Tabloid Shocker!

Enquiring minds want to know why the National Enquirer and its parent company are doing so badly.

If you’ve made your pile through a comparatively boring pursuit like real estate or management consulting (or by inheriting or marrying it), owning a magazine can confer intellectual or social legitimacy. That’s why plenty of owners hold on to money-losing periodicals: William Buckley at the National Review, Martin Peretz and his predecessors and successors at the New Republic, S.I. Newhouse at TheNew Yorker (sometimes), and David Bradley at the Atlantic. And it’s also fun and status-building to own magazines that might not have redeeming social value but make a ton of money, such as People or Vogue.

The nightmare scenario for the status-conscious Type A would be to own and run magazines on the bottom of the food chain—say, supermarket tabloids—and lose money in the process. And that’s precisely the dubious feat that the highly intelligent, sophisticated, and experienced owners may be about to achieve at American Media, the publisher of the National Enquirer, Star, and Globe.

In 1999, Roger Altman, veteran of the Carter and Clinton administrations, former vice chairman of the Blackstone Group, and co-founder of private equity firm Evercore—got together with David Pecker, the infelicitously named former head of Hachette’s magazine unit, to buy publicly held American Media. They paid close to $300 million for the Florida-based company, which carried about $470 million in debt. The plan was to replace the chumps running the tabloids, gussy up the trashy magazines, recruit better advertisers, and buy up the competition.

Pecker set about executing the strategy. In 1999, American Media spent $105 million to buy the company that owned Globe and other tabloids. Pecker also acquired nontabloid magazines. In the fall of 2002, American Media agreed to pay $350 million, most of it borrowed, for Weider Health and Fitness, which owned Shape and Muscle & Fitness.

But to really compete with the big boys in New York, Pecker realized he would have to move back to New York and get a big New York editor. (The bizarre 2001 anthrax episode at the company’s Boca Raton building likely accelerated the departure.) Pecker scored a major coup in the summer of 2003 when he hired Bonnie Fuller, the much-traveled, hard-driving editrix (Glamour, Cosmopolitan) who had turned Us Weekly into a money machine. As Carl Swanson put it in this feature on Fuller in New York, “Fuller made her name—and moved the newsstand needle—by pushing magazines down in the direction of tabloids.” Who better to turn the tabloids into respectable magazines and thus attract advertisements for cars and consumer products instead of tobacco and diet pills?

Pecker and Fuller spent lots of cash on editorial and design talent, marketing, and bulked-up New York offices. The centerpiece of the undertaking was Fuller’s effort to turn Star into a glossy celebrity magazine.But the seven-year endeavor to rebuild a Condé Nast (or a Condé Nasty) out of a bunch of junky tabloids and muscle magazines is languishing. The last several years have been a difficult period for all magazines as advertising dollars (and readers) continue to migrate online and to cable television. Respectable large- circulation national magazines like Time, Newsweek,and Fortune are losing readers, advertising, and in some instances, both. So, too, are American Media’s publications. Between 2003 and 2005, as this 10-K for the fiscal year ended March 31, 2005, shows (see page 13), circulation of the revamped Star is up. But other publications like Flex, Fit Pregnancy, Shape, and Natural Health have lost circulation even as they maintained or cut the cover price.

When it comes to the tabloids, Fuller & Co. may be victims of her success. Celebrity magazines are multiplying like rabbits and going downscale. InTouch Weekly,the rapidly growing entry launched by Bauer Publishing in the fall of 2002,retails for a mere $1.99, cheaper than Star.The price war has cut into profits. And the Internet, which is displacing newsprint as a source of salacious gossip, is cutting into circulation. The National Enquirer’scirculation fell from 1.4 million in 2003 to about 1 million in March 2005.

American Media’s revenues have been growing more slowly than operating expenses over the last two years. To aggravate matters, American Media is saddled with nearly $1 billion in debt. In last year’s third quarter, operating income was $15 million—down a third from the previous year—and interest payments were $24 million, up 37 percent from the previous year. That kind of disconnect isn’t sustainable for long.

As a result, the market is getting skittish about the company’s long-term viability. The company’s bonds are as shaky as Jessica Simpson and Nick Lachey’s marriage was. Bond research outfit Debtwire in February added American Media, along with troubled automaker Ford, to its Distressed list. The fact that the company delayed issuing its most recent quarterly report hasn’t helped.

And so Altman, Pecker, and Fuller seem to be trapped in tabloid hell. The likelihood of an initial public offering or a sale to another company seem remote. It could be that these savvy players know something we don’t about the tabloid and celebrity journalism business—Altman has an excellent long-term record, after all. But it also could be that these guysmiscalculated the attractiveness of their products. And for all their experience and success in the world of glossy magazines, Pecker and Fuller just may not be able to spin tabloid dreck into commercial gold.