Ancillary products: how profitable? - for a magazine - column

Ancillary products: How profitable?

Many publishers of small magazines think about the possibilities of generating profits through products that are ancillary to the magazines they are producing. Each of us has heard of someone who has had enormous success creating new revenue streams through one or more of the myriad acillary products out there: videos, buyer's guides, directories, trade shows, seminars, catalogs, posters, books, newsletters, research studies, card decks, cable TV shows, calendars, computer disks, clubs, list rentals, even trips to Europe--the list, of course, goes on, and on.

In this column I will express some opinions--perhaps biases--about those ancillary products I consider worthwhile, and those I consider to be risky. But let me start by offering this caveat: As you begin to look at magazines involved with ancillary products, you will find that many of these products represent more hype than profit. Although it is useful and often productive to explore these derivative opportunities, I see too many instances in which the energy devoted to the ancillary product is out of proportion to the profit developed. More often than not, publishers are failing to allocate the proper overheads to these side ventures. And frequently, the staff of a publication, diverted by the ancillary product, fails to develop the full potential of the core product.

It's very easy to become enamored of video offshoots or a newsletter or something else that is fresh and different. And where pressure exists to create additional revenues, too many people begin thinking about new projects rather than just doing a better job with what they already have. This doesn't mean it isn't worth exploring a video product or card deck or trade show or any combination, but there is indeed a caveat: Look at these add-ons as you would a new business--to see what contribution to the bottom line they will really make.

Support system

Some ancillary products play a key role simply as support devices for the magazine. Card decks can support an advertiser's commitment to pages in the main publication, for example. As another example, at Ziff-Davis, Travel Weekly developed The World Travel Directory, which provided the marketplace with accurate information about the names, addresses and dollar volumes of travel agencies. The World Travel Directory also became a tool with which the Ziff-Davis Travel Division (now owned by Murdoch Magazines) sold all of its products and services and kept track of who had purchased them. The directory also became an instrument of a highly effective telecommunications sales organization--and, overall, helped to create the concept that the Travel Division really understood everything about who the buyers in this market were.

I'm not sure the directory ever made any money at all. In fact, in annual profit and budget reviews, the financial management of the company always made it a target for elimination, or for cutbacks in quality. We could never demonstrate that, as stand-alone entity, it provided the returns to which we were accustomed. Nevertheless, the directory supported money-making activities and increased the bottom line for a number of print products. Consequently, publishing management always managed to keep it, and the property remained a key element in the product mix. This is by no means an unusual example. In nine out of 10 acquisitions I examine, the ancillary products are not integral to the cashflow, but essentially serve more as support mechanisms.

Directories and buying guides are among my favorite add-on products because, in addition to opening doors for a magazine and providing recognition, they can also be highly profitable. An example of such a directory is Hotel and Travel Index, which helped Travel Weekly improve its hotel linage. Although we never sold space for the Index in tandem with Travel Weekly, the link between our involvement in the hotel business and the travel agency business clearly helped Travel Weekly's salespeople project the image that the newspaper served the hotel marketplace.

Perhaps more important, Travel Weekly was used to help the Index build its market position. The pages of the newspaper were made available to Hotel and Travel Index on a straight page cost basis, or "remnant basis"; the Index used this opportunity to promote subscription sales and the image of the Index as a publication used by travel agents when making hotel bookings. If the Index had been required to pay full cost, it would never have received the budget it needed to promote itself adequately. Today, Hotel and Travel Index is a quarterly directory and actually contributes more revenue than Travel Weekly. (Both are now owned by Murdoch Magazines.)

Booming trade shows

There have been a number of magazines that developed trade shows only to see the trade show become more profitable than the magazine (some examples of this exist in the sporting goods industry). The magazine then becomes more of a tool to support the show. There's nothing wrong with that--you're merely finding out where your highest profit contribution comes from and making it your business.

Trade shows are often viewed as significant revenue sources. Gralla Publications, for example, has had great success with trade shows and plans to expand in this area through start-ups and acquisitions. In addition, Cahners and Harcourt Brace Jovanovich, to name but two, are working hard and investing significant resources to establish high margin trade show businesses. There are also a growing number of service companies like Expocon Management Associates that are working along with publishers to develop and launch trade shows.

As Peter Sprague, a magazine consultant with experience in the trade show field, points out, a magazine has a wide variety of internal resources that can be applied to the profitable development of a trade show. These include the circulation file for generating attendance; the expertise of the editorial staff for organizing seminars and conferences; the list of advertisers and prospective advertisers for marketing booth space; and the ad space in the magazine for promoting the show and conference programs.

Beware videos and books

Ancillary video products are always a temptations, but the costs to achieve quality in almost all special interest markets are quite high. There are success stories in the video area--The New York Times Magazine Group's video for Golf Digest, for example. On the other hand, many video by-products have yet to demonstrate their viability.

I would also be careful about book publishing, which involves some treacherous economics. Ziff-Davis went into the book business three times and got out three times. Doing books in fields related to those in which we published magazines always seemed to be a nice idea. But we would probably have been better off either trying somethings else or inviting a book publisher to participate in a joint venture in which we had no significant responsibility. As well as we understood what the readers of our magazines would buy, we really didn't understand what books they would buy. It's a very time-consuming area that requires more investment than you could begin to imagine. Once again, there are success stories, such as Southern Living's program, but I think it sounds more romantic than it really is. It's really more hype than profit.

A small publisher who has successfully put out a wide range of ancillary products is Stanley Klein, president of Technology & Business Communications, Inc., which specializes in computer graphics and imaging. Klein, who began in 1979 in conjunction with Harvard University, now produces a twice-monthly newsletter, a quarterly card deck program, an annual suppliers directory, a series of techical reports, audiocassettes, seminars--and, oh yes, a magazine.

Klein, however, did it all in reverse: He started with the ancillary products, using them to form a circulation base and generate cash, and then launched a controlled magazine--which now generates more than half of the firm's revenue. Klein did it this way on the theory that the magazine was the most expensive product to put out--so why not build a foundation for it first? That foundation enabled Klein to avoid seeking cash from banks or venture capitalists in setting up the company. He says that the ancillary products were like "booster rockets" that helped launch the main rocketship--the magazine. Now that the magazine is in orbit, he is letting the booster rockets loose, and not pushing as hard. (For a more complete description of Klein's story, see update article in the October 1987 FOLIO:, page 26.)

Before getting started with any ancillary products, you should carefully assess whether you will be devoting your energies and resources to those ancillary activities in a way that will deprive your main product of its ability to achieve its highest potential. You should ask yourself whether you've tried everything possible to improve your classified ad section and your display mail order sections and to create special advertising sections. In a world of limited resources, you should look to those things first.

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