Meredith Corp. Makes the Case for Magazines

Stephen Lacy, executive chairman of Meredith Corp. MDP +0.98% , the magazine publisher and owner of 17 broadcast television stations, has had his share of disappointments. In 2013, he tried to buy a group of magazines from Time Warner Inc., only to see Time Warner spin off all its magazines under the Time Inc. umbrella.

Mr. Lacy persisted. Meredith-with its long history of women’s service titles that include Better Homes & Gardens, Shape and Allrecipes-appeared the most likely partner for Time Inc., whose properties include such women’s brands as Real Simple, InStyle and People.

Now, after several years of trying, Mr. Lacy has acquired Time Inc. for $1.85 billion, establishing Meredith as the country’s largest magazine publisher. It represents a daring bet on the future of print magazines at a time when print advertising and circulation revenues continue to slump.

But it also signals Meredith’s confidence in a brighter digital future. With Time Inc.’s digital properties on board, Meredith generates 170 million unique monthly visitors in the U.S., more than 10 billion annual video views and nearly $700 million in digital advertising revenue, according to the company. That scale, says Mr. Lacy, will enable Meredith to better compete with Facebook and Google, which together command the lion’s share of new digital ad dollars.

Mr. Lacy, 63, joined Des Moines, Iowa-based Meredith in 1998 as chief financial officer and was named CEO in 2006. Now he faces his greatest challenge, melding two different corporate cultures. Following are edited excerpts of a Wall Street Journal interview with Mr. Lacy on the future of magazines and Meredith’s place in the industry.

Bigger is better
WSJ: Why was it so important for Meredith to get bigger?
MR. LACY: In all conversations with our major advertisers and marketers, they’ve said they want to do larger cross-platform deals with fewer players. The ability to have a consumer audience that moves across all major adult life phases creates so many more opportunities. We now reach 200 million unduplicated consumers with 60 million unduplicated subscribers.

WSJ: Why are you bullish on the future of magazines?
MR. LACY: The consumer part of the business, the 60 million subscribers that we have on a combined basis, is our second-largest revenue stream. The renewal rates are very consistent. I have a lot of confidence in our longtime consumer connection. Then we built a digital business on top of that and never cannibalized our print business with the digital.

WSJ: Hasn’t that changed over the years?
MR. LACY: When I talk to young portfolio managers, I say that we printed eight million copies of Better Homes & Gardens when I joined in 1998. How many do you think we print today? They usually guess three million or so. But it’s still eight million.

And the median age of the reader is fundamentally the same-and so are the renewal rates. The businesses in our industry that have struggled the most look like newspapers-they create time-sensitive information. We focus on life-stage activities, such as having a child, or lifestyle activities, such as cooking, gardening and decorating. That’s what gives us confidence: our connection to our consumers, and the fact that consumers pay for our content.

WSJ: But Ladies’ Home Journal had a very large readership, and you ended regular monthly publication back in 2014.
MR. LACY: Unfortunately it had a very difficult time in the advertising marketplace because the title to young female buyers in the ad agencies was off-putting. Even though it was a good journalistic write and read, it was moving to the point where it wasn’t going to make any money anymore. We have a belief that if we can’t find a way for something to make money, we shouldn’t be directing effort at it.

WSJ: How does that apply across all your magazines?
MR. LACY: We’re going to do more careful portfolio management from a position of strength going forward. A troubled business gets a disproportionate amount of attention from senior management. Instead, you should be paying the most attention to where you make the most money. We shouldn’t run businesses that don’t make money. We’ll lean into the ones that make the most money for our shareholders.

WSJ: Newsstand sales are declining nationwide at a steady pace. Isn’t the newsstand the best barometer of consumer interest in print magazines?
MR. LACY: Absolutely not. The newsstand business was built in an environment where the consumer went to the supermarket three times a week. There was no Costco or Sam’s Club. Now the average consumer makes a big monthly run to those stores, and uses the grocery store to shop the perimeter for fresh meat, the bakery and produce. As a result there is less impulse buying. You’re going to see us continue to focus on the subscription side of circulation, and only focus on places with [high magazine sales] where you make a lot of money.

‘Solid as a rock’
WSJ: What makes the subscription business desirable?
MR. LACY: We get the cash and run the business on consumer operating capital. We’ve always worked hard to sell one- and two- and three-year subscriptions. The renewal rate and the ability to [charge a little more over the years] is as solid as a rock. The beauty of millennials is that they are very comfortable buying anything online and using their credit or debit card. Our interface with them is the credit card and auto renewal. It has to be the right content, and it has to be served to them the way they want it. But they’ll pay for it.

WSJ: There is so much competition for reading time these days. Meredith has kept a very tight focus on serving women at various stages in their lives. How will the purchase of Time Inc. affect that focus?
MR. LACY: Now we have People, the biggest and most profitable magazine brand in the world. We can say to those readers, if you like this, you might like that. The circulation opportunities are there. Millennials are even more interested in entertaining at home and decorating and remodeling than their baby-boomer mothers.

They may not have Waterford crystal, but the men and women both entertain at home. We try to pick her up at the earliest stage of her adult life and serve her throughout her life. And millennial men are much more involved than our fathers.

WSJ: For the fiscal year ended June 30, Meredith’s revenue at its magazine group declined 2% to $1.08 billion, while revenue at the TV station group increased 15% to $630 million. Why not double down instead on the side of your company that is showing stronger growth?
MR. LACY: We love that business. It’s a high cash-flow margin business. But you never own the brand. You have the pleasure of renewing your affiliation with the network every five years, and they take their bite from that apple. That business is a wonderful local megaphone, and like any other media business, if you are No. 1 or No. 2 in the market, you get a disproportionate share of the revenue. But you are a franchisee, and the terms and conditions change. That’s not the case with People and Real Simple and Better Homes & Gardens. Those are owned-and-operated brands.

WSJ: At different times in recent years it appeared Meredith was going to be solely a magazine company, or solely a broadcaster. Will the company split in two?
MR. LACY: The answer is no. With the Time Inc. transaction having closed, we are now in a deleveraging mode to pay down debt to give us more financial flexibility. Both our activities [broadcasting and magazines] generate a lot of cash flow, and we’ll need that cash flow to deleverage. In a five-year time frame, if all our projections play forward, we may have the opportunity to consider that separation.
Building plans
WSJ: Can publishers increase revenue today?
MR. LACY: After we get the portfolio rationalization complete, and we can compare on a same-store basis going forward, we think we can. We think we can move Time Inc.’s advertising revenue in the marketplace to performing at a level of what we’ve done, and reach a point where the growth in digital offsets the print declines and allows for organic growth. We’ve got a couple of years of hard work to get this bigger portfolio to that place.

WSJ: People magazine, Time Inc.’s largest title, has seen its single-copy sales decline to 413,000 for the six-month period ended Dec. 31, 2017, from 1.26 million for the six-month period ended Dec. 31, 2010. How does People fit into the Meredith portfolio, and is there any way to actually increase single-copy sales?
MR. LACY: We’ll optimize that channel as best we can where the consumer wants to buy it. You can’t force-feed it. But that’s OK. We’ll optimize it for profitability and lean in on digital-first auto renewal with credit-card subscriptions.

WSJ: A private-equity unit of Koch Industries called Koch Equity Development provided $650 million in financing. You’ve earlier said that you’ve never met Charles and David Koch. Is that still the case, and what do you make of the concerns raised regarding the Koch Industries investment?
MR. LACY: We wanted the ability to go to the Time Inc. board with a very simple all-cash offer. We didn’t have the ability to borrow that much money, and we didn’t want the leverage of doing so. We wanted some preferred equity and went to 10 different players. We said they wouldn’t have any seats on the board and wouldn’t have observer rights, and there would be no involvement with the management of Meredith. Private equity tends to get involved with managing the business. Koch Equity agreed to our terms, and we agreed to their dividend. It’s pretty straightforward.

Mr. Trachtenberg is a Wall Street Journal news editor in New York.

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