics.

For many publishers of magazines, catalogs, and books, 28,000 is a meaningless number. Those publishers can count on one hand the number of U.S. printers that can meet their needs.

I hope this time around the regulators will focus not on the printing industry but rather on the multitude of printing markets.

Related articles:

Thursday, February 21, 2019

Enjoy a Day of Golf and a Texas Sunset at Falconhead Golf Club


Sunset golf at Falconhead
Austin, Texas, is one of the United States’ most-visited cities.

The city itself has an eclectic feel and is thriving in a wealth of growth and new businesses.

For this reason, people frequently visit Austin for work-related travel or to visit friends and family.

While there is a lot to do and see while in Austin, the city has recently become noted as a thriving golf community. There are typically many local golf tournaments that go on throughout the year. Many high-ranking golfers, as well as local pros, play in these tournaments.

One of the most noted courses for local golf tournaments is Falconhead Golf Club, which is a top golf course in the Central Texas region. People come from all across the area and beyond to enjoy a great day of golf and watch some of the region’s top players compete.

Falconhead Golf Club has set itself apart from other golf courses with its pristine grounds and wealth of amenities. The course itself was designed by the PGA design team that designs the actual PGA golf courses. Built in 2003, the grounds are set above the norm due to the precision work that went into their design and the building of the course. It is dotted with a variety of creeks and ponds. The maintenance staff at Falconhead Golf Club does precision work to ensure that the golf course has the look, feel, and quality of a PGA course.

It is because of this superior course that many local golf tournaments are attracted to play on the grounds. Typically, there are multiple local golf tournaments held each week. It is an excellent place to stop in and enjoy a warm, sunny Texas day while watching a great game of golf. Aside from the course itself, the scenery is absolutely stunning. The ponds are sparkling and narrow creeks wind throughout the lush landscape. Texas’s rolling hills are peppered with tall trees, and people who attend these tournaments are typically treated to warm, sunny Texas weather.

In addition to the course itself, there is a wonderful on-site bar and grill. Talon’s is a place where you can kick back and enjoy a delicious meal prepared by a staff that has been honored time and time again for the quality of the food served, and the above-average service provided by the team members. In addition to typical golf fare, the bar and grill ensures that the menu provides a strong range of salads and low-calorie options designed to cater to those looking for healthier options. Items such as gluten-free dishes are also available at Talon’s. The restaurant even serves up breakfast tacos, which are one of the items that have earned Talon’s its sterling reputation.

If you are in the area and are a fan of local golf tournaments, Falconhead Golf Club is the perfect place to visit. One of the best things about spending a day at the course is finishing the day watching a gorgeous sunset. You can find the list of local golf tournaments on the club’s website.

Wednesday, February 20, 2019

4 Print-Centric Assumptions Publishers Should Avoid Online

By D. Eadward Tree, Chief Arborist of Dead Tree Edition

My latest article for Publishing Executive looks at some ways digital publishers are often governed by assumptions that are true in the print world but don't make sense on the web.

For example, digital publishers are able to see that some content and some readers are many times more valuable to them than others. And yet so many -- digital-native ones as well as those with a print legacy -- mindlessly focus their efforts on increasing the number of unique visitors.

That's a nearly useless measure of volume, not value, that causes them to chase after "viral" hits rather than building a sustainable enterprise.

Something not mentioned in the article is an old print-magazine trick that the digital geniuses haven't figured out how to copy yet -- getting subscribers to renew when they have two years left on a three-year subscription. That's what my friends in the Circulation Department call "cash flow management."

Wednesday, February 13, 2019

5 Things Publishers Should Do Before Erecting a Paywall

By D. Eadward Tree, Chief Arborist of Dead Tree Edition

This is the year, the pundits tell us, when digital publishing will pivot to paywalls. Good luck with that.

Getting people to pay for online content is already hard enough. With more publishers in the game, it will become even harder. How many digital subscriptions do you think people will pay for?

Tread carefully, or you may become like the newspaper Newsday, which spent $4 million redesigning its site to support a paywall and then in the first three months signed up only 35 subscribers. To avoid that kind of disaster, here are five paths to pursue before putting all your content behind a paywall:

Thursday, January 24, 2019

USPS Proposal Could Spread Pain to Catalogs

Comail is working. But in Postal Land, no good deed goes unpunished.

Like lashing two water-tight boats to a sinking vessel.
The good news — for mailers, printers, and the U.S. Postal Service — is that flat Standard Mail is being sorted far more efficiently than it was just two years ago. 

The bad news is that the trend is prompting postal officials to consider a proposal that would almost certainly lead to higher-than-normal rate increases for efficiently mailed catalogs and other Standard flat mail.

Some postal experts fear the proposal would lead to reduced incentives for co-mailing, which even postal officials admit is the main reason that highly efficient – and profitable – “High Density Flats” volume has grown by 45% in the past two years.

More bad news: Postal officials can’t explain -- and don’t seem to be trying very hard to understand — why the Postal Service’s costs of handling most types of Standard flat mail have skyrocketed in the past year. That trend also threatens to cause higher rate increases even for efficient mailers.

Although the Postal Service is supposed to act like a business, this is a case of it operating like a bureaucracy where CYA trumps ROI.

Hall of mirrors

Let me walk you through the strange hall of mirrors where postal officials are ready to shoot themselves in the foot rather than celebrating, and building on, a successful tactic.

The Postal Regulatory Commission and legal challenges have pressured the Postal Service for years to do something about what is essentially a subsidy for the least-efficient flat Standard mail – the mail that does not meet the 10-piece minimum to create a carrier-route bundle. (Note: The USPS refers to such mail by the misleading moniker “Flats,” but for the sake of clarity Dead Tree Edition calls it “Non-Carrier-Route Flats.”)

The USPS has responded by imposing slightly higher rate increases for such mail than for most other Standard classifications. In Fiscal Year 2018, for example, revenue per piece rose less than 1% for the Standard class as a whole but was up 5.1% for Non-Carrier-Route Flats mail. But the cost per piece rose 13.4%, putting the category further into the red, with revenue covering only 68.65% of costs.

Got no explanation

In a recent report, postal officials speculated that, because of economies of scale, a 17.5% drop in volume for Non-Carrier-Route Flats during FY2018 caused the category’s costs to spike. (See pages 17-18 of this PDF.) But that simplistic theory doesn’t explain why the cost per piece for Standard Carrier-Route Flats rose even more, to 15.2%, when volume for that category dropped only 1.4%.

(Don't blame postal workers: The agency's average cost per labor hour has recently been increasing less than 4% annually.)

These unexplained cost increases have caused the cost coverage for Carrier-Route Flats to decline from 137.53% to 108.49% in just two years. Postal officials have not explained that dramatic trend, which could soon turn what was a highly profitable category for the USPS into a money loser.

“Based on feedback from industry representatives, which is supported by volume trends, flats volume has migrated from the Flats and Carrier Route products into High Density Flats because of comailing,” the USPS report said.

True. Better incentives have encouraged more comailing, a process that sorts a variety of mail pieces -- mostly catalogs and magazines -- into a single mailstream to take advantage of postal discounts. The work is typically done by printers, which are rewarded with a share of their customers' resulting postal savings.

High Density Flats are like Carrier-Route Flats on steroids, with a minimum of 125 pieces per carrier route. Achieving a significant proportion of such mega-bundles typically requires a mailing list – or a comailing run – with at least several million addresses.

It's working. Now let's screw it up.

The rapid growth of High Density Flats is good news for the Postal Service because of the category’s 131.20% cost coverage. That’s the kind of trend rate incentives are supposed to produce.

But postal officials are focusing on the phantom “problem” that the move to High Density Flats is allegedly causing: the reduced efficiency of Non-Carrier-Route Flats. The “solution” they are considering, they revealed recently, is to combine Non-Carrier-Route Flats, Carrier-Route Flats, and High Density Flats into a single category known as Non-Saturation Flats. (See pages 20-22 of this PDF.)

“In a way, the USPS is suggesting that if it lashes two water-tight boats to a sinking vessel it will save the sinking ship,” the Mailers Hub newsletter quipped this week.

No longer would postal officials be pressured to get Non-Carrier-Route Flats “above water,” which would require either massive (and, in some circles, unpopular) rate increases or massive cost reductions. This poorly sorted mail would become part of a larger category with more palatable cost coverage of 88%.

But two profitable categories – High Density Flats and Carrier-Route Flats – would also join that slightly unprofitable new category. Based on the Postal Service’s history, we know what will come next: Postal officials will spread the pain around, jacking up prices across the category, even on the types of mail that would be considered highly profitable if not for this bureaucratic finagling.

(That already happens in the Periodicals class, where efficient and inefficient mail are in a single category in which efficiently mailed publications subsidize the inefficient ones.)

Increasing the price spread between efficient and inefficient mail has prodded more mailers to participate in comail and more investment by printers in enhancing the process. By the same token, freezing or shrinking the price spread by having efficient mail subsidize inefficient will curb the favorable trend.

Iceberg off the starboard bow

What really galls the postal experts I’ve spoken with recently is that the Non-Saturation Flats proposal looks like an attempt to paper over some very real problems – what one postal expert called “re-arranging the chairs on the Titanic deck” -- instead of understanding and addressing them.

Postal officials don’t understand the cost trends with flat Standard mail, don’t know whether their various efforts to improve the handling of flat mail are working, and can’t even say when they will know.

Their explanation of the cost increases for Non-Carrier-Route Flats are simplistic and probably off base. (Note to the USPS: Here’s a hint in your own data: The proportion of Non-Carrier-Route Flats dropshipped to the SCF level has declined from 64.1% to 51.7% in just two years. If you actually dig into the category’s data, I’ll bet you’ll find much less relatively inexpensive mail, such as dropshipped 5-digit bundles, and a higher proportion of poorly sorted, non-dropship mail.)

Postal officials’ explanation of the even larger cost spike for Carrier-Route Flats is non-existent. Here’s why: A big culprit is probably the money-eating Flats Sequencing System, but postal officials won’t admit that or even discuss trying to unwind the FSS fiasco. Doing so would force them to shoulder the blame for rushing into the multi-billion-dollar investment before it was proven to be workable. The unofficial motto at L’Enfant Plaza is “Never recalibrate, just obfuscate.”

(Another note to postal officials: I dare you to publish a clear analysis showing the cost-per-piece of handling and delivering FSS mail – including the stuff the machines aren’t able to sort – with the costs of carrier-route and 5-digit-bundle mail. No, I take that back. I double-dare you.)

Related articles: