Source: ValueNotes Research

Dissatisfied buyers reflect badly on providers (including captives) servicing the segment. The growth in production-related outsourcing (and offshoring) by STM publishers has over the years spawned several small, fly-by-night operators, incapable of providing sustained and consistent delivery of services. Also, several mid-sized providers have not innovated sufficiently to match the growing expectations of STM publishers. In general, complacency, lack of consistent quality and delivery amongst providers has contributed to this dismal rating.

The education segment, on the other hand, has close to 80% of respondents being moderately satisfied – of which 20% have indicated high levels of satisfaction. Educational publishing requires somewhat niche capabilities. The large providers that cater to educational publishers have taken the effort to develop these capabilities. Even the mid-small vendors in this space have built their businesses around differentiated offerings with a clear focus on content and design capabilities and not merely production services.

While providers catering to both segments have a long way to go, those servicing STM publishers need to go all out to enhance customer satisfaction, else some of these risk losing business. On the other hand, providers servicing the educational publishing segment face an uphill task of pushing satisfaction levels from moderate to high. This will entail higher levels of servicing, quality in output and consistency of delivery.

While cost pressures have always existed, revenue pressures hit newspaper publishers hard – an aftermath of the economic collapse.  Publishers lost advertisers, consumers were cutting back on expenses and moving online to gain access to news – prompting many to migrate to and address the digital market. As the prices of raw materials increase at the paper manufacturer’s end and consequently at the publisher’s, the ability to align rising costs with prices of newspapers will get tougher. Affording news in print will be a luxury, and this in turn will prompt a significant portion of newspaper readers to move online.

Across the world, there is a slow but steady transition to saving paper – and no one can really dispute the ecological and economic ramifications of saving paper. While there will always be demand for paper, the market will inevitably shrink. The increase in value will never compensate for the drop in volume. In such a scenario will they survive? How will paper manufacturers cope? Will they diversify?

Amazon Kindle, Sony Reader, Barnes and N0ble Nook, Apple iPad, Plastic Logic, InfiMedia Pi, Asus, Lenovo, Acer, Samsung, Neonode, BeBook, Spring Design Alex, Aluratek Libre, Yinlips, Teclast K3, Oppo Enjoy, Hanlin, Cube, iRiver, Interead Cool-er, Elonex, Bookeen Cybook Opus, Onyx BOOX, QuokkaPad, Hanvon, IREX, Copia

[ I have not mentioned the devices in any order - preference, price, etc. Also, as far as possible I have included the official links to these devices. In a few instances, I have not been able to find the right link.]

With atleast 28 companies manufacturing readers (and multiple variants at that), publishers face a daunting task of figuring what their readers will end up using. While most of these devices offer  multiple formats, I wonder if content published will appear the same in all devices…

- Setting up training arm within the company to develop and absorb trained manpower

- Relocating onshore experts and trainers to provide training for their offshore employees.

In Chennai – the publishing offshoring hotspot, industry-academia affiliations are gaining traction and there is continuous effort to make academic training more relevant to the industry needs. Service providers are contributing with their inputs and obviously benefiting to a certain degree from greater interaction with the academia..

Various steps continue; however another common complaint by service providers is that trained employees are actively poached by (or lost to) competitors. Poaching may be a temporary respite for the hirer (poacher) but the problem remains… lack of an abundant talent pool to choose from! From a training perspective, copy-editing is a difficult skill to develop. The cycle time for achieving optimum levels of efficiency cannot be shortened beyond a point. Despite continuous and concentrated efforts by the Indian publishing offshoring industry, does the answer lie elsewhere? Will a model that involves and integrates cross-border outsourcing by Indian vendors provide a viable, sustainable solution… especially at a juncture when the industry is desperately seeking to move up the value chain?

Does a drop in revenues merit a need to re-invent the business model? How are publishers coping with the dip in revenues? Will the digital market provide a strong revenue source? Will this mean more outsourcing/offshoring?  In this post I look at the magazine segment.

The Magazine Segment

The magazine segment represents a major chunk of the global print publishing market. Considering that more than 100,000 magazine titles are being published in the US and UK alone, the magazine publishing industry is huge in scale and operations.  Each year the US and UK magazine market sell upwards of 4 billion magazine copies. However, like the newspaper industry, over exposure to ad revenues is hitting the segment hard.

December 2009 figures reported by the Magazine Publishers of America suggest that advertisements with finance, automotive and retail themes have drastically reduced. Advertising revenues dropped by 18% and while the segment generated almost 169,218 advertising pages through the year, there was a drop of 25% from the previous year.

The emergence of Web advertising has added to publisher woes. Print ads are billed higher and the shift in ad dollars to digital forms has seen substantial decline in print ad revenues. While publishers tend to push for print ads, advertisers look at digital ads as a cheaper yet effective means to address the reader.

Production costs and increasing salaries coupled with distribution and printing are crippling publishers. The diagram below illustrates the relative cost and revenue contribution of each functional head in a typical magazine publisher’s work flow. It illustrates the pressures brought on by declining revenues and increasing costs:

Source:ValueNotes

What options do magazine publishers have?

We have mapped the probable course of a magazine publisher’s operations – the purpose of which is to determine stages during which magazine publishers will evaluate options – to increase revenues and look to decrease costs.

These options are illustrated below:

Source:ValueNotes

Many publishers are now moving to Web only form to cope with cost pressures and dwindling revenues. While this might be considered a favorable option, the shift of ad revenues to Web advertising is one of the biggest challenges that magazine publishers face. Presstime, the monthly magazine of the Newspaper Association of America (NAA) has transitioned to a Web form that saves them up to $500,000 per year for a circulation of 20,000. While this might suit the NAA, it might not necessarily suit a small publisher whose circulation is too small.

The advantages of migrating to web-only form are:

• Massive cost savings, attributed primarily to the absence of printing and circulation.
• Cost saving from scaling down operations – building and office overheads are done away with.
• Sizeable reduction in manpower redundancies.
• Easier management of  workflow.
• Easier monitoring and monetization of content.
• Opportunity to tap a larger subscriber base that can be generated due to internet percolation.

However, there are severe repercussions to transitioning completely to a web-only form:

• Shift in ad dollars from print to Web advertising may not sustain the publisher. There is a massive difference in pricing and this will not help the publisher unless there is drastic reduction in operations and manpower.
• Redundancies in the workflow may remain especially with smaller publisher where one person does many jobs. In cases where certain publishing heads are removed (printing and circulation), there may exist employees who are not used to complete capacity. This will require severe restructuring of the workforce and thereby a dip in productivity.
• The online competition is high. To retain attention is a challenge and there would to be a need for strong in-house presence for content and new media expertise.
• Lot of employees will need to be reduced, leading to lower employee morale amongst existing employees.

The biggest of them is the fact that not many people are conforming to paying for content – thereby resulting in the publisher looking at ads for revenues. While some magazines like Time have already started restricting access to non-subscribers, the trend is yet to catch on. More often than not, when a reader is faced with restricted access, he/she might just look for another source. Traditionally, magazine publishers have encouraged a digital paradox – wherein they have provided content for free in the hope that it would result in a subscription for the printed form. Paying for content online is a trend that is slowly picking up, but might just hinder a publisher’s plan to shift to a Web only form.

Publishers have also grappled with excessive printing. Take for example news magazine, Newsweek. In May 2009 Editor Joe Meacham announced plans to cut magazine circulation by half, and was met with skepticism and in some cases ridicule. However, it makes sense looking at the cost aspect. While ensuring that the printing costs do not overwhelm them, Newsweek’s plan to cut back circulation has allowed them to retain their loyal readers – thereby creating and retaining an elite (read: high quality) subscriber base. With magazine print operations under control, Newsweek can now concentrate on its other subscribers using its web form. (How is Newsweek doing – got any comments?)

Will the need to cut costs result in more outsourcing or offshoring? While publishers have been outsourcing, offshoring is still nascent. Overcoming language issues, quality, delivery, etc is critical if the segment is to open up. However, more on this when we analyze our survey data.

On a side note: I am waiting to read the  World Magazine Trends 2008/2009 published by FIPP.

To gain clarity on where the industry is heading, we needed to understand:

• whether more publishers are considering outsourcing
• what functional areas are publishers looking to outsource
• what are the primary drivers for outsourcing
• what are the cost savings publishers expect

We would like to thank all our respondents  (237 of them) – your inputs and insights has helped us gain better understanding of one of the most important questions, will publishers outsource?

Who took the survey?

We got 237 responses from across the industry value chain – buyers, industry trackers and sellers. The following illustration gives a snapshot of our survey demographics:

Source: ValueNotes

The responses so gathered are diverse in terms of:

• Geographical presence of the respondent and his/her company
• Size of the respondent company (from below 300 employees to more than 10,000)
• Segmental presence (newspaper, magazine, education, etc)

The diversity of responses has been instrumental in understanding how industry perceptions vary based on the attributes mentioned above.

Of all the insights we have got through the survey, none is as important as buyer expected cost savings and vendor projected cost savings. Cost savings is one of the key drivers of outsourcing and there still remains a significant misalignment between buyer side and seller  side savings.

What do buyers expect in terms of cost savings?

We asked buyers “what cost savings are you looking to achieve?” The responses are below:

Source: ValueNotes

Most responses indicate that savings of 15-25% is realistic and attainable. There also exists a portion of buyers that have achieved/looking to achieve 25-40% savings. These publishers represent shrewd buyers – ones that have nurtured their vendors.

However, seller projected savings indicates there is a misalignment.

Source: ValueNotes

While buyers expect 15-25% savings, sellers project 25-40% savings.

So, why is there a misalignment?

The misalignment exists because seller end savings are never the same as buyer’s actual savings. The diagram below illustrates this:

Source: ValueNotes

• Buyers do not account for overheads from their end – project management, in-house quality checks, etc.
• Sellers need to ensure that the buyer understands the difference between seller end cost savings and actual cost savings.
• Time. This is often overlooked as buyers expect immediate cost savings and sellers do little to dispel the myth. Transition requires time and costs tend to go down once productivity and efficiency kicks in. This in turn will require lesser effort by the buyer while monitoring outsourced work and thereby reduce actual cost to the buyer.

Expectations and realizations are too far apart to result in a good experience while outsourcing. For their part, sellers need to include buyer costs in their savings projection. More stress needs to be put on when projected cost savings will emerge.

Some other insights from the survey:

• 75% of buyer responses indicate considerable improvement is required in terms of quality of outsourced work.
• Quality requires a drastic improvement.
• Outsourcing in the publishing industry is set to increase by 15-20%
• In addition to cost savings, value addition in current offerings is a strong challenge for publishers.
• Overcoming lack of in-house capabilities is also a strong driver for outsourcing.
• 64% of buyers will continue outsourcing.
• Demand from buyers lie more for content and production.
• India remains a favored publishing outsourcing destination followed by US, Philippines , China, UK.

Download the findings of the survey here.

Please do comment – would love to know what you think.

Does a drop in revenues merit a need to re-invent the business model? How are publishers coping with the dip in revenues? Will the digital market provide a strong revenue source? Will this mean more outsourcing/offshoring?  Over two posts, I will answer these questions, starting with the newspaper segment.

The Newspaper Segment

The newspaper segment contributes 36% to global publishing revenues. The prominent revenue sources for newspapers come from:

• Readers/Circulation (Subscriptions/News stand sales)
• Ad sales
• Classifieds

Circulation is one of the critical performance indicators for a newspaper publisher. It demonstrates the number of copies that a publisher sells and is often used as marketing collateral while selling ad space or classifieds (refer to the diagram below).

Source: ValueNotes

The need to boost circulation has often induced publishers to decrease subscription prices or single copy prices. While this leads to loss on subscriptions/news stand sales, it allows for more traction and leverage while negotiating ad and classified sales. Ad space sales compensates for losses made on subscriptions/news stand sales.

This over reliance on advertising increased the risk exposure of newspaper publishers in the wake of the economic slowdown. With companies cutting back on costs, advertising in print dropped significantly. Consumers, too, were cutting back and this in turn affected subscriptions and news stand sales.

WAN-IFRA surveyed publishers, editors, MDs, CEOs, etc. to better understand the state of the industry. Ad revenues dropped 20% in North America, 16% in Western Europe, 19% in Eastern Europe and 11% in Asia Pacific in 2009. The US, alone, experienced 29% decline in y/y advertising revenues!

The online market

Like with many publishers across segments, newspapers are looking at generating revenues from online offerings. However, this presents some inherent challenges:

• Going completely online will result in publishers having to cut back on the scale of operations. While many newspapers have made the transition, I don’t see that happening with larger companies.
• News reporting as a differentiator for newspapers no longer exists. Publishers will have to compete with news aggregators such as Google and Yahoo.
• The dynamics of the internet will present a unique set of challenges that print publishers have to adapt to. A shift towards the way Net companies operate will be required.
• Consumers have been consuming content for free. Paying for content online will require publishers to rationale with the consumer’s mindset and find ways to demonstrate value proposition that will convince consumers to pay.

Digital advertising will never match the value of print advertising as forecasted by PricewaterhouseCoopers (PwC) estimates:

• The print advertising revenues to be valued around USD 182 b as of 2008 and digital revenues at USD 6 b.
• By 2013, digital revenues will grow to USD 8.4 b. However, print and digital ad revenues will barely match up to the print revenues generated in 2008.

Adopting a hybrid model needs to be thought through. Publishers will need to identify and adopt a realistic mix in terms of revenues that can be generated through digital sources and print revenues that can be retained.

Content transition

Content will remain the core and Les Hinton, CEO of Dow Jones, is right when he says the newspaper has undervalued its content by giving it out for free. However, this does not hold true for news reporting. Publishers will need to push news reporting as one of the offerings and focus on opinions, analysis and back stories as the core.

This in turn will present an immediate challenge – generating highly analytic, opinionated content will require more focus and resources on part of the publisher. This focus and need for resources will ultimately translate as costs, and at this point publishers should look at outsourcing. I am by no means promoting outsourcing or offshoring, but I am looking at what outsourcing can do strategically.

The newspaper has already been outsourcing and has recently begun offshoring (sourcing has been from freelancers, third party players or in-house low cost offshore centers).  Publishers can therefore source production, printing, distribution and other process driven functions from third party players to not only reduce costs but also restructure internal operations to accommodate for more focus on core processes.

Sourcing is not without its challenges. Overcoming quality issues and inculcating cultural sensibilities still requires significant effort from service providers. However, this bottleneck in content services can be overcome by bringing more freelancers with the required capabilities into the mix. After all, if Wikipedia can do it, so can the newspaper industry!

Side Note: Some other interesting finds from the WAN-IFRA survey

The fear of ending up with a 50 page blog post prompted me to post these findings as a side note. I thought these were quite interesting and each might just merit a post of their own.

• India is the largest consumer of newspapers. Pegged at 107 million copies daily, it contributes around 10% to the global circulation.
• India, China and Japan accounts for about 60% of worldwide circulation.

I was really interested in how Japan has fared as a newspaper market. The Japanese newspaper market has been surprisingly robust witnessing only a 4% drop in circulation since 1998.  Japan also has the highest adult newspaper consumption with 612 newspapers sold per 1000 people. The market has also demonstrated that the subscription model works with 90% of newspapers being home delivered. This is in part due to Japan’s ageing population that will continue to sustain the industry in the short and medium term. However, the real test of the hybrid model will come in 2010, when Nikkei (a Japanese publisher) will start charging for online content.

I would love to hear from your thoughts, opinions and comments. Do check my next post on magazines.

(ValueNotes Outsourcing Practice had the opportunity to present on Editorial Outsourcing at the WAN conference held in Hyderabad during the start of December. To download Arun’s (CEO, ValueNotes) presentation, please follow this link.)

So will ebooks address the  challenges faced by the industry today?

• Rise in costs  [YES]
  

Yes, ebooks have gone a long way in reducing costs for publishers. Printing overheads, at times, may account for up to 40% of book publishing costs . Plus, ebooks are not bound by the ‘need’ to print. Ebooks are the epitome of non-linear growth. One copy or a million, the cost to produce it is the same (digital distribution means costs are not as significant as with print).

• Change in consumption – from hard copy to soft copy [YES]
  

Yes, ebooks are addressing change in users’ consumption patterns. Publishers are now able to tap into the device market (e-readers, computers, smart phones and handhelds, etc.). Ebooks have also prompted publishers to target the social media segment by creating interactive applications and marketing campaigns.

• Drop in revenues [MAYBE]
  

Sure, the ebooks market is growing. In the US alone, ebooks have raked in close to USD 48 million (Q3 2009) – three times more than Q3 2008 . So the market does show promise…

But, will ebooks become a strong enough revenue source to sustain publishers?

I don’t think so. And here are some reasons why:

• Ebooks are still prone to high levels of piracy (like with other digital products). There isn’t a foolproof method to ensure copyrights (a feat even software biggies like Microsoft haven’t been able to pull off!). Print has always been difficult to pirate because someone has to re-print them! Ebooks, like all digital content (music, videos, software, etc.) just needs someone to crack it…and this means higher levels of control will be required. The down side is that measures to control piracy often deter reader experience.

• Lower pricing doesn’t always translate as demand. While the cost of producing ebooks is significantly lower, so is the price per copy. Sure, we can all argue about how lesser pricing means more volume. And how niche titles can also be sold easily. People will invariably mention the long tail, but finding the demand and satiating it is something else. Even if publishers are successful in creating a strong reader community (thereby satiating the demand), recouping the difference in pricing will eventually require multiple block buster titles (and if a publisher does make a complete transition to digital offerings only, it will be difficult to sustain with existing scale… this will likely result in publishers downsizing operations).

• The jury is still out on whether ebooks are better than print. I don’t see that debate coming to an end anytime soon. Why is this important? Numbers. The value of 100,000 readers still paying for print will always be more than the 200,000 that prefer ebooks.

• Ebooks are still being bundled as value additions. Ebooks are being offered in parallel, and not in isolation. For most publishers, ebooks are positioned at monetizing content they already have, through parallel or cross selling book titles in digital form. Big publishers will not be too keen on generating revenues from ebooks alone. And if they are, well… they would have to compete with the likes of Amazon and possibly Google.

Small and medium publishers, on the other hand, might just make the transition and do away with print completely. But naturally, this is easier said than done. How easy is it to go digital? Just ask the music industry…

So, in conclusion, can publishers sustain their current levels of operations through ebook sales only? No.

While this phenomenon on one side of the industry spectrum has led to rapid commoditization of services, it has also galvanized creativity amongst players on the other side. Innovations in productivity enhancements, process refinement and proprietary product development has become the new mantra for industry leaders, in order to stay in a profitable game. Today, prices have dropped to levels that have pushed struggling players out of business, while the larger players are desperately seeking opportunities to grow.

As a consequence, publishers negotiate the lowest possible prices, with the availability of a large pool of cheaply-priced suppliers to choose from.  For the more discerning customers, the wannabes have in fact helped create differentiators for the stronger players. Industry leaders have now begun to position themselves as sustainable, technologically suave partners in business for publishers.

Over the years, the commoditization-innovation cycles driven by the two forces in the industry have helped set new standards and redefine focus in publishing outsourcing. So, can we say that the wannabes are a necessary evil for sustenance (and growth) of the industry? Arguably, yes – like the yin and yang elements in nature, the two essential forces in the industry will always need to coexist!

The publishing industry has been undergoing a transition. Starting with increasing costs of production and print, the industry is struggling to address the increasing demand of digital content as opposed to print. In the midst of this transition, the global economic slowdown prompted lesser spending by consumers and corporate spenders.  Over the past few months, we have seen publishers try a variety of approaches – going digital, reducing print publishing, and cutting costs.

In spite of these measures, one thing comes across very strongly – the industry is yet to find that one formula/method that addresses all their problems. The lack of such a formula forced us to ask the question – will publishers outsource? Sure, some publishers already outsource certain aspects of their operations. But will they outsource more? Will they end up offshoring? And if they do want to outsource/offshore, what are the primary reasons for doing so? Are they hoping outsourcing will  be the ‘X’ factor while re-defining their business model?

To understand and evaluate where the industry is heading, we have been running a publishing survey. Our main objective here is to gain clarity on the following factors:

• Are more publishers considering outsourcing?
• What functional areas are publishers looking to outsource?
• What are the primary drivers for outsourcing?
• What are the cost savings publishers expect?

We have conducted an initial analysis of the survey results, and if you would like to know more, please do leave us a comment, and we’ll get back to you on the latest analysis.

Also, if you would like to participate in our survey, please follow this link. Feel free to pass on this survey to anyone and everyone you feel might take this survey. As always, we will be happy to share a summary of our findings once the study is completed.

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