Pulling Back The Curtain on Rate Base Inflation

By Bob Sacks on February 14, 2014

For the last twenty years I have been publicly critical of the process and accountability—or lack thereof—of rate base, yet it never occurred to me to write an article about it. The truth is, I don't recall anyone writing an article about rate base from a positive or negative viewpoint.

From my perspective, rate base is a convoluted tool designed to produce distorted circulation figures. Yes, auditing is an attempt to verify with some precision and prove to the advertisers that a certain number of people may have picked up and read your magazine. But imbedded in this arcane system is a potential for trickery and a temptation to abuse the well-meaning audit results to achieve what amounts to some meaningless readership number.

Since I wanted to express more than just my opinion on this topic, I reached out to industry leaders from all segments of our noble franchise. Most of the people I spoke to in the research for this article focused their observations on the abundant abuse of rate base and its antiquated nature.

I spoke to magazine media pundit and Publishing Executive columnist D. Eadward Tree and started by asking, "What is the problem with rate base?" He says, "I think we should define the problem clearly: Is it circulation audits? Rate base in general? Or inflated rate bases? I don't see a problem with the concept of rate base in general: We make a promise to our advertisers about who will see their ads, then verify that they got their money's worth by having the circulation audited. What gets us into trouble is inflated rate bases, which force publishers to do desperate, stupid things like offering $5 annual subscriptions, using negative-remit agents, and getting into trouble with the Federal Trade Commission."

I agree with Mr. Tree completely. The problem is not that we have a system called rate base, but that many publishers feel compelled to develop unnecessary and inflated rate bases that in the end dilute the authenticity of the process and which hasn't been good for anyone's longevity.

Bryan Welch, publisher and editorial director of Ogden Publications says, "We decided about 15 years ago that rate base was an obsolete concept, and that in its obsolescence, it was damaging our business and our industry. We abolished all discussion of rate bases in the late 1990s and never saw any negative impact on advertising revenue. We share all our audience data, postal reports, newsstand galleys, and selected financial statements, if asked. But we're almost never asked. We prefer to give advertisers methods for measuring the response to their advertising with our media brands. We ask them what measurement would be meaningful, and we try to provide that measurement."

Welch continues: "Rate base is a destructive concept because it distracts publishers from our core mission: Building engaged audiences. Inevitably, the rate base publisher resorts to circulation methods that round up the required number by degrading the value of the relationship between the brand and the audience. The energy expended in that effort is energy that would be better spent finding and engaging with the highest-quality audience possible. In the process we underwrite corrupt subscription agencies, extravagant newsstand fees, and generations of consumers taught that our products should be free, or nearly so."

Of the dozen professionals I questioned about rate base, there came a single semi-positive response from a retired publisher of a major publishing house. Wishing to stay anonymous, he suggests, "While the whole process of determining what counts towards a rate base is arcane and complicated and sometimes just plain stupid, the notion of a rate base (at least for the foreseeable future) is important to the magazine business…attempting to quantify circulation is still relevant."

Meanwhile John Harrington, the publisher of industry newsletter The New Single Copy, questions the need for rate base. "First, the UK seems to do alright without it. So does the rest of the world. Second, I quote (or paraphrase maybe) my old and late friend, Dan Capell: Most bad circulation decisions are made because of rate base. To explain what to many is probably abundantly clear: cheap, unprofitable, and poor renewing subs are obtained to get the last few copies to make rate base, and publishers push out the last 100,000 copies (or pick a number) to retail, which sell less than 10%, also to make rate base. I'm sure there's more to the rationale behind rate base, but from an audience development, AKA circulation-view, those are some of the downsides."

Downsides indeed. It is the very subterfuge underlying the process of rate base that offends me the most. Although all readers read, they are not all equal in a business equation and certainly not to advertisers. "Junk" circulation is just that: A less-interested, less-focused readership assembled to falsely bulk up a publisher's audited statement for the sake of delivering a "number" to an advertiser that should never have been promised. 

Bryan Welch feels that blind devotion to rate base has eroded the industry's credibility. "Today we need meaningful global audience measurement. Our historic focus on rate base has created the perception among advertisers that magazines employ the least valid form of measurement in the marketplace. That's not fair, but it's a perception we've created by employing a methodology that was flawed at its birth. Now we have an opportunity, finally, to abandon rate base. Then we can begin showing the world how valuable our deeply engaged audiences really are."

D. Edward Tree thinks publishers should consider eliminating their most unprofitable circulation. "A rate base that made sense in an era of heavy subsidies from the ad department might be way out of whack today. And I think advertisers are more tolerant of rate base reductions than they used to be. They're advertising in magazines to target niches and to influence opinion leaders, not to reach mass audiences."

Samir "Mr. Magazine" Husni, professor of Journalism at the University of Mississippi, thinks magazines have been preoccupied with "counting customers rather than customers who count." Continues Husni: "In the rush to compete with the emerging television we had to find a way to assure the advertisers that we have a mass reach. Now, rate base is holding the American magazine business model hostage. We have passed the point of no return and thus it is so difficult to change the business model to focus on revenues from circulation instead of advertising. As long as ad agencies and advertisers think rate base, there is no way out for the big magazine publishers."

Rate base just doesn't apply to the dynamics of the current media landscape. It's more of a habit than a useful practice, says Jim Elliott of the James G. Elliott Co., the largest national magazine advertising sales outsourcing firm. "Rate base guarantees were put in practice when these two situations were much more prevalent than today. First, agencies typically had longer planning horizons and, secondly, they were working off of rate cards. Today, we have plans that change or are reviewed frequently, and buyers are generally protected by RFP price or CPM guarantees. We recently co-sponsored a research study that will show how much emphasis agencies place on CPMs and general price discounts. We believe that rate base guarantees just don't supply a useful function today."

Bernard Mann, publisher of Our State magazine, offered the following, "Rate base is an old form of advertising guarantee. The problem is in today's world, it's not the number of people who see an ad but rather who they are. What is their sex, education, income? Do they own a home? Do they take vacations? The list of questions then hones and makes the buying decision appropriate for the right media. We sell ourselves short as an industry by supporting this old idea."

Some publishers have already moved away from rate base. Joe Berger of Joseph Berger Associates, a newsstand consultancy, says all of the audited clients he works with don't have guaranteed rate bases. "At best, they have circulation targets," says Berger, "And we do everything we can to get there because they have told their advertisers that is what they can deliver. But no one that I work with has the old fashioned "guaranteed rate base" that I am aware of."

Joe Webb, industry analyst and author of Disrupting the Future: Uncommon Wisdom for Navigating Print's Challenging Marketplace, is dismissive of rate base. "I have nothing to add. Rate base is another thing where people say one thing and do another, and people drunk on statistics use lamp posts for support rather than illumination."

After consulting with many, the conclusions are that no one I spoke to had very nice things to say about rate base, and yet many of the industry's major players are still totally beholden to it. I suggest that managing a business with rate base can often lead you to incorrect conclusions about what your franchise is, and what your readership really wants. It is a pricing currency that is disconnected from the reality of insuring the advertisers that we have a focused and engaged readership.

Part of the problem from the beginning has been creating a proper value for print where the standard practice has been caveat emptor, or "Let the buyer beware." When you have editorial budgets that are supported by advertising and not the readers, you create a disconnect not only from reality, but from the true value of the product. This smoke and mirror system of accounting has hurt our industry and will continue to do so until we end it. The true worth of our products and the longevity of our franchises ought to be based on what the reader is willing to pay. That is the only concept that validates the worthiness of any magazine and therefore the value of the magazine to the advertiser.

By Bob Sacks| February 14, 2014

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Bob Sacks

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