E-biz pubs feel the pain

The Industry Standard's high-profile crash draws attention to the problems facing many other New Economy publications. Wharton takes a look.

Earlier this month, a publication long noted for its relatively objective and clear-eyed reporting on the Internet and technology boom, went out of business. The seeming success of the three-year-old Industry Standard, both editorial and financial, made its demise all the more poignant.

After all, the Standard's Web site had been nominated for National Magazine Awards in 1999 and 2000, and this year Senior Writer Gary Rivlin won the Gerald Loeb Award for Distinguished Business and Financial Journalism for a story on AOL Time Warner.

Just last year, the Standard, owned by Standard Media International, set an all-time publishing industry record with 7,558 advertising pages. Some of its weekly issues in 2000 had a backbreaking 300 pages. It made profits in its second year, something few magazines accomplish. And even in the first half of 2001, it was 19th among all magazines in advertising pages, beating out such healthy publications as Barron's, Newsweek and Martha Stewart Living.

But The Industry Standard, whose owner filed for Chapter 11 bankruptcy Aug. 27, hasn't been alone in its difficulties. Among publications that once thrived covering the New Economy, Business 2.0 was bought by Time Warner and merged with its nascent e-Company Now. Hearst's Offspring was absorbed by SmartMoney. Fortune has retrenched its technology section as have other major financial news publications. Red Herring and Upside are said to be up for sale at bargain-basement prices. Both have cut staff significantly amid a more than 50 percent drop in advertising revenues over the last year.

In addition, on Aug. 13, Ziff Davis Media, publisher of PC Magazine, Yahoo Internet Life and Interactive Week, replaced its CEO in the face of a 37 percent decline in revenue for the quarter ended June 30, caused in part by a 47.5 percent decline in advertising pages, according to the Standard. (Not all is gloom and doom: The Standard also reported that Ziff Davis is continuing to support several new launches, including ExtremeTech and PCMag.com.)

"I find these departures both surprising and distressing," says Wharton marketing professor Peter Fader. "Even if the e-commerce curve didn't turn out to be the hockey stick shape these publications thought it would be, it is still a big enough chunk of industry to support advertising, reading and writing about it."

Some saw it coming
But the telltale signs were there, say magazine industry experts. When a publication grows so fast in terms of advertising and employees, "you rise up almost vertically 90 degrees. And then you drop that fast," says Steve Cohn, editor-in-chief of Media Industry Newsletter. "Strangely enough, I think if 2000 hadn't existed, maybe The Industry Standard would still be around. In fact, the ad pages for 2001 were up some 17 percent from 1999. But they had a radical transformation, hired too many people and spent a lot of money they ended up not being able to replace."

Magazine consultant Ali Shapiro concurs. "There was a glut of venture-capitalist dollars. It was easy money," says Shapiro. "So many companies had to get the word out (about their existence) that they had no time or advertising people to do anything strategic. So being in Fast Company or Red Herring or The Industry Standard was no-brainer dollar-dumping. Since the dollars were there, money wasn't the issue. Everything had to be done on Internet time and tech books were the first logical stop."

Eventually, though, many of the businesses doing the most advertising lost their venture-capital investors and subsequently stopped their advertising cold. "When those issues were huge and fat, you knew that couldn't last," says Fader. "But we didn't know it would just dry up as it has."

Wharton marketing professor Jerry Wind believes, however, that the downturn for publications solely devoted to the Internet economy was inevitable. "If the magazine was only devoted to the New Economy it was doomed," says Wind. "They ignored the fact that the New Economy can only exist with hybrids. That is what consumers want: new choices, but integrated with their old way of doing things.

"Had, say, The Industry Standard recognized this and become a hybrid publication, it may well have prospered," says Wind, who is the co-author of "Convergence Marketing," a book on negotiating the hybrid economy due out next month.

Yet it is not only Internet-oriented publications that are suffering. Last week, Hearst closed Classic American Home magazine, a 26-year-old title. Working Woman stopped publication the week before, and earlier this year Family PC and Individual Investor ceased publication (although the latter's Web site is still up). In addition, many newspapers and magazines have cut staff and sections this year, blaming that primarily on cutbacks in advertising.

Timing is everything
Still, most of these have been slower in coming and substantially similar to other overall economy slowdowns. The demise of The Industry Standard and the potential for the contagion to bring down other Internet-economy magazines may be unprecedented. Even with those that have survived in some form, timing was everything. Morton Zuckerman sold Fast Company to Gruner + Jahr for an estimated $360 million in December 2000. By the time Business 2.0 was bought by Time Warner six months later, it was at a bargain-basement $60 million, no more than half the price it could have generated earlier in the year.

"I've been editing this magazine for 15 years, and I've never heard of such an abrupt situation," said Media Industry Newsletter's Cohn. "It was like having a sunny 80-degree morning and by afternoon it was a blizzard. The betting was that everyone was going to embrace the Internet as a business, but when people didn't embrace it fast enough, things just crashed. As generations change, it could very well be that magazines like The Industry Standard will be needed. But maybe it isn't quite there yet."

Jimmy Guterman was at the epicenter of the Industry Standard demise. He was the editor of Media Grok, the daily online newsletter published by the Standard and is also the president of the Vineyard Group, an editorial consulting company in Massachusetts. "I had worked as a consultant to publishers and dot-coms, and my advice for all of them was to staff at sustainable levels with the understanding that the good times could not last forever," says Guterman. "But in the case of a magazine, the temptation is if you can make a 400-page magazine, do it.

"There is a case to be made not to accept every ad," he says. "One, you don't have to increase editorial staff to cover for it." Two, for a publication to be considered a magazine and not a catalogue--and thus to qualify for lower postal rates--"it is required to carry a substantial amount of editorial" content.

"If you limit the number of ads, you don't have to add staff and you could make the ad price go through the roof because it would be wanted by everyone," he says. "But that would take some guts."

The temptation to accept all the advertising money you were offered was too great for the Internet-economy magazines, said Fader. "As all these firms were booming out of the starting gate, it was a landgrab. What better way to grab land than to advertise? It made sense to bundle a lot of these ads together to readers who care about that stuff, so they went primarily to the Standard and Red Herring and the like.

"I think that interest in the information economy is no less now than it was a year ago," Fader adds. "There is still a lot of exciting technology happening. The rate of technological change hasn't slowed. But if there is no advertising money, all that doesn't matter. We'll just have to read less about it."

 
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All materials copyright © 2001 of the Wharton School of the University of Pennsylvania.

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