When the merger  between Newsweek and The Daily Beast was announced almost a year ago, it seemed like it might, at least, have the makings of a good story: charming nonagenarian audio tycoon teams up with a media mogul and celebrity editor to save a beloved dinosaur from extinction.
Those behind the mashup believed, of course, that their idea was a great one. Or at least they hoped it would be, despite the battered state of both the economy and print media.
“We’re providing a much bigger platform and access to a very sought-after audience for marketers in the various platforms they want,” Stephen Colvin, the combined company’s CEO, said just after the merger was announced. “That will definitely lead to all kinds of incremental revenue opportunities. And Tina Brown is a very talented editor. There’s no doubt that will lead to circulation growth.”
“This merger provides the ideal combination of established journalism authority and bright, bristling website savvy,” Newsweek owner Sidney Harman said at the time.
Their expectations have not been met. The company has made some strides toward improving its financial state, but together Newsweek and the Beast lost an estimated $30 million last year, sources with knowledge of the company’s finances told Adweek, confirming earlier reports. Brown said the Beast was on track to be profitable this year, but even if that happens, the company still has to find a way to deal with the losses at Newsweek, which are estimated to have hit $20 million last year.
An Adweek investigation into the company’s finances and revenue drivers, based on interviews with people with direct knowledge of the situation, income statements, circulation and advertising figures, and press reports, reveals that getting the combined NewsBeast into the black by early 2013—a time frame Barry Diller, chairman and CEO of Beast backer IAC, has said is reasonable—will be a daunting task. If that task takes years and Newsweek can’t find a way to regain the relevance weekly newsmagazines have lost since the explosion of news on the Internet, then Diller and Jane Harman, Sidney Harman’s widow, could reach the point where they finally decide to cut bait.
The idea that NewsBeast could ever become a successful operation has always seemed far-fetched. Newsmagazines were all struggling by the time of the merger, and Newsweek had also been weakened by three other factors: an ill-conceived effort to reposition itself as a commentary-heavy, elite-aimed magazine; the drawn-out process that was The Washington Post Co.’s attempt to sell it off; and the departure of editor Jon Meacham and other marquee journalists.
And while The Daily Beast had an editor with a glamorous resumé, as well as some other high-profile hires, it hadn’t been able to attract much traffic. Plus, its ad model was a head-scratcher. It focused on premium custom treatments even though ad agencies don’t like to spend time on tailor-made ads for such a small audience. Besides, the two brands had very different names, audiences, and editorial voices, and not necessarily in a complimentary way.
The biggest problem NewsBeast faces, however, isn’t of its own making. It’s one inherited from Newsweek’s previous owner, The Washington Post Co. The magazine redesigned itself in 2009 as a “thought-leader” publication in the hope that it could attract affluent readers. It cut its rate base—the circulation guaranteed to advertisers—to 1.5 million from 1.9 million (that figure was itself considerably lower than the 3.1 million the magazine’s rate base had been at little more than a year before), with the idea advertisers would pay a higher rate to reach a more desirable audience. That’s not the way it worked out, especially not after The Post Co. put the magazine on the block the following May, which hurt advertiser confidence. “Buyers were looking at us with a really appropriately high level of skepticism,” one former executive says. Newsweek budgeted for a 10 percent decline in print ad revenue in 2010, according to a sales memorandum distributed to prospective buyers; it ended up down 34 percent, according to Publishers Information Bureau.
Now, nine months since the merger was finalized, and with its thought-leader strategy long since cast off, Newsweek’s circulation is still lackluster at best. Using Q1 figures as a guide, the magazine would have made $63 million in print circulation for all of 2010, down from $80 million in 2009. It’s unlikely that’s increased this year, since paid subscriptions, which account for 92 percent of Newsweek’s circulation, declined 8 percent in the first half of 2011, to 1.4 million. Newsweek is getting less from those subscriptions, too, having lowered its average subscription price almost a dollar versus a year ago. This spring, Newsweek made an offer of 90 percent off the cover price for a two-year subscription.
Newsweek also increased its reliance on some suspicious circulation sources, like verified subscriptions (the free copies typically distributed in places like barbershops and doctors’ offices). These can be a good way to get people to try out a magazine, but when they’re needed to meet the publication’s circulation guarantee to advertisers, as Newsweek’s were, they raise a red flag with buyers.
In another red flag, on its June publisher’s statement, 4.6 percent of Newsweek’s average paid subs, or 65,000 copies, were post-expiration copies—issues delivered to people even though their subscriptions had run out. Magazines often resort to post-expiration copies, also called graced copies or arrears, when they’re in danger of falling short of their promised circulation.
“Four-plus percent is a high number for arrears,” says Jack Hanrahan, the editor of CircMatters, a newsletter about magazine circulation, and a former print buyer. “The spin that would make sense to me was, ‘Well, we had a lot of people coming up to their final copies just as we were redesigning the magazine, and Tina was having her input.’ But if it’s big, you’ve got a problem.”
There are some bright spots.
Advertising is starting to move in the right direction. Ad page declines tapered off at 10 percent in the third quarter after drops of more than 20 percent in each of the two previous quarters, and the magazine has been able to attract some new luxury ads. Of course, considering how bad things had gotten in recent years, that’s not saying much. And buyers say Newsweek has been discounting 70 percent off the rate card. That means print ad revenue would have come to only $36.1 million for the first nine months of the year, including the international edition.
Better than that, newsstand sales have gotten better since the merger, up 2.8 percent in the first half of the year compared to the same period one year before. And to Brown’s credit, single copy sales were up 30 percent in the three months after she redesigned the magazine, according to the company. But newsstand sales are only 3 percent of the magazine’s circulation, and they don’t make it much money. A title like Newsweek would typically keep 40 percent of its $4.95 cover price (down a dollar from a year ago). After covering the cost of handling unsold copies, though, they’d bring in a total of only about $1 per copy, or just $2 million per year.
It’s not clear that the digital side of the operation is faring much better. One premise of the merger was that the combined two properties would significantly boost traffic. But despite folding Newsweek.com into TheDailyBeast.com and hiring blogger Andrew Sullivan, with his 1 million-plus unique visitors, traffic to the Beast has fallen. Monthly uniques stood at 2.6 million in September, down from a combined 5.3 million for Newsweek.com and the Beast in November 2010, when the merger was announced. (Figures are from Compete.com.) Part of the decline was because Newsweek.com ended a partnership with MSNBC that had supplied the site with almost half its traffic some months.
It’s hard to see how the combined company could be making more money online than it did in 2010 when, using first quarter as a guide, Newsweek.com would have made $5 million for the full year. With a few million in revenue that informed sources said the Beast contributes, the total could come to $8 million. While other news sites are experimenting with online paywalls, Colvin said recently that the Beast had no plans to ask consumers to pay for access to the site. Brown’s new foray into TV, Daily Beast TV, could boost their traffic numbers, but video can be expensive.
NewsBeast’s options to grow revenue seem limited. Raising print ad rates, for instance, would require dramatic circulation growth. “If Newsweek is going to do anything about raising its rate card percent, they’re going to have to say circ is up,” says Roberta Garfinkle, director of print strategy for TargetCast tcm. “I think 20 percent would be a good number.” But adding circulation is costly, which is why most consumer magazines just break even on their circulation, or at best see modest profits.
Assuming it keeps its current rates, Newsweek would have to almost double the number of ad pages it’s been selling. That will be difficult, as buyers have reacted coolly to the redesign thus far. Brown might have given Newsweek a much-needed jump start, but it’s so different in tone that one buyer who spoke with Adweek said she’s not sure whether to consider the magazine a newsweekly or an entertainment title. And Newsweek still has to compete with Time, with its much bigger circulation, website, and established events like the Time 100 and Person of the Year.
If it can’t grow revenue, NewsBeast will have to cut costs. Newsweek budgeted its expenses at $182 million in 2010, according to the sales memorandum. It’s likely trimmed that by moving into the IAC building and sharing other resources with The Daily Beast. Of course, the quickest way to get there is by reducing head count. NewsBeast already has a smaller combined staff than Newsweek and the Beast had when they were separate businesses, though its staffing costs have been inflated by the stars Brown has hired, like Sullivan and former Washington Post media reporter Howard Kurtz. But cutting $20 million in costs would require lopping off as much as half the staff—hardly a palatable option. And a reduction in staff wouldn’t do much about Brown’s use of freelancers and what insiders say are her free-spending ways.
“I don’t think it’s a quick turnaround,” says Reed Phillips, managing partner at media investment bank DeSilva+Phillips. “Advertisers are going to take time to get comfortable that Newsweek is on a solid foundation. And the ad market’s jittery already. I think the biggest challenge is, it has to be redefined in a way that has to be engaging with readers. New York magazine did it. With the talent The Daily Beast has, there’s anticipation that that can be done. And it needs more of an edge compared to what it was in the past, before they bought it.”