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MARKETING

A Whole New Game
 

A Mexican media magnate and a New York publisher team up to start a national daily sports newspaper called The National.
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At birth, it's already bigger and richer than most businesses ever get. But like many start-ups, America's first all-sports daily newspaper is gambling on a hunch

* * *

Frank Deford's favorite color is purple, a hue that does not match his prose. A writer for Sports Illustrated for 27 years, Deford has been chosen six times as national Sportswriter of the Year. He has also written 10 books and done sports commentary for both TV and radio.

Despite the acclaim he had garnered as America's de facto dean of sports writing, Deford, by the time he was pushing 50, had come to feel the dread that rises in any magazine writer embarking on the same sort of story one too many times. By February 1989 Deford was ready for a break. He had his house on the market and was looking forward to a year in London, during which he would finish a novel. But then came the call from Peter O. Price.

Price was the publisher of The New York Post, and in February 1989 he was a harried man. The paper was about to launch its first Sunday edition. After that, Price was looking forward to a well-earned vacation, the opportunity to lie on a beach somewhere and give his mind a chance to empty out. But before he went, Price had to talk to Frank Deford.

When Price called, Deford protested he was on deadline; he couldn't talk. Price persisted -- five minutes, Frank. Deford relented, and Price went over to Sports Illustrated. "Here's the concept, Frank: a sports daily for the United States."

"It'll never work."

Price wanted Deford to edit this mythical paper, and he needed Deford's decision fast. Price himself had a decision on his hands, thanks to a high-stakes offer by someone else hungry for an answer.

That person was Emilio Azcarraga -- the owner of, among other properties, a media company that controls 90% of Mexico's television programming. As influential as he is rich, Azcarraga is reputed to be worth at least $1 billion. In November 1988 he had met Peter Price, and the subject of national sports daily papers came up. Other countries had them, said Azcarraga, why not the United States?

Price replied that America was a "confederation of city-states," each with a loyalty to its local institutions, including sports teams. A sports daily would require marrying local and national coverage. That required talented people and state-of-the-art technology. That required satellites in space, bureaus and presses across the continent. That would cost a ton of money.

"I know," said Azcarraga. "We ought to do it." Price then said he had a handshake deal that obligated him to the Post for one year.

Last February, just as Price was approaching his first anniversary as publisher of the Post, Azcarraga called. That precipitated Price's urgent call to Deford and a detour to Mexico City on his way to a long-anticipated Caribbean vacation.

When Price met with Azcarraga, he threw out six numbers off the top of his head. These related to such issues as circulation, staffing, and revenue. The most mind-numbing figure was $100 million. That's what the venture would consume before the paper broke even three to five years out. Azcarraga, unfazed, asked, "Anything else?"

Price considered him blankly. "No."

"Let's do it."

Price, in semishock, protested. Maybe he should call his lawyer.

Azcarraga rolled his eyes. "You Americans are all the same. You always want to get lawyers involved." The next morning they signed a letter of agreement, giving Price enough time to catch a 10 a.m. flight and ring up Deford before his plane took off. "Uh, Frank, you'd better take your house off the market."

Unless you've spent the past six months crossing the Gobi Desert, you've probably already heard about The National. On January 31, 1990, the first copies of this amply hyped paper rolled off presses in New York City, Chicago, and Los Angeles. The National Sports Daily is published six times a week (Sunday through Friday). It costs 50¢ a copy and varies in length from 32 to 48 pages per issue. Initially, single-copy sales will account for all the circulation income, which will contribute 75% of the paper's revenue. Advertising income will make up the balance.

The National is a hybrid. It carries sports stories of general interest wrapped in eight pages of intensive, up-to-date reportage about the local heroes. In New York, for example, the lead stories detail yesterday's fortunes of the Yankees, Giants, Islanders, Rangers, and Knicks, written by beat writers assigned to cover those teams on a daily basis. The National runs columns and cartoons. It has an editorial page and a gossip page. It has a full-time two-man investigative team. It intends to write about the business of sport.

The National is meant to convey the immediacy of a tabloid and the permanence of a magazine. It is printed on a heavier-weight newsprint. The brightness factor -- contrast between type and page -- is more than 70%, while the typical newspaper falls somewhere in the 55% to 58% range. About one-third of its pages are in color. The black ink is low rub, designed not to come off on your hands or the inside of your raincoat pocket.

By the end of its first year The National hopes to have added as many as another dozen bureaus to its initial three, reaching audiences in the 15 largest markets in the country. By the end of the second year, coverage and availability will peak at 25 markets, comprising about 85% of the national market.

One key element in The National's strategy hinges on Peter Price's belief that "Sports is like entertainment. It requires some stars." The National has put together a firmament's worth, a number of whom are pulling down six-figure salaries. Besides Deford, these include John Feinstein, author of the basketball best-seller A Season on the Brink. Then there are Scott Ostler and Dave Kindred, prized and prize-winning columnists from The Los Angeles Times and The Washington Post, respectively. The paper's executive editor, Vince Doria, came from The Boston Globe, whose sports section is often considered the country's best. The best paid in this highly regarded bunch is Mike Lupica, a sports columnist who had a wide following at The New York Daily News. He is making a reported $300,000 a year, putting him right up there with your basic journeyman infielder hitting .235, lifetime.

So who will buy The National? The company has done scant market research, but Peter Price nonetheless has a vision of his archetypal reader. That person is likely a man, an avid and learned follower of the sporting scene, a connoisseur of sorts. (The National's radio spots have run, among other places, on classical music stations.) Conversely, Price asserts: "The hard-core sports fan is not our audience. The fan is a junkie. The fan buys USA Today for the stats because he must have them. He eats them for breakfast."

Price hopes for a daily audience of some 1 million readers within about four years. "At that level we're making money," he says. "And we're also the fourth-largest daily newspaper in the United States of the some 1,800 out there."

But how exactly does Price intend to make this leap of more than faith? In projecting readership, says Price, "we've tried to be very conservative." In its first year The National expects daily circulation of about 200,000 in its three markets (100,000 in New York, 50,000 in Chicago, and 50,000 in Los Angeles). Those three markets comprise about 15% of the national market. Thus, extrapolating from that, once The National goes truly national it will be read by about 6.6 times more readers, or some 1.3 million.

What's the logic behind those numbers? Price bases his conservatism on the New York metro market, where 5 million papers are sold daily, and The National need capture only a 2% share. Some of these 100,000 readers will replace their daily paper with The National. Most will buy it in addition to their daily paper.

But is the typical National reader really a diehard, a six-days-a-week, 52-weeks-a-year buyer? No, says Diane Morgenthaler, the paper's circulation director.

How often then?

"I don't know, but the less frequent buyer, the guy who reads us two or three times a week, will make or break us."

So how many of those readers are there?

"I don't know. That's a multimillion-dollar question."

The National's conservative numbers begin to look less so when the scene shifts to Los Angeles, where people commute by car and the old-fashioned newsstand is as rare as snow. Add to that the substantially lower circulation base of daily papers than New York's (2 million versus 5 million), high ratio of home delivery versus single-copy sales, and the Sunbelt fact of life that people have less time for the newspaper and more for TV.

Frank Herrera, vice-president of Hearst Magazines, considers The National's circulation figures "wildly optimistic." He points out that there are 3,000 magazine titles muscling one another for space on the nation's newsstands. Of those, only 40 circulate more than 1 million copies. Most of these titles have built readership slowly over the years and are backed by huge promotion budgets. Herrera also notes that pro football, for example, has a huge TV audience -- and no widely circulating publication to match.

Another skeptic is Glenn Guzzo, former executive sports editor of The Philadelphia Inquirer, now assistant to the vice-presidents for news at Knight-Ridder Inc., the Inquirer's parent company. He says that for The National to reach its projected circulation figures in cities like Los Angeles it may have to go to home delivery. "That's extremely expensive and a tremendous administrative burden. If the demand [on the street] in Los Angeles is 20,000, would that encourage them to take on the cost of home delivery [to sell the additional 30,000 copies]? That's a decision a lot of big corporations wouldn't want to have to make."

The National's strategy is to invest heavily in talent and technology in an effort to add as much value as it can to a commodity product -- sports information. In addition to paying top dollar for marquee names, The National has poured a lot of money into a state-of-the-art electronic publishing system. This is a system that beams copy via satellite to the paper's hub in New York, where stories are edited and pages made up. That information is then beamed back to print sites around the country.

The National also seeks to outsource as much of the labor and headache of running a paper as possible. Unlike USA Today, which owns two-thirds of its printing sites and fleets of trucks, The National owns none. It will contract for printing and delivery in each market. "We don't want to get into the trucking or printing business," says Tim Lasker, The National's assistant publisher. "Our philosophy is to run a lean, clean machine."

The National also has no national distribution network. It has instead entered into a service contract with Dow Jones & Co. to distribute the paper and process the paperwork. (A distributor does not physically distribute the paper. It acts as an adjunct marketing force, ensuring the paper is reaching the right retail locations in the right quantities and then seeing that returns and payments are handled smoothly.)

In its first year The National expects each copy of the paper to generate roughly 67¢ of revenue (50¢ from circulation, nearly 17¢ from advertising). About 14¢ of that total will be consumed by production (paper, ink, press time), another 20¢ by circulation, distribution, and commission. The National will thus take in about 33¢ per paper. With a projected daily circulation of around 225,000 the first year, that amounts to about $23.2 million. That sum will be more than consumed by salaries and benefits (almost $19 million) and promotion ($10 million). From there The National goes deeper into the red.

General overhead and administration -- which includes such items as capital equipment, rent, free-lance fees, travel, satellite time, and accounting support -- will account for about 23% of gross revenues, or nearly $11 million. This includes the cost of depreciating equipment and an allowance for bad debt. In its first year of operation The National will lose at least $15 million.

Price expects his paper to break even probably around its fourth year of operation. What will circulation be then? Price will say only that the number is somewhere between 500,000 and 1 million. The National's likely break-even figure is about 740,000 (see "Financials," page 5). At 1 million circulation the paper's gross profit should be around 14%. Since The National will be printing the paper at multiple sites and selling fewer than 50,000 copies in most markets, it will likely achieve few economies of scale as circulation rises. Its large variable costs -- production, distribution, administration -- will continue to rise. Above 1 million circulation, though, the differential between revenues and fixed costs begins to widen, as more and more copies of the paper are sold and advertising revenue increases to about 35% of total revenue.

But getting from zero to 1.3 million looks tough. USA Today, after all, has spent about eight years and $500 million building circulation to its present 1.7 million -- and even now is barely breaking even. Price and company, by comparison, intend to spend $100 million to get to 1.3 million circulation and hefty profitability.

Nonetheless, Al Neuharth, founder of USA Today, thinks The National might have a chance. This, after all, is a subject he has considered. "A sports daily was one concept we looked at 10 years ago before we started USA Today," says Neuharth. "I thought the concept was good, but in the end we went for a general-interest publication with an emphasis on sports." He adds: "Our sports section has hooked by far the highest percentage of our readers, maybe higher than the other three sections combined."

Another affirming journalistic force is Dow Jones, publisher of The Wall Street Journal and distributor of The National. Dow Jones not only has clout at the newsstand. Its name lends credibility to The National's efforts; its sales force ensures that bills get paid on a timely basis. In return, The National has something to offer Dow Jones -- the potential for a great fit. The Journal's market research reveals two interesting facts. First, 98% of the Journal's readers read a second paper. Second, next to business news, the Journal's readers are interested in sports.

Every wholesaler that takes The Wall Street Journal in New York, Chicago, and Los Angeles will also take The National. In addition, a good number of wholesalers who don't distribute the Journal have taken The National. This considerable interest is reflected in what is known as the draw -- the number of copies the wholesalers take.

At the outset The National projected its daily draw at 250,000, assuming about 70% of those papers would be sold on day one. Two weeks before the newspaper was launched, wholesalers, who had been talking to newspaper and magazine retailers about their customers' buying habits, came back with another number. They told The National to raise the draw to 380,000.

Interest in sports has mushroomed in the past decade. Attendance records continue to be set. The airwaves grow ever-more saturated with sporting events and sports information. Advertisers see sports as a great vehicle to reach a prime audience -- affluent males between 25 and 54.

The National hopes to be the print version of this phenomenon -- a pipeline to this hard-to-reach audience. Before it had published even a single issue, the paper had signed commitments for 1,200 pages of paid advertising for 1990. At $9,800 per full-color page in all three editions of The National, the paper offers its advertisers low out-of-pocket expense. (Incremental discounts would lower that number further.) Advertising sales director Peter A. Spina says The National's strategy is to cultivate charter advertisers that will not see large increases in cost per thousand as circulation picks up. The National might continue to look like a bargain to loyal advertisers for years to come. USA Today (circulation 1.7 million) charges $66,000 per color page. Sports Illustrated (circulation 3.1 million) charges $113,000.

Another facet of The National's strategy is to rely initially on circulation for 75% of revenue, and advertising the balance. (With most magazines the ratio is about 50-50.) This will take pressure off the ad pages. Spina will not be forced to chase advertisers. Rather, he can court -- and showcase -- blue-chip advertisers that do not often advertise in sports publications. It is a given that The National can wallow in beer, cigarette, and automobile ads. But keeping those advertisers in check and enticing an IBM or American Express into the paper will be key. Charter advertisers thus far include Philip Morris, Panasonic, Minolta, AT&T, Nike, and Sears Roebuck. Those companies may have come in because The National offers advertisers another advantage: the pass-along factor -- how many readers see each copy. The National is projected to have a pass-along number between 2.5 and 3.0. This compares favorably with daily newspapers, which are in the 1.2 to 2 range. Moreover, daily papers reach a mass audience. The National reaches a choice slice of the market.

The National also offers urgency. A color ad can run within 48 hours of being placed. It produces, as well, a hard-core audience, its ranks uninflated by discounts, free alarm clocks, and promises that the bill isn't due before the next millenium. The National is a demand buy. The reader plunks down his two quarters to buy the paper -- now.

The National has announced that it will spend $10 million its first year to promote and advertise the product, but one newspaper executive finds that number low. "To successfully launch a national newspaper and have it become known you've got to spend between $30 million and $50 million in the first three years." Given Emilio Azcarraga's deep pockets, promotion may be the least of his worries.

If things go according to plan, in two years The National will be in 25 markets. That's 25 bureaus sending copy and photos back to New York. That's New York editing the package and making up the pages to be sent on to 25 print sites, from which the paper will be taken by 25 fleets of trucks -- all in the space of about four hours. That's so many contracts to negotiate, so many suppliers to be relied on, so many snowstorms to endure. "The biggest problem will be the linkage," admits Peter Price. "There are so many individual pieces that have to work together."

Down the hall in another corner office, looking out over a prime block of Fifth Avenue, Frank Deford, smoothing his purple tie, projects none of this angst. Deford, with his graying swept-back hair and pencil mustache, projects a swashbuckling air. He has never been an editor before, never worked for a newspaper. He seems bemused by this role that fate has handed him. "Right now it's a little vague who our readers will be," says Deford. This seems to excite him. He continues the thought, a bit of wonder now rising in his voice: "The product I know will be terrific. The technology seems to work, and we know we can distribute it. But at the end of the food chain, will Mr. Sports Fan reach down into his pocket, put half a buck on the table, and say, 'Give me a National.' . . . ?"

* * *

Research assistance was provided by Leslie Brokaw.


EXECUTIVE SUMMARY

THE COMPANY
The National, New York City
Concept:
Publish a national daily sports newspaper

Projections: Losses of about $16 million in first year, break-even in fourth year; 1 million circulation and pretax profit approaching 14% in about five years

Hurdles: Getting people to buy another newspaper; providing competitive coverage with a smaller staff; sustaining up to $100-million loss before break-even


THE FOUNDERS
Emilio Azcarraga, 58
Majority stockholder

The National's deep pockets belong to Mexican media impresario Emilio Azcarraga, a tenaciously secretive man believed to be worth from $1 billion to $10 billion. Azcarraga's Mexico City-based media company, Televisa, has 90% of the Mexican market and exports to the United States, Europe, and Asia. The empire also includes film production, real estate, insurance, hotels, and videocassette manufacturing. Despite his low profile, Azcarraga has contacts at the highest levels of Mexican political life, ensuring him control of a business that in this country would have long ago been busted up by the Federal Communications Commission and the Justice Department.

Peter O. Price, 49

Publisher, president, and co-owner

Publisher Peter Price's edges are less rough, his pockets less deep. A graduate of Princeton and Yale Law School, he is no stranger to publishing ventures. With his wife he started Avenue, an upscale monthly magazine that chronicles trends and lifestyles in the United States. When Rupert Murdoch sold The New York Post recently, Price became its publisher. That complex deal took all of three months to complete. "A lot of very big deals are very compressed and very spontaneous," he explains. Then there is The National, which Price acknowledges is in a different league. "I've been through big deals before, but not on this scale, and not with something so conceptual. We're dealing with pure concept."


FINANCIALS

The National Projected Operating Statement

($ thousands) Year 1 Years 3-4
(Launch) (Break-even)
Number of markets 15 25

Average daily circulation $225,000 $740,000

Number of employees 250 450

Sales
Circulation revenue $35,100 $115,440

Advertising revenue 11,700 49,474

Gross Sales 46,800 164,914
Cost of sales

Circulation/distribution 10,530 34,632

Ad expense 3,276 11,544

Production (paper, printing) 9,828 38,326

Gross Profit 23,166 80,412
Expenses
Salaries & benefits 18,750 36,000

Promotion 10,000 10,000

General & administrative 10,764 34,631

Net Profit (before taxes) (16,348) (219)
*Source: Inc. estimates, based on information from The National and industry sources

PRINTING MONEY
If The National reaches 1 million circulation, its year-five projection, and hits a 65%/35% circulation to ad revenue ratio, each copy would generate $.77.

Paper and printing $.16

Circulation/distribution .15

Salaries and benefits .13

G&A, including rent and depreciation .15

Profit .10

Ad discounts and commissions .05

Promotion .03

Total revenue from one copy sale is $.77


WHAT THE EXPERTS SAY

COMPETITOR

BRIAN TOOLAN

Assistant managing editor, Philadelphia Daily News, a sports-driven tabloid relying mainly on street sales; former sports editor

The National will have to force itself into the customers' hands every day. The only way it can do that is by breaking news, having information other papers don't have, and looking terrific. It's impossible to have compelling, exclusive material six days a week, 52 weeks a year. To sell 1.3 million copies per day they're going to have to average 54,000 sales in each city. In Philadelphia, the fourth-largest newspaper market, USA Today sells between 17,000 and 22,000 papers a day, and that's after eight years and tons of promotion dollars.

This paper is also going into markets where the best daily newspapers are. The National is going to be outgunned in every instance. In Chicago, New York, and Los Angeles, it will have bureaus with 10 to 12 staffers in them, competing with papers with staffs of 40 and 50 in just the sports departments.

I think it's a misjudgment to place entertainment value on writers. People in New York know who Mike Lupica is, but if you asked 100 people in Denver or St. Louis who he is, they wouldn't know. Writers build a reputation by writing about local issues, teams, and personalities.

Finally, The National also incorrectly believes that the notion of a national sports daily is reinforced by there being more sports on television and radio. In fact, The National's reader is being wooed by TV and radio, which have never been more sophisticated, informative, and appealing than they are now.

ANALYST
KEN NOBLE

Media analyst, Paine Webber, New York City; has watched newspaper and magazine properties for 23 years

This may look like a newspaper, but economically it is a magazine. That means it'd probably be better off with a cover price of $1. The higher price would demonstrate to advertisers that indeed the audience is above average and therefore desirable. It would also enable it to generate profit sooner.

I'd also consider trying out the paper in one city at a time. That lowers the investment cost and allows it to test the concept in one market before committing to the next. By going national quickly, they've created a splash, but I'm not sure how much that splash is worth.

It's going to be tough to obtain the circulation numbers with a newsstand approach. Street sales are erratic because buying a magazine on the newsstand is an impulse buy. The newsstand circulation of magazines has been declining for years now, in part because of increased competition for what space there is. The magazine industry is going very much toward subscriptions. That attracts advertisers because it offers a more stable audience.

CUSTOMER

RON REILLY

Senior vice-president/executive media director, Ogilvy & Mather, Los Angeles; has bought ad space in The National for clients

The key to the paper's success will be selling its editorial excellence. The National hired some very good writers, and it needs to continually push that, because that will keep it attracting the audience it wants -- upscale, not kids or statistic fanatics. To do that, it should continue to promote Deford, do advertising that features the editorial staff.

The financials are somewhat optimistic on when they'll turn profitable. That's not a problem, though, as long as the pockets remain deep. It's refreshing to see people who still understand the value of a brand: that you can still create something with long-term value. Sports Illustrated wasn't profitable until its 19th year, but Time Inc. continued to invest in it and today has a valuable franchise.

The advertising revenue for year one is reasonable. The National will not have great difficulty attracting advertisers, because the audience it expects is an appealing one. Down the road, ad sales will be guided by the actual readers of the publication and the health of the circulation -- will people continue to buy it, or will it become a sporadic purchase? Will the circulation be stable on a day-to-day basis? I don't think it will; I think they'll see significant fluctuations.

Will they succeed? I believe that they have a good chance of succeeding. They've hired a good staff. It will not be a success like People magazine, which hit big almost instantaneously. The real question is, how deep are Mr. Azcarraga's pockets -- or how big is his ego, pick one. If his pockets are deep or his ego is big, then I think over time it can succeed.

COMPETITOR
THOMAS G. OSENTON

President and CEO, The Sporting News, a St. Louis-based sports weekly with 730,000 circulation

They've identified a market that has a great deal of vitality: advertising pages in the sports category have grown significantly over the years; the number of newsstand sales generated by the sports category has grown in the past several years, as has the number of subscribers in the category. Major-league attendance each year has been reaching record levels.

But The National is asking people either to add this source to their reading list or replace something else with it. I don't know that people have the time to add it.

Can it replace The Wall Street Journal? The New York Times? USA Today? You have to get almost market specific and person specific. To speculate is tricky -- there was so much speculation about whether ESPN would succeed or CNN or USA Today, and they all generated an interest and an audience.

I don't view The National as a threat because The Sporting News isn't daily. Our mission is to give retrospectives and previews of the sports world on a weekly basis. As a result, the time spent with each publication will differ greatly. A daily is designed for readers to move in and out of and then toss away; a weekly is slower and more thoughtful. Our relationship with the reader is very different, and from the standpoint of the appeal to the advertiser, more attractive, because we have the attention of the reader for a longer period of time.

Last updated: Apr 1, 1990




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