DISCOVERING America, Again - Review

OVERSEAS MAGAZINE PUBLISHERS ARE INCREASINGLY BUYING INTO THE U.S. MARKET AND WILLING TO PAY HEFTY PRICE TO DO IT. HERE'S WHY.

Overseas magazine-publishing companies have to like what they see/when they look across the Atlantic: a massive homogeneous market of 300 million people with enough purchasing power to justify nearly $10 billion in magazine advertising expenditures in 1998.

But getting here--through acquisition or launch--is not always a smooth trip for foreign publishers. Sobering entry costs, a high possibility of failure and a domestic business model that doesn't travel well have traditionally contributed to keeping publishing in the U.S. mainly an affair for local publishers. In recent years, however, foreign publishers--particularly English, Dutch and German companies--have been staking claims to increasingly larger segments of the American market-mainly by acquisition. Consider that 10 years ago just three of the top-25 leading media companies in the United States were based overseas, according to a 1989 Advertising Age report. Now, that same list includes seven foreign-owned companies, and these companies comprise nearly 23 percent of the list's $18.3 billion total revenue.

Indeed, of the top 20 magazine-industry transactions tracked by FOLIO: in 1997 and 1998, six were by overseas companies, with the largest being U.K. conglomerate Emap's $1.2 billion acquisition of the Petersen Cos. The second largest was the $447 million acquisition of the Chilton Business Group by Anglo-Dutch giant Reed Elsevier's Cahners Business Information.

The trend continued into this year when London-based United News & Media plc spent $920 million to buy Manhasset, New York-based CMP Media. And the U.S. holdings of Dutch giant VNU have grown substantially during the past year with acquisitions that included Macfadden Business Communications and Shore-Varrone Inc. In fact, of the foreign publishers on the Ad Age list, only the Tokyo-based software and media giant Softbank, which owns Ziff-Davis and other American companies, saw U.S. revenues decline from 1997 to 1998.

Playing in the big leagues

So what's behind this foreign invasion, aside from the obvious attractions of mass and a robust economy? Felix Dennis, chairman of Dennis Publishing, which launched the red-hot Maxim in the U.S. in 1997, cites the prestige and challenge of publishing in the United States. "What is the point of playing in the game if you're not going to be playing with the big boys?" he says. "Why play on the softball team when you can play in the big leagues?"

Gruner+Jahr USA president and CEO John Hems agrees: "The U.S. is the most sophisticated market," he says. "If you're going to be a big international player, you have to have a significant American presence." New York-based G+J USA publishes seven titles in the United States, including YM and McCall's.

In many cases, it's also a matter of publishers simply outgrowing their home markets. Larger companies like VNU and Reed Elsevier often find expansion difficult in smaller countries like France or the Netherlands, where the magazine markets are extremely crowded and the threat of violating antitrust laws is a greater possibility. While an estimated 5,000-plus consumer magazines compete for consumer and advertiser attention here, much of Europe has reached near saturation.

Interestingly, high Internet penetration in both the household and the workplace also makes the United States a hot destination for publishers who want to test and implement online initiatives, says Jim Rutherfurd, an executive vice president at the deal-brokerage and equity investment company Veronis, Suhler & Associates. "Through acquisitions or alliances with companies here, many Europeans hope to learn more about the Internet than they might in their home markets," he says. Many believe that CMP would have commanded a significantly lower price had it not been for the company's well-developed online operations.

Another factor that industry observers point to in explaining the influx of international publishers into the U.S. is the predominance of English as the international language of business. In fact, some believe that because of this, foreign interest in b-to-b properties is likely to outpace interest in the consumer-magazine side. "Because English is becoming the de facto standard across Europe, you will see a lot more business-to-business publications coming across these borders," says Marco Sodi, managing marketing director at New York-based Veronis, Suhler. Indeed, although six transactions by foreign-based publishers appear in FOLIO:'s list of the top deals of 1997 and 1998, the only one on the consumer side was Emap's acquisition of Petersen.

How to make a good match

How do prospective entrants evaluate whether the U.S. market is right for them? The most apparent barometers are synergies with the parent company's products. Reed Phillips, managing partner at the magazine-industry deal broker DeSilva & Phillips, says, "When you're coming from another culture, it's easier if you're doing something that's familiar." Emap's purchase of Petersen is a textbook example. Petersen's rapidly growing roster, including the flagships Hot Rod and Teen, complements Emap's U.K. consumer group, which is primarily geared toward sports enthusiasts and youth.

Of course, launching titles here is an entirely different story from acquiring. Emap had been trying for several years to find a platform for building a base in the U.S. Identification with the established Petersen brand name leaves Emap in a good position to launch and import products, such as Maxim's competitor FHM, which launches here in February.

In some cases, these U.S. properties have become the breadwinners in the parent companies' portfolios. Miller Freeman, for instance, went from being a $15 million company in 1985, when United Newspapers bought it, to one that currently posts U.S. revenues in excess of $500 million, according to sources, not including the contribution from CMP. And with the CMP acquisition in June, United News & Media's percentage of operating profits earned in the U.S. from business services increased from 39 percent to 45 percent.

Similarly, G+J has been in the United States since 1978, but it was a minor piece in the Hamburg, Germany-based conglomerates' portfolio until its 1994 acquisition of the six-title Women's Magazines division of The New York Times Co. Today, the company's U.S. and French operations are its biggest. Heins says much of the company's success in the United States is attributable to its flexible approach. "They recognize that markets are different," he says. "We have very much taken the route of creating individual magazine subsidiaries--run by local management operating in the local environment, doing business the way it gets done in the local environment."

Importing ideas

But for some, going against the grain and importing ideas from the home market has defined their success. This has been the case with Dennis Publishing's Maxim. In the last five years, so-called "lad" magazines have gained about three million new readers in England and have come to dominate the market. Yet when Maxim made its U.S. debut, many dismissed the magazine as too sophomoric for U.S. standards. Charles McCullough, vice president of corporate strategy at New York based Hachette Filipacchi Magazines, recalls with amusement that while working on the U.K. launch of Rodale's Men's Health, "If I heard it from one person, I heard it from a dozen: 'That formula [loosely defined as "beer and babes"] will not work in the United States.' " But it has worked. In just over two years, Maxim's circulation has skyrocketed, and in August it raised its ratebase for the first half of 2000 to 1.3 million.

Another British import that's having an impact is Imagine Media, a Brisbane, California, publisher of niche computer/gaming enthusiast titles. The eight-title company first introduced the idea of including CD-ROMs with magazines in the U.K., where the newsstand is the primary sales method and where circulation is the primary source of revenue. Magazines are generally pricey in the U.K. compared to the United States; because "value-add" premiums and cover-mounts can significantly increase sell-through, they are an integral part of the newsstand climate. Hachette's McCullough notes that employing this business strategy probably helped Imagine's magazines avoid falling victim "to the American market's low-cover-price mentality" when the company made its debut here in 1993. Many computer publications soon mimicked the idea.

Most observers say that standards for running a business can't be pigeonholed by country, and that, by and large, any foreign impact on the the way American magazine companies are managed remains to be seen. But most agree that management hierarchies are flatter at companies in the U.K. than they are here. One result, according to Maxim's Dennis, is that "people tend to zoom through the ranks faster." Hachette's McCullough concurs, adding that the British bring a leaner publishing model. "Go to Emap offices around London and you will see very modest offices," he says. "It certainly wouldn't be fair to compare them to Conde Nast."

The long view

But regardless of the size of the offices, paychecks or limos, long-term commitment to this market is one of the most significant barometers by which the new wave of acquisitions will be judged. A European company that suddenly has problems in its own backyard, for example "might put its emphasis on fixing operations there," says Reed Phillips, "and lose commitment to the United States pretty quickly." Analysts suspect that the creation of the European Union might divert the interest of some European businesses from operating in America in favor of creating pan-European networks. But as Thierry d'Allant, president of the international magazine-consulting firm Planet2.com, says, "you have to acquire one publication in 10 countries to build a strong European network-which is difficult, and takes time and resources.

Ultimately, however, the trend may represent nothing more than a logical globalization of magazine publishing. After all, many major American publishers, including Hearst and Rodale, have been active in markets spanning the globe. And as Heins notes, to be major player around the world, it helps immeasurably to have a major American flagship.

                                RISE OF THE
                           INTERNATIONAL PLAYERS
  The top-25 publishing companies, measured by revenue, in 1988 and 1998.
         Non-North American publishing companies are shown in red.
                            Figures in millions.

                                     1988
Time Inc.                        $1,752.0
Hearst Corp.                        919.0
Advance Publications                745.0
Reader's Digest Association         598.4
Thomson Corp.                       596.0
News Corp.                          509.6
Cahners Publishing Co.              420.0
McGraw-Hill                         413.7
Capital Cities/ABC                  370.0
Hachette Group                      366.0
Meredith Corp.                      365.1
International Data Group            352.0
Washington Post Co.                 327.5
Times Mirror                        298.5
The New York Times Co.              249.1
National Geographic Society         245.4
Ziff Communications                 200.0
Petersen Publishing Cos.            186.7
Forbes Inc.                         175.0
General Media International         150.8
Edgell Communications               148.3
U.S. News & World Report            141.8
Crain Communications                136.8
Playboy Enterprises                 120.4
Whittle Communications               96.6
Time Inc.                        $3,309.3
Hearst Corp.                      1,563.2
Advance Publications              1,365.8
Reed Elsevier (includes Cahners)    968.8
Primedia                            927.5
United News & Media                 910.4
International Data Group            857.1
Reader's Digest Association         809.3
Thomson Corp.                       722.4
TV Guide Inc.                       640.0
Meredith Corp.                      622.6
Hachette Filipacchi Magazines       613.8
Ziff-Davis                          585.5
McGraw-Hill                         532.6
Gruner+Jahr                         521.1
Washington Post Co.                 399.5
Walt Disney Co.                     398.6
Forbes Inc.                         345.4
VNU                                 303.0
American Media                      300.0
National Geographic Society         290.0
Emap Petersen                       289.3
Rodale                              265.0
Wenner Media                        264.4
Times Mirror                        262.7


SOURCE: ADVERTISING AGE

TOP-5 PUBLISHERS BY TECHNOLOGY AD DOLLARS

Of the top-five publishers generating tech-ad revenues in 1998, only two, IDG and Penton Media, are based in the United States. United News & Media vaulted from fifth to second place after Miller Freeman purchased CMP.

1998 AD REVENUES IN MILLIONS.

Ziff-Davis Publishing Co. $654,655
United News & Media        630,102
International Data Group   413,782
Heed Elsevier              165,047
Penton Media                98,792


SOURCE: ADSCOPE

BUYING INTO THE AMERICAN MARKET

A timeline showing some of the major acquisitions by foreign publishers as they've built critical mass in the U.S. market.

1985

* United News & Media (London) buys Miller Freeman Publications

1987

* Hachette Filipacchi (Paris) buys Diamandis Communications for $712M

1991

* Hachette Filipacchi buys Home

1992

* United News & Media buys M&T Publishing Inc.

* Hachette Filipacchi buys Metropolitan Home

1993

* Reed Elsevier (London/Amsterdam) buys Official Airline Guides

1994

* VNU (Haarlem, the Netherlands) buys Bill Communications for $125M

* VNU buys BPI Communications for $220M

* Gruner+Jahr (Hamburg) buys New York Times Co. Women's Magazines for $325M

1995

* VNU buys Lakewood Publications Inc. for $20M

* Hachette Filipacchi buys Mirabella, Premiere, Family Life

* Softbank (Tokyo) buys Ziff-Davis for a reported $2B

1996

* Hachette Filipacchi buys Travel Holiday for $9M

1997

* Reed Elsevier buys Chilton Business Group for $447M

* Miller Freeman buys Telecom Library for $130M

1998

* Emap plc (London) buys Petersen Cos. for $1.2B

* VNU buys Shore-Varrone Inc. for $55M

* VNU buys Progressive Grocer Associates

* Reed Elsevier buys Geyer McAllister

* VNU buys Young-Conway Publications

1999

* United News & Media buys CMP Media Inc. for $920M

* United News & Media buys Continuing Medical Education

* VNU buys Editor & Publisher Co.

* VNU buys Macfadden Business Communications

* VNU buys Beverage World Group

SOURCES: VERONIS, SUHLER & ASSOCIATES, COMPANY REPORTS AND FOLIO:

COPYRIGHT 1999 Copyright by Media Central Inc., A PRIMEDIA Company. All rights reserved.
COPYRIGHT 2004 Gale Group