BusinessWeek And The Cowardice Of McGraw-Hill (MHP)

BusinessWeek is losing money, over $40 million last year by some accounts, and more if the publication’s corporate overhead is included. There have been questions about whether BusinessWeek is financially viable for some time. McGraw-Hill (MGP) is trying to sell the magazine it launched in 1929 as “The Business Week”. Most analysts would agree that the publication has made McGraw-Hill hundreds of millions of dollars in profits. But, Harold McGraw III, who is the firm’s CEO due to his membership in the firm’s founding family, knows that his shareholders don’t want to be in money-losing operations, so BusinessWeek is for sale.

There are a lot of parties interested in owning the magazine. That is odd if the future of BusinessWeek is so bleak. It means that some of the groups of sophisticated private equity and publishing groups believe that BusinessWeek can make money. They apparently believe that they can see potential that McGraw-Hill does not.

Bloomberg is rumored to be a buyer. Platinum Equity, which has been dismantling the staff of the San Diego Union-Tribune, and Bruce Wasserstein, are apparently looking at BusinessWeek. So is Zelnick Media which has driven Take-Two Interactive (TTWO) into the ground. The parent of the Financial Times might also be a potential buyer. There may be a “vanity” buyer in the market who is wealthy enough to sustain the operation’s losses in exchange for being the owner, not unlike Mort Zuckerman and his ownership of US News. Mr. McGraw has hinted that dozens of parties have an interest in BusinessWeek. That seems to be an exaggeration, but it depends on what he thinks the term “interest” means.

It is hard to tell what a buyer would do with the weekly. Analysts speculate that to cut costs Bloomberg might fire most of the magazine’s editorial employees and use its own journalists. Another buyer might decrease BusinessWeek’s publishing frequency back to every other week with double issues during slow advertising periods in the late summer and the year-end holidays. This would match the publishing schedules of Fortune and Forbes.

A buyer also might lower the number of copies that the magazine sends to subscribers the way that Newsweek, Reader’s Digest and other magazines have. TV Guide will apparently announce a circulation cut of 30% to a rate base of two million this week  BusinessWeek currently has a circulation rate base of 900,000. Lowering that would mean bringing advertising rates down, but the cost of delivering all of those copies is significant enough that the move would probably make financial sense.

BusinessWeek’s online operations are said to do fairly well. comScore says that the website had 2.9 million unique visitors in July. BusinessWeek management says that this figure is too low.

BusinessWeek is one of the largest financial publications in the world and still has a substantial advertising base both in print and online. It has about 200 editorial staff members, which may not be sustainable and may have to be cut. Those elements, as a package, are enough to attract substantial interest in the purchase of the magazine.

McGraw-Hill is unwilling to do what several outsiders believe can be done, which is to believe that with some changes BusinessWeek can become valuable again. The Washington Post (WPO) announced last week that the alterations it has made at Newsweek, including a plan to sharply raise subscription prices gives the magazine a chance to breakeven in 2011.BusinessWeek can raise what it charges subscribers if Newsweek can. It has a much more affluent set of readers. McGraw-Hill is the best candidate for making BusinessWeek a success again. It does have eighty years of experience operating the property. It has a roadmap that several other major magazines have decided to follow as a way to become profitable again.

BusinessWeek ran almost 6000 advertising pages in 2000. That number dropped below 1,900 last year, and pages are down another 36% through the magazine’s September 14 issue according to MIN. That puts the magazine on a course to run about 1,250 ad pages in 2009. BusinessWeek may face a number of problems, but if advertising pages were back above the 2,200 page level, the rest of the magazine’s troubles would become substantially less important.

BusinessWeek says that it charges over $112,000 for a four-color ad page in its global edition. The number is probably much closer to $60,000 once discounts are factored in. The $40 million loss that BusinessWeek runs is the equivalent of about 700 advertising pages. If McGraw-Hill cuts enough of the magazine’s costs, the number is probably under 500 pages, depending on how its online edition is doing and how quickly the overall advertising market recovers.

BusinessWeek’s financial contribution would not go back to what it was a decade ago, but it could be modestly profitable with a healthy improvement in revenue and a substantial cut in costs. The economy is likely to help over the next year or two.
No matter how the auction for BusinessWeek turns out, the question will always linger about why McGraw-Hill did not have the guts to take the chance that a buyer was willing to take. A lot of smart money still believes that Business Week is viable.
Finally, there is one more reason for keeping BusinessWeek and it may be the most compelling one. McGraw-Hill has faced charges about whether its financial ratings arm, S&P, played a role in the mortgage meltdown. The market has questioned S&P’s independence. BusinessWeek may be only 2% of McGraw-Hill’s revenue, but it is critical to the company’s reputation as an ethical distributor of business information. That has to be worth a great deal.

Douglas A. McIntyre