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  • | 7:56 a.m. September 6, 2013
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To get a sense of how the magazine business has changed, consider Motor Trend Magazine.

The car-enthusiast magazine now has 1.6 million subscribers on its YouTube channel, vastly exceeding its 1 million print subscribers.

Behind the digital push is Michael Sullivan, the president and CEO of Source Interlink and a veteran of the magazine business. Besides Motor Trend, the company publishes more than 70 magazines in the auto and sports enthusiast categories.

At the heart of this digital push is a 15,000-square-foot state-of-the-art digital production studio in El Segundo, Calif., where videographers, editors and producers create more than 60 hours of original programming for Motor Trend and other publications.

Social media is a big part of the push, too. With 90,000 followers on Instagram, for example, Source Interlink's Surfer magazine last year had more Instagram followers than Sports Illustrated or Vogue. “There are a million surfers, but there are 100 million people who want to be surfers,” Sullivan says, quoting the magazine's publisher.

Despite the push into other media, Sullivan says enthusiast magazines still have a place in the racks of supermarkets, drug stores and bookstores. Because of the dedicated fan base, he says, “I don't think they'll go away anytime soon.”

Source Interlink's roots are in magazine distribution, and the company currently supplies 45,000 retail outlets with an army of 12,000 in-store merchandisers. While its staff now distributes magazines for its own account as well as other publishers, Sullivan wants to handle other front-of-store items such as greeting cards, sodas and snacks.

Growth has been slow in recent years after emerging from a speedy 31-day bankruptcy reorganization in June 2009 that wiped out equity investors. Owned by its creditors and now privately held, Source recently restructured its balance sheet. The details of the recapitalization weren't disclosed, but Sullivan says it involved converting debt to equity in a bid to deleverage and provide the company greater liquidity.

As part of the recapitalization announced Aug. 21, GoldenTree Asset Management is increasing its ownership, though specific terms weren't disclosed. GoldenTree is a New York-based money management firm that specializes in investing in corporate debt and has $18 billion under management. Executives with GoldenTree declined to discuss their investment in Source.

Vast distribution network
Source has its beginnings in the magazine-distribution business. Under former chief executive Leslie Flegel, Source acquired small and inefficient regional distribution companies and cobbled them together into a national network through the 1990s through the mid-2000s.

Flegel consolidated the company's far-flung administrative operations to Bonita Springs in 2003, where he owned a condo. Today, the company has 238 employees in the Riverview Corporate Center overlooking the Imperial River near the Collier County line.

Flegel, who left the company in 2006, says magazines will likely continue to hold prime real estate in stores at the checkout counter. “Source's business has a future because single-copy sales have always commanded more attention from advertisers,” says Flegel, who now lives in Naples.
“When a customer pays $4 for a magazine they're going to read it.”

In 2007, Source got into the magazine publishing business with a debt-fueled acquisition of Primedia, the publisher of 78 consumer magazines including Motor Trend. Unfortunately, the timing was unfortunate as the recession was hitting. “It stumbled and fell under the debt burden,” says Sullivan.

Source filed for bankruptcy reorganization in June 2009, its days as a publicly traded company over after equity investors were wiped out. Investors included companies controlled by Los Angeles billionaire Ron Burkle. But creditors cancelled nearly $1 billion worth of the company's debt and provided it with $100 million of liquidity to continue operations.

Sullivan took over as president and CEO of Source Interlink in April 2010. An experienced executive and University of Florida alumnus, he previously served as president and CEO of Comag Marketing Group, a joint venture of Conde Nast Publications and Hearst Magazines.

Despite the challenges of the magazine business, Source Interlink continued to grow its distribution reach by adding new retailers and streamlining its warehouse operations from 58 depots to 30. It now services 45,000 retail outlets ranging from Target to Kroger, Safeway, Walgreens and 7-Eleven.

Source buys magazines from publishers at a discount and resells them in supermarkets, drugstores and bookstores, often in wire racks it has manufactured. Those stores share profits with Source while the company manages the inventory, returning unsold magazines to the publisher for credit.

But Sullivan says he's focused on getting his sales force of 12,000 merchandisers to focus on other products such as greeting cards, sodas and snacks that typically reside near magazines at the front of stores. “We're running outsourcing tests now,” says Sullivan.

Sullivan, who worked for Publix when he was growing up, says manufacturers of products such as snacks and cards will ship their product directly to the stores where Source merchandisers will arrange them in displays. That will save the company from additional warehousing and shipping costs while benefiting from the fact that its merchandisers are already in the stores handling magazines. “We don't want to touch any more than we have to,” he says.

Digital growth
Meanwhile, Sullivan has pared down the number of magazines that Source publishes to focus in two promising areas: automotive and enthusiast sports such as surfing, snowboarding and cycling. Gone are titles such as Soap Opera Digest.

Today, Sullivan says advertisers want more than just print exposure, though that's still the most profitable part of advertising today. “They don't want the traditional marketing campaign,” Sullivan says. “We had to change around the way we had to go to market.”

In addition to creating the digital studio in California, Source Interlink acquired companies such as Grind Media, MediaWorks and Mind Over Eye in 2010 and 2011 that specialize in creating digital platforms. “They had the platform, we had the content,” Sullivan says.

In particular, Grind has deals to publish content with Yahoo Sports. While Source's magazines boast monthly circulation of 6.3 million combined, its websites get 45 million unique visitors a month. “What used to be in print is now done in apps,” Sullivan says.

Still, print advertising commands the better rates and persuading advertisers to pay more for online advertising has been a challenge. “It's a tough row to hoe,” Sullivan says.

To boost brand awareness, Source Interlink organizes more than 50 events a year to promote its magazines. These include Bike Heavy Pedal Tour, Skateboarder's North Shore Bowl Jam, Surfer Cold Water Classic, and 22 Motor Trend auto shows.

The promotional opportunities are numerous. Source licenses its content and lends its brands' seal of approval to products such as automobiles and it sells more than 800 branded retail products, from apparel to jewelry, auto accessories and collectibles.

Source also hires out its publishing know-how. For example, the Competitor Group, which operates the Rock 'n Roll Marathon and Muddy Buddy running races, recently inked a deal with The Media Source, a division of Source Interlink, to provide subscription and newsstand marketing for its magazines.

Sullivan says Source Interlink has less name recognition than some of its counterparts in the publishing business, but that's motivation. “We have to work hard to be noticed,” he says.

 

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