Marketing Magazine, Sept. 20, 1999
Republished with permission
An exclusive round table of media professionals offer their views on what lies ahead for the magazine industry and advertisers as the Canadian market opens up to foreign competition.
Introduction
The future of the Canadian magazine industry promises to be eventful in the next few years following the controversial deal on split runs brokered between Ottawa and Washington in June.
For decades, the federal government had stood by policies that supported the relatively small domestic magazine industry by effectively disallowing U.S. and other foreign publications from substituting ads in their original domestic market editions with ads targeted at Canadians.
Supporters of the policy maintained that it ensured Canadian content would get a small leg up in a global magazine industry dominated by the U.S., with its much larger economies of scale and distribution and marketing infrastructures. Critics, especially among U.S. publishing interests, maintained that this policy amounted to unfair restraint of trade and market restrictions.
The debate is now history. After years of pressure from the American media industry, and buoyed by a favourable 1997 World Trade Organization ruling on the issue, the U.S. government finally succeeded in getting Canada to adopt a more open-door policy this spring.
Under the new rules, foreign publishers can now sell up to 12% of the ad space in a publication produced elsewhere to advertisers specifically targeting spillover Canadian readership. That limit rises to 18% by 2002. If they wish to sell ads beyond that threshold, these publishers will be required to set up a distinct Canadian edition, produced here in Canada and containing a "substantial" amount of Canadian content. (Details on what precisely "substantial" means and, indeed, a full definition of what comprises Canadian content are still being worked out by Heritage Canada officials. Details of Ottawa's proposed subsidy program aimed at offsetting the ad revenue losses to Canadian publishers as a result of the new policy are also still pending.)
In addition, foreign-based publishers can now buy up to 49% of an existing Canadian publisher, up from 25%, and may own 100% of any new start-up publication in Canada. Changes to the tax code will allow a sliding level of tax deductions for magazine advertisers, depending on levels of Canadian content.
Those are the new broad ground rules. But what it all means is still anyone's guess. Will U.S. magazines begin actively hustling for the incremental ad dollars they now have access to any time soon? Will they form partnerships with Canadian publishers or go it alone? Will existing Canadian magazines give way to new CanAm hybrids? What does it all mean for Canadian advertisers and ad agencies?
To begin an exploration for answers to these kinds of questions, Marketing invited three senior media directors and a senior executive with the country's largest magazine publisher to a round table discussion one morning late last month.
The participants were:
Bruce Claassen - president of Genesis Media Inc. in Toronto;
Janet Callaghan - corporate vice-president, media director, The Media Company/MBS in Toronto;
Terry Malden - executive vice– president, Maclean Hunter Publishing in Toronto;
Terry Sheehy - senior vice-president, managing director, Starcom Canada in Toronto.
David Chilton - Marketing's media writer, moderated the round table. Marketing editor Stan Sutter and managing editor Jim McElgunn also attended.
The following are edited highlights of that discussion.
Assessing the lay of the land
Marketing: What do you think the magazine industry will be like once the split-run legislation is law?
Janet Callaghan: From everything that I know right now, rather than everybody standing at the border desperate to come over, there has not been significant interest by the Americans to come into Canada.
That said, I think it is probably in the interest of (U.S. negotiator) Charlene Barshefsky to have somebody enter this market to challenge the ruling to see that everybody is doing what was negotiated. So there may be some encouragement in the U.S. for a magazine to come in.
We have seen what happened in the newspaper business with competition entering the market. We had a revamped Globe and Mail, colour in the Globe and Mail, the (Toronto) Star...everybody talking to and understanding their readership. I think that what's happening now is probably very good for the Canadian periodical industry in terms of sharpening its marketing.
Bruce Claassen: I think the next year probably is going to be spent by both Canadian and American publishers that have got any degree of interest in the Canadian marketplace looking at what the landscape is like. What strategic alliances might be in play; what partnerships might come to pass; what kind of business models might look sort of profitable.
Terry Malden: I think a year to two years from now we will see a number of consumer and business publishers in the States selling advertising in this marketplace; probably most of them doing it under the so-called de minimus situation, which means that they don't have to do a separate Canadian edition. They can get significant amounts of advertising revenue from this market without doing that, and I think that will be the logical way most of them will test the marketplace.
I think they'll probably see one or two or three real Canadian editions getting launched–maybe in conjunction with a Canadian publisher, maybe not. From our discussions with U.S. publishers over the last month or so, I think that they think there is an opportunity here. But they are not sure how to approach it. They like the idea of being able to do it in a fairly risk-free way.
Marketing: Can you give us any indication of which U.S. titles have shown any significant interest here, whether with MH or with Telemedia or any other publisher?
Malden: No, I can't talk about our specific discussions. It will be very obvious to figure out who would have an interest based largely on their level of circulation here, and there are a fair number of titles that have got circulations that would make it worthwhile to come to the marketplace.
Callaghan: I haven't personally been contacted by anyone. I think all of us are thinking that any underserved market niche would be a likely contender. For instance, Sports Illustrated certainly could come back for the sports-enthusiast market. Another kind of male-targeted magazine you could see easily coming in too, saying, "Gee, it's an underserviced market and not really taking anything away."
Claassen: It all comes down to the financial viability of the exercise. Without question, there are huge gaps in terms of magazine categories that are under or not serviced in this country.
Now, does that mean there is room for a bulk digest to come into Canada? Is there a financial viability for that? Is there a business model that can be put into place so that it works? Is this something that will work south of the border as well as north? That, I think, all has to be worked out. But the fact is there are places and there are magazines where our clients would be more than happy to be able to purchase Canadian issues.
Marketing: You haven't had anybody approach you yet about split runs, but can I ask you to expand, theoretically, on what you might tell them?
Callaghan: I think a concern that we would have immediately would be in terms of position–say a client that wants the good position or is launching a product. There are certain criteria we all have about booking our magazine space and giving it good value.
Demonstrating effectiveness
Callaghan: I think the big issue here is: What should Canadian magazines be doing now?
When do you say "magazines can contribute to short-term sales"? When are we going to spend enough money in magazines to move the needle? That's really what Canadian magazines should be doing now. They should be looking at all these marketing skills, looking at the readership, looking at testing, to demonstrate that magazines work, because if there is this influx and this interest right now in magazines, then we should be pushing everything we can in terms of what they can do.
Claassen: That's a very interesting point. The issue of effectiveness in magazines has been going on since I can remember in terms of trying to get more and more information from magazines to justify their role.
Terry just pointed out discussions are now happening between Canadian publishers and American publishers. I think that can only be beneficial to Canadian publishers in the long run. The amount of research money that's available in the United States that has been put to use measuring magazines' effectiveness and all the other areas is certainly far and away greater than anything we can ever afford in Canada.
Terry Sheehy: I think this is a little bit of a red herring. It's unfair to suggest that magazine effectiveness is the issue. I'm not sure which medium can deliver a complete, quantifiable (result), whether it's TV or radio or newspaper. The problem is universal and is shared by all media. I think actually the magazine sector in general has done an admirable job.
Partnership opportunities
Malden: The one thing that I do agree with is the changing environment that I think will result from the rule changes does have the potential to stimulate the magazine marketplace, and that may sound a little bit strange coming from me in the position that I occupied up until the rule change.
But you know a big part of that debate was on the issue of Canadian content and the availability of content for Canadians. But now we are in an era where content is probably not the key issue. The key issue is successful magazine publishing.
We did get excited about the potential opportunities to work with American publishers and with the publishing industry on a North American basis, because I think we can bring things, as Bruce said, to Canada that we haven't had up till now for whatever reasons.
I think the marketplace will be bigger in terms of the number of titles available. And that will stimulate the kinds of improvement in what we can deliver to advertisers–information-wise, and maybe in other respects too–in terms of product.
One of the publishers that we are talking to in the States has magazines that are in the same field that we publish in. We are looking at the possibility of packaging its magazines with ours; to bring better, bigger audiences and fill some of the gaps that need to be filled in terms of quantity.
Wither Canadian content?
Marketing: Somehow I get the uneasy feeling that eventually it's going to be an American tail wagging the Canadian dog. Does anybody else get that feeling?
All: Yes.
Callaghan: Canadians want to read about Canadian business. They want to know what's in The Economist, but they also want to know a Canadian point of view. There are Canadians who buy Good Housekeeping, but an awful lot of them would prefer Canadian Woman or they would prefer Chatelaine. They want their letters appearing in the letters column. They want to read about themselves in Saturday Night. They want to have somebody on the cover that they recognize.
Basically, we have the best of both worlds now, but I don't see Canadian magazines sort of dripping down the drain here.
Malden: Well, all I know is that not many of our titles could afford to lose very much advertising volume or see very much eroding of advertising rates as a result of competition from U.S. titles.
Maclean's magazine couldn't go on forever as a weekly newsmagazine with a huge editorial budget if rates drop a significant amount. There aren't a lot of Canadian magazines to start with, so whatever number we end up with wouldn't necessarily have to be much smaller than it is right now. It would still be a fairly small number against the hundreds of U.S. titles.
Callaghan: Now, these joint ventures you've alluded to, Terry. If you did a joint venture with a U.S. magazine, that in fact would be the different model in terms of having Canadian content.
Malden: Yes.
Callaghan: That would be good for everyone, journalists and everyone else. This would be a magazine that could be in competition with Canadian magazines but would have the investment of Canadian content.
Malden: I spoke too fast, I guess. The requirement is for original content, not Canadian content. And if you look at magazines published under licence around the world, that content isn't always local. There are some local aspects to it, but you take a magazine like Cosmo, there is the ability to use materials from shoots and so on that don't show up in the Cosmo U.S. edition and would be used for the first time in the Canadian edition and, therefore, would be original. But it wouldn't be Canadian as such.
If we were in partnership with a U.S. publisher, we'd want to be very careful not to change the editorial content of a publication that's doing very well with readers in Canada such that it is less attractive to them.
Marketing: What can Canadian titles do to remain attractive?
Malden: There's absolutely no doubt that a Canadian edition of Cosmo or of any other U.S. title operating as a Canadian edition will have significant cost advantages over Canadian publishers if Canadian (editions) are published just for the Canadian marketplace.
Our challenge will be not only competing with somebody that's got a lower cost base, but doing all the things to make the magazine even more attractive to advertisers to try to hold on to them. You're faced with a situation where Chatelaine–it wasn't directly in response to the threat of U.S. competition–increased its cost base very significantly earlier this year by going to the new perfect-bound format, and so on. If we had to do more of those kinds of things to stay one step ahead of competitors who have lower cost bases, it doesn't sound like a winning formula.
Callaghan: The message here basically is (for) the sectors that are well-serviced in Canada, it is the U.S. magazines that will have to make significant adjustments to attract readers, because we are discussing readers right now. Canadian publishers do service their readerships very well in certain sectors, but we are very vulnerable in sectors that are not serviced.
Where will the buy come from?
Callaghan: There's one point I want to add. There are a lot of advertisers that many of us have as clients who are already appearing in the U.S. magazines that are spilling into Canada. So a part of what we do is assess the spill effect when we do our Canadian planning. You think about how many multinationals are advertising in magazines, and you could see how many campaigns are coming across the border already.
To me, this raises the question: How do you convince that guy in New York to pay a lot of attention here?
Sheehy: Absolutely. What if, in fact, the exact opposite is going to happen now that Canada is more integrated in the minds of those folks in New York and Chicago?–that Canada is no more complex than figuring out the nuance you put in the L.A. edition or the Chicago edition. And those decisions (are) actually migrated further south, and there's less to do here, in fact. Canadian-based publications fall off the radar entirely.
The vast majority (of U.S. books) don't have the nuances of something different in the West Coast edition. It's planned as a national business. And here we are, a country of 23 or 24 million anglophones and a brand manager in New York City is brought into a plan that includes a lot of U.S. titles. He or she is informed that his titles are available in Canada. I would suggest it's a very facile decision in providing some depth of circulation and readership to say replicate the plan. That person doesn't want to hear about lots of differences or the big differences.
Claassen: To a certain extent, that's happening on the creative side. There's a hell of a lot of campaigns now that are both American and Canadian.
Sheehy: But then this is alarming.
Claassen: No. But we couldn't have it any more alarming than it currently exists.
You can't buy the titles. You don't even talk to the publishers of the U.S. publications. They don't knock on your door. They don't even care about you. You don't have any numbers that are the equivalent of Canadian numbers for measuring. You're completely lost.
The client goes in and says, "We're buying these 12 U.S. titles," and all you can do now is nod your head. You don't know what their readership is. You have no say in positioning and placement. You have no discussions about whether it reaches the proper Canadians or not. We have no role whatsoever in the decisions to buy U.S. publications.
Sheehy: I'd say right now we have a reasonably healthy Canadian publishing industry with reasonable choice. And we can create plans in the Canadian marketplace that are viable in terms of reach against the competition. Right now we have fairly good ammunition for a Canadian buy in magazines short of U.S. strength.
If the menu dissipates, dramatically or radically, then we'll have a real difficult time justifying something that is other than a replication of a U.S. title.
Marketing: Do you see the Maclean Hunters, Telemedias, doing more direct selling into U.S. media departments and agencies?
Malden: Only as the decision-making takes place. We at MH generate for our women's magazines about a quarter of the advertising linage that we run south of the border. So we're down there selling ad space right now.
I guess what Terry is getting at is that if those guys down there that we're selling to are already automatically included in the U.S. magazines' Canadian editions, then when we go down to make a pitch, where are we coming from and why do they want to talk to us? Whereas now, if they want to reach the Canadian market with a separate campaign, they have to talk to us.
Claassen: Of the total magazine readership in Canada, what proportion is to specific Canadian titles? And if that number is 27% in women's service, do you need that 27% to make an effective plan? Yeah, probably. Could you live without it? Yeah. But we don't know that. Those are the facts.
If all the U.S. titles were members of PMB, we may be able to get that kind of data. And the role we have cannot be as experts in Canadian media, we have to be the experts in Canadians and how to best reach them.
Callaghan: So our role becomes more complex?
Claassen: Yes.
Callaghan: But attractively so. As we go deeper into all of this, we want that share of mind of the Canadian consumer. And if you can't reach that 100%, then what percentage can you get at and what has value? Because it's all about value.
Malden: Going back to Terry's point, though, isn't the issue that if, in our case, 25% of the advertising decisions that generate revenue in our magazines are made south of the border, that means that agencies in New York are making the buys?
Those agencies now start to get calls from, or are getting calls, from all the U.S. publications now saying: "We've got a Canadian edition. It's much bigger than it used to be, because it's a separate edition. And we're members of PMB, so here are the runs and here's everything you need." You end up with some of the multinational clients that are doing separate Canadian buys through Canadian agencies wondering why they need to do that.
It will be interesting to see if we end up with a joint venture with a U.S. publisher, what will turn out to be the logical way for that joint-venture publication to sell advertising in the States?
