Monday, April 22, 2013

What should a publisher spend on their digital publishing platform? Your print P&L should provide the answer

The one question I get asked the most involves advice concerning digital publishing platforms. Not a week goes by when I am not asked for a recommendation concerning platforms. Many publishers remain confused by all the new digital publishing platforms, their pricing, and making all this fit into their current title's budget.

My answer, I know, often disappoints the publisher: "it's complicated" and will ultimately be determined by their own P&L.

Publishers, like everyone else, like simple answers – which is why they are so vulnerable to the sales pitches of vendor who position their platforms as "cheap and easy." Many publishing companies today simply wing it – the old days when one couldn't make a move to do anything without creating a new P&L seem to be gone. That's too bad. While forced bureaucracy prevented many new product launches, it also prevented many financial disasters, too.

I once worked for a magazine pro who said to his team of publishers that if you didn't feel comfortable creating and examining the P&L you were not yet truly a magazine publishing professional. I felt he was right then, and I still do today.

The first thing a publisher should understand is where they are today, what percentage of their total costs, and costs to revenue, are they spending on print and distribution today? To make it easy, I would suggest leaving out the question of G&A (general and administrative costs) and concentrate on production and circulation.

A caveat: that P&L should reflect its magazine during its profitable days – if that is last month's P&L, well, congratulations. But for some titles, the publisher might want to pull out a P&L from many years ago. We're trying to learn what the ideal percentages are, after all. If your title is bleeding red ink it is hard to really judge these things.

Looking at the P&L of one magazine I used to publish I can see that production and distribution accounted for nearly 50 percent of all costs (not including G&A) – 48.5 percent to be exact. Looking at things this way, one can see that digital production costs generally will greatly reduce overall costs when compared to print. But looking at simply the costs involved in a digital magazine won't give you a complete picture. After all, there is the revenue side of things, as well.

One should also look at total production costs to total revenue. At this same title, which was light in subscription revenue, and heavy in advertising, the ratio was over 3. That is, for every dollar spend on production and distribution, $3 came in.

When you added in editorial and advertising costs, one would see that year my magazine was running at close to a 35 percent margin before admin costs, though only 20 percent after admin costs. Still not bad, though, huh?

Many replica makers do not charge any production costs at all – which makes them very attractive. The idea is that any money that comes in is new dollars. This makes it difficult to judge their economic worth – with no costs place on the solution it appears at first to be quite a deal – and in some cases it might well be.

But if a publisher looks at the money lost to both Apple and the vendor as a cost then it is easier to see the true situation.

Take a magazine that sells a monthly subscription at $1.99. Say they sell 10,000 issues, that's $19,900 in revenue. Apple takes 30 percent ($5,970), and the popular vendor takes 50 percent of the rest ($6,965). That leaves $6,965 for you.

If one only looks at the hard dollars spent ($0), the digital publishing solutions seems to create money out of thin air. But looking at it from the perspective of total dollars made versus total net income one sees that the margin is 35 percent.

That magic 35 percent again. Except this time this doesn't include editorial and advertising costs. It also doesn't include any new ad revenue brought in by the tablet edition.

In situations where no new ad revenue comes in it is almost impossible to make any replica digital publishing platform that uses revenue share work within the Apple Newsstand. Apple's 30 percent take is about what print publishers spent on production and distribution, so any money going to a vendor makes the model break down. The only way to make it work, without any new ad dollars, is to make the digital edition part of the print edition's P&L, then the new digital edition's 35 percent margin works.

This is the hard reality many publishers see when thinking about shuttering their print edition: production and distribution costs seem to be lowered to the point where it might all work out, but those editorial and advertising costs are now no longer supported by a print title and now get thrown into the P&L of the digital edition. That P&L will now look pretty ugly.

In the case of native tablet publishing systems, the cost are hard, rather than a revenue share. They are also far more complicated: a set fee based on the system, and then hosting costs, and possibly circulation verification costs.

In most cases, if a magazine can sell a large number of digital copies, the native solution actually comes in quite a bit cheaper than the revenue share solution. When the numbers are low the situation is reversed. In the situation above, where 10,000 copies are sold, I calculated that the costs were cut by more than half. But in a situation were only 1,000 copies are sold (where the replica maker would get only $597) the costs were three times as high with a native solution.

These are the variables that make all the difference on the P&L – and why creating a new P&L is so vitally important.