Cartelization and Revenue Sharing in the Magazine Industry

The magazine industry appears to be suffering from a similar blight as the newspaper industry, with consumers increasingly choosing digital content from disparate sources, such as via google searches, rather than showing loyalty to a particular brand and backing it up with a (usually still paper-based) subscription.  The good news for the magazine industry is twofold. First, despite shrinking readership, they never relied as heavily on classified advertising, which has been decimated by google, eBay, monster (& other online job services) and craigslist in particular.  Second, magazines can more easily stem operational losses since they print less frequently. This buys them time to figure out a better way to approach the digital world than merely posting their content online and hoping the banner ad revenue will compensate for the loss of subscriptions and decline in both the number and price-per-square-area of print-ads.

This week, Time Inc announced a joint venture with many of the other major magazine publishers in the USA.  This initiative has as its objective creating and pushing a standardized "e-magazine" format, which will allow for rich content (controlled by the publishers) which is portable across devices of various platforms, including e-readers, pc's, macs and the iPhone.  Some have deemed this "the mag industry's Hulu", which seems to be a bit of a misnomer.  In this case, the industry is picking a technical and somewhat aesthetic standard for delivery, not a means or channel of distribution, or even a single business model, since publishers will still be free to choose ad-supported or subscription-based schemes. It does, however, include a single storefront (sound familiar?), which is notably lacking for magazines at the moment.

This move strikes me as being motivated at least in part by the media companies's realization of what happened to music companies, who saw their market power greatly weakened by the initiative Apple's iTunes (not alone, but certainly in the greatest part) took from them by aggregating a huge catalog of content, making it available online, and most importantly easy to purchase and put onto popular devices for consumption.  Thus we now see erstwhile competitors Time, Condé Nast, News Corp, and Hearst forming a joint entity responsible for developing and monetizing a more robust - and controlled - way to deliver content electronically.

From my point of view, this looks like a strategic move on the part of the publishers.  They seem to be viewing their consumers as a party to a strategic game, and acting as if the game were sequential by making a commitment move.  In other words, the publishers are telling consumers not to expect their easy, zero-marginal monetary cost (just the cost of viewing a few ads) access to quality content to continue unabated into the future.  They are committed to reviving their ability to charge subscription revenue, even if it means effectively cartelizing in order to start this phase of the game.  It will be interesting to see if consumers will be happy to pay for legal, portable high-quality content, as they largely have shown to be with music after years of preferring piracy (to DRM and fragmentation) - or if this commitment move will be the end game of this industry as we have known it.

Another interesting topic related to this announcement is the problem of revenue sharing.  How will the joint-venture be funded?  Will Time simply get licensing revenues from the other publishers from having taken the initiative and created the prototypes?  Or will the publisher, recognizing the network externalities in play (e.g. that the system, and particularly digital store if that actually launches, are more valuable the more wide-ranging the content available is), come up with a more sophisticated revenue-sharing system.  What would be the standard of 'fairness' used?  Will a publisher whose content lands more visitors who end up buying other publishers' content be rewarded?  How?  This aspect of the cartel will probably prove the most contentious, as there is no simple way for the members to get equitable, efficient, and envy-free pieces of this new, complex, digital pie in the internet ether.