The May 11 issue of Fortune Magazine is a perfect demonstration of what the three largest business magazines have done for decades. Its cover story, “How Bernie Did It’ is the culmination of a four-month investigation into the details of Bernie Madoff’s life and business operations written and reported by three of Fortune’s best editorial staff members, one of whom is a Pulitzer Prize winner. This issue of Fortune is also an example of why the magazine and its competitors Forbes and BusinessWeek, will soon no longer be able to publish these kinds of stories. The May 11 issue has 92 printed pages and covers. There are only 21 pages of paid advertising compared with more than a hundred pages in a spring issue 20 years ago.

All three of these magazines lost money in the first quarter, according to people who are knowledgeable about the details of their operations. Admittedly, it is difficult to define a “loss” at Fortune and BusinessWeek because they are part of larger media companies which have shared administrative costs with other publications. BusinessWeek is owned by McGraw-Hill (MHP) and Fortune by the Time, Inc. unit of Time Warner (TWX). Forbes is privately held.  All of the corporate overhead assigned to the magazines and their online operations have been included in the 24/7 Wall St. calculations of a “loss.”

The three publications were founded at the beginning of the modern era of magazines: Forbes in 1917, BusinessWeek in 1929, and Fortune in 1930. Each has reached the point where it is not economically viable as it is operated now.  The owners of the three magazines and their online sites have very few options to become profitable as 2009 progresses.

BusinessWeek is in the worst shape of the three. Its advertising pages fell 16% in 2008, according to data from industry research letter MIN.  The magazine’s ad pages are down 38% this year through the end of April, and in the most recent issue, the drop was an extraordinary 63%.  The magazine has more than 220 editorial, support, and management personnel based on the BusinessWeek masthead. This does not include ad sales, production, or circulation staffs. That is a large number of people to put out a magazine that often has fewer than 60 editorial pages and a website with less traffic than TheStreet.com based on March figures from online audience research firm comScore.  BusinessWeek online had 3.3 million unique visitors and 18 million pageviews. TheStreet.com, which has a larger monthly audience, had advertising sales of only $30 million in 2008, based on its 10-K, and that number certainly dropped in the first quarter of this year. That is probably a good benchmark for what BuinessWeek brings in for online advertising.

Industry experts say that Business Week has lost money for two years and will lose over $20 million this year if its advertising continues to move down at its current rate and the operation does not make large cost reductions. BusinessWeek is part of a unit of McGraw-Hill that also operates JD Power and Platt’s, an energy information company. According to the McGraw-Hill 10-Q, this division had first quarter revenue of $225 million but operating income of only $3 million. McGraw-Hill’s cash cow, S&P, has been suffering as activity in the capital markets has dried up.  S&P also is under investigation and may have liability because of its favorable ratings for mortgage-backed securities, which some staff members said were inaccurate. McGraw-Hill is probably not a company in a position to tolerate BusinessWeek’s losses, especially if it looks like they will extend into next year.

BusinessWeek is doing so badly that its parent has a small number of options, each of them unattractive. McGraw-Hill can live with the large deficit and hope that as advertising returns to print when the recession ends, that the magazine will once again become profitable.  It is not clear that print advertising will rebound sharply in a better economy. And, BusinessWeek’s online operation is not large enough to support all of the magazine’s expenses. BusinessWeek could do what Newsweek is doing, which is to sharply shrink the number of subscribers it has, cutting printing costs and eliminating the least profitable customers. The global edition of BusinessWeek has an advertising rate base of 900,000. The printing and distribution costs of those copies could easily be $1 a piece. The solicitation of new subscribers to replace those who do not renew costs millions of dollars a year.  A cut in the rate base would drive down printing and circulation acquisition expenses. It would also decrease what BusinessWeek could charge for advertising, so this plan would cause a drop in print advertising revenue.

BusinessWeek could do what US News did last year and reduce its frequency of publication. It might decide to go from weekly (the magazine does publish several double issues) to fortnightly, the same frequency as Fortune and Forbes. In this situation, advertisers will be likely to decrease the number of pages a year that they are running in the magazine if it comes out less frequently.

The most probable solution for the magazine’s financial problems is staff reduction.  This is exactly what large metropolitan newspapers have been forced to do over the last two years. It would not be unusual if the salaries and benefits paid to people who work at the magazine averaged $60,000 a year. Several dozen people would need to be laid off for this solution to have any significant effect.

No matter what McGraw-Hill does, BusinessWeek will not be a weekly magazine with over 200 employees and a rate base of 900,000 at the end of the year. BusinessWeek will have to become a much, much smaller operation.

Fortune is the other business magazine which is part of a big corporation, but its direct parent, Time, Inc. lost money in the first quarter. Time, Inc.’s revenue fell 23% to $809 million. Advertising at the company was down 30% to $323 million. Fortune’s advertising pages were nearly flat in 2008. It has lost 38% of its pages this year.  Advertising pages dropped 68% in the most recent issue, a sign that the pace of the losses may be accelerating. Fortune management has said that the magazine still makes money, but based on most definitions of profit that is almost certainly not true.

Fortune.com’s website is part of CNNMoney which had 4.9 million unique visitors in March and 61 million pageviews.  Fortune’s annual online revenue is unlikely to be more than $40 million, if it is keeping half of the CNNMoney.com advertising sales.  Revenue may drop further due to the low CPMs that financial sites are earning. While Fortune has its own online staff, it is not clear what costs it is assigned from CNNMoney’s operational expenses.

There are over 60 people on the “editorial bio” section of the Fortune website. The magazine has additional editorial employees, advertising, production, circulation, and management staff.

Time, Inc. might be able to carry Fortune’s losses if it were not having such great financial difficulties. Parent Time Warner has been criticized for the performance of its magazine group. That does not leave Fortune with many options.  It will have to cut costs and its choices are similar to BusinessWeek’s. Fortune could decrease its frequency of publication to monthly and rely on the Internet to cover current news. Fortune has a worldwide rate base of 1,020,000 which is certainly expensive to maintain due to printing and distribution costs and the expense of bringing in new subscribers. The company needs to fulfill its subscription liability, which is the number of issues it owes to readers who have paid for their subscriptions in advance, even though cutting frequency would bring down costs. Decreased frequency of publication would also lower circulation cash flow, at least short term, because Fortune would not have the opportunity to renew subscribers as quickly as it could when the magazine came out every two weeks.

With Time, Inc. in trouble, it is almost certain that Fortune will have to cut staff, publishing frequency, or rate base and perhaps some combination to try to become profitable again. Current estimates peg Fortune’s loss for 2009 at $7 million to $8 million.

Forbes got an investment from Elevation Partners in August of 2006, which was, by the estimate of The New York Times, between $250 million and $300 million for a 40% stake. This was one of the worst media transactions of the last decade.  Forbes will do no better than breakeven this year. That means the company is certainly not worth $700 million.

Forbes has a financial advantage over its two competitors. It has already gone through two large staff layoffs which totaled about 70 people, about 15% of the staff who worked at Forbes and Forbes.com. The company also owns several smaller operations including Investopedia and RealClearPolitics which have their own employees.

Ad pages at Forbes were down 17% last year and are down 19% year-to-date. The most recent issue’s ad pages were 33% lower than they were in the same issue last year. Forbes has a circulation rate base of 900,000 in the US. The company also has an edition for Asia and several smaller publications.

The print business at Forbes is doing as poorly as it is at BusinessWeek and Fortune. Forbes has the advantage of a much larger audience online. In the US, it has almost 5.6 million unique visitors and 66 million pageviews. Revenue from the Forbes online business is between $70 million and $80 million, but is not growing.  Forbes management might say that its online operations are profitable and that its print business loses money. It is convenient to separate the two businesses, but they share so many resources, that this is not a realistic description of the Forbes overall business.

It is a reasonable option for Forbes to cut the frequency or circulation of the publication, because it is so successful online. Forbes readers are clearly already accustomed to reading content on the company’s websites.  Publishing the magazine monthly instead of fortnightly or cutting circulation down to 500,000 is not as risky as similar decisions would be for the company’s two peers. Forbes has an important motivation to move quickly. If it begins to lose money, it does not come out of the bank account of a large public company. The media firm’s private owners are responsible for the deficits.

Over the last several weeks, there has been speculation that one of the three large business magazines might fold. That is not going to happen, at least not in the foreseeable future. Instead these publications will have to cut staff, circulation, and abandon the ambitious editorial goals that have sustained their images for decades.

Managing Editor Andy Serwer wrote in his editor’s letter in the issue of Fortune with “How Bernie Did It,” on the cover, “There’s a place for loudmouth journalism, but it will never be a substitute for a deeply reported story, which I believe is a higher form of journalism.”  The days when Fortune will have the resources to produce this kind of journalism are coming to an end. The company that employs the editor and his shrinking editorial staff can no longer afford it.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.