There are many ways to spend &£26m. You could buy Manning Gottlieb Media twice over, or snap up a couple of Aroma coffee chains with money to spare. You could even splash out on a branding consultancy such as Fitch.
But publishing company IPC has chosen to stake &£26m on the high risk world of the Internet, with the creation of a new Internet portal venture, dubbed IPC Electric (MW July 29).
The new project is set for launch at the end of the year, depending on whether the banks agree that this is a wise way to spend such a lot of money – it is they, after all, who will provide IPC with the cash for the venture.
It is a phenomenal sum of money for a company which is already making substantial interest payments to its backers Cinven. But the extra earnings IPC could eventually gain through spinning off the venture or incorporating it into its flotation package will not have gone unnoticed by David Arculus and Mike Matthew, chairman and chief executive of IPC.
IPC, with its portfolio of women’s titles such as Marie Claire, Living Etc and Mizz is in a prime position to cash in on the next wave of surfers, who are expected to be young upwardly mobile women with money to spend.
And the news last week of Dixon’s Internet service, Freeserve, which was valued on its first day of trading on the stock market at &£2.1bn, is incentive enough for anyone thinking of jumping on the Internet bandwagon.
The move is the boldest and most positive step IPC has taken in the 18 months since its &£860m Cinven-backed management buyout in December 1997. It has been hit hard since then, with the announcement of 200 redundancies in January, a stream of high-level executive exits and static or falling sales of its magazines.
“IPC has got to do something radical and this is a radical move,” says David Stubley, managing director of Tempus-owned new media and sponsorship company MVi. “While it has had some success, the weeklies and monthlies haven’t really gone anywhere. Taking its established brands and creating new ones within the new media platform makes perfect sense.”
There are several revenue sources which have huge potential for portal owners, and which have fuelled the stock market’s recent grand passion for Net-related stocks.
Revenue can be generated by goods sold over the IPC Electric portal. By clicking through to company Websites, or by ordering directly from the page, IPC stands to gain a percentage of any purchase made.
IPC could also make money from selling advertising on its site, and it could get a percentage of call revenue from telecoms companies, if it offers a free Internet service.
The company may also generate substantial revenue from selling direct e-mail lists to advertisers by offering subscribers free e-mail in return for demographic information. In addition, it could charge a subscription fee.
If IPC manages to bring its new venture to the market early it could have another huge advantage. According to management consultants McKinsey, early movers onto the Internet have a unique opportunity to build customer loyalty and turn it into a lasting source of competitive advantage.
Joanna Barsh, director of the New York branch of McKinsey, says in the latest McKinsey Quarterly: “Today’s Internet users are settling into sites, not merely surfing. Those who have yet to go online are even more likely to settle in quickly.”
But there is a downside. No one has yet proven a model that can generate profit from the Internet as a standalone business, even if the sales business that e-commerce generates makes a good profit.
There is also a high risk of Internet ventures failing or being taken over by larger companies.
WestLB Panmure media analyst Paul Richards says: “There is a ten per cent chance that this kind of business could be worth &£1bn in three years’ time, but a 90 per cent chance of it being worth nothing. Who would be a manager in this business?”
But IPC, like its competitors in the women’s magazine market, such as Hearst and EMAP, cannot afford to ignore the portal bandwagon. If one of the other magazine companies steals a march, IPC will at the very least lose a vital brand extension opportunity. At worst, its readers may defect to the rival’s Internet site at the expense of magazine readership.
Hearst subsidiary the National Magazine Company, whose portfolio includes Cosmopolitan and Good Housekeeping, is expected to launch a version of its successful US operation women.com in the UK soon.
NatMags deputy managing director Duncan Edwards comments: “All I can say is that we are in negotiations with women.com about this.”
EMAP on the other hand said earlier this month that it was ploughing at least &£10m into Internet ventures. Two weeks ago it bought travel agency Taillebout in France, and plans to sell holidays online through its new Escape Routes magazine.
Condé Nast in the US signed a deal with home products company Williams Sonoma in June through CondéNet, its online operation in the US, to integrate content with e-commerce.
Williams Sonoma will handle all merchandising fulfilment and customer service while Condé-Net will retain control over all content. Both companies will split revenues from joint sales.
If e-commerce takes off among women, the implications for all magazine companies are far-reaching. They will move from being simply publishing houses, working with suppliers and distributors, to become virtual department stores and, as the CondéNet example shows, will need to access a broad range of skills, including building partnerships with retailers.
IPC will also need to graft a more dynamic culture onto its present form. MVi’s Stubley explains: “It is a different way of managing a business. IPC’s personnel will have to think on their feet more if they are working in the Internet business. IPC has traditionally been good at bringing titles to the market, courting distributors and wholesalers, but this is a different type of business.”
E-commerce creates a make-or-break opportunity for magazine publishers facing declining sales. But the threat of competition and the need to build new relationships with suppliers suggests a few sleepless nights for those at the top of the Kings Reach Tower as they ponder whether their &£26m has been wisely spent.