TV guide facelift seems to be working but red ink still flowing.

Marketing disasters like New Coke and the change of United Air Lines' name to Allegis demonstrate the risks of fiddling with an established brand.

So when publishing professionals considered turning the iconic TV Guide from a digest-sized listing of television shows into a full-sized magazine with more news and feature stories, they approached the task with caution.

The jury remains out on the changeover. The magazine is still losing money but the costs the company penciled in for the transition have been lower than expected. Newsstand sales are up and circulation figures have been encouraging.

Before attempting surgery on the weekly magazine, parent corporation Gemstar-TV Guide International of Los Angeles conducted extensive research. After two years and millions of dollars, a picture emerged of two distinct groups of readers.

One segment, consisting mostly of older and male readers, showed strong loyalty to the traditional TV Guide format. The other group, skewing younger and female, wanted more feature stories and less data.

Financially, the magazine was ratcheting down toward breakeven. Excluding special items, it had an EBITDA (earnings before interest, taxes, depreciation and amortization) of $3.6 million in 2004 on revenues of $384 million. The previous year, EBITDA was $7.9 million on revenues of $424 million.

"We were reaching a tipping point, and we needed to look to the future and make a radical transformation," said Scott Crystal, president of TV Guide Publishing Group.

"This was far beyond a redesign, because magazines do those all the time. This was a total transformation of the magazine brand."

One study by market researcher Penn Shoen & Berland asked both TV Guide subscribers and general consumers if they had enough information about television. Despite the glut of entertainment magazines on the newsstand, 60 percent of respondents said there wasn't enough information available. About 80 percent wanted up-to-the-minute, detailed coverage of their favorite shows, and 90 percent indicated they would read TV Guide if it covered the medium that way.

"We have inverted the model. The old digest was 75 percent listings, whereas now it's 75 to 80 percent features," Crystal said.

The new full-sized, full-color magazine launched in October. Crystal emphasized that the new TV Guide doesn't want to be a celebrity book; he describes it as a special-interest enthusiast publication for avid TV watchers.

Simultaneous with the re-launch, the magazine cut 3 million so-called sponsored subscriptions, obtained through promotions with organizations or marketing partners. The magazine reset its rate base (the minimum circulation guaranteed to advertisers) at 3.2 million copies per issue.

By shifting to a new audience, the magazine anticipated losing a chunk of its core readership. The re-launch came down to a calculation of whether new subscribers would compensate for the losses.

"We knew we were going to frustrate some of our customers who had been with us over the years. That's what made it such a unique decision in consumer branding," Crystal explained. "It was a tough call, but we felt we had to make it for the future as a magazine and as a brand."

Circulation boost

In January, Gemstar announced that preliminary circulation data showed the magazine had over-delivered by more than 50 percent on its rate base for the first 11 issues. Circulation averaged 4.9 million copies.

Better yet, average newsstand sales increased 38 percent to approximately 400,000. Although newsstand sales count for only about 5 percent of total circulation at most national magazines, those sales can spike or fail, based largely on the appeal of the magazine's cover and graphic presentation.

"The magazine has seen far fewer cancellations by existing subscribers than had been projected in light of the drastic redesign," Gemstar said in the January circulation statement. "As expected, the likelihood of a customer to cancel increased with their age."

Given the better-than-expected results, Wall Street took a quick liking to the new format. Of the seven analysts who cover Gemstar, five currently give the stock a "buy" or "accumulate" recommendation.

Based on the company's fiscal 2005 performance, April Horace, an analyst at Hoefer & Arnett in New York, switched her call from "neutral" to "buy." She stated that previously, Gemstar estimated lost revenues from the magazine revamp would total $100 million to $110 million. During 2005, it lost about $60 million, about the same as previously estimated. In her note to investors, Horace said she was encouraged that Gemstar "was focused on churning out cheapy subscribers and maintaining the 'higher quality' subscriber, something consistent with what DirecTV is doing as well. Over the long term, a smaller, higher quality subscriber base is better than a large, lower quality, lower RPU (revenue per user) subscriber."

First quarter 2006 results, announced May 4, showed that revenues for Gemstar's publishing segment declined $32.6 million, or 46 percent, compared to the first quarter of 2005. Publishing lost $13.6 million, making it the only operating unit of the company with a negative performance. Circulation averaged 4.1 million copies during the quarter as the company continued to weed out sponsored-sale subscribers.

Horace has a target price of $4 per share for Gemstar, which trades on Nasdaq under the symbol GMST. The stock currently sells for around $3.30 per share.

In keeping with the enthusiast publication business model, most of the advertising in TV Guide originates in the industry it covers. The firm has benefited as the number of networks, cable channels, shows and related media has grown, providing a greater number of prospective advertisers.

While the magazine has held its core advertisers, the new format allows it to lure advertisers in other categories. Crystal reported the publication has landed more ad pages from consumer electronics, beauty, packaged goods and pharmaceutical companies.

"We had anticipated the magazine would move to a younger and female demographic, as well as more affluent. That's exactly what we see in new subscribers," said Crystal.

As for the show listings that formerly anchored the magazine, they have migrated to other media. Users can access them for free online at TVGuide.com, as well as a myriad of other program listing sites. Downloadable listings work on mobile devices, and can be localized and customized. The TV Guide Channel, distributed via cable, has the listings as well.

Prime position

Technology and brand power have given Gemstar a prime position in the interactive program guide (IPG) market. IPGs help viewers locate a show on their satellite or cable system and watch or tape it for later viewing. According to a report from research firm InStat, "TV Guide is still in a position to define the agenda for the IPG market. Their large installed base, key customer relationships, and the power of TV Guide's brand name will keep them in command for the immediate future."

The convergence of print, online and on screen represents the future for Gemstar's fortunes. "The transformation couldn't have been better timed in terms of the media industry," said Crystal. "Consumers now have the ability to choose what to watch and when to watch it. They have more choices than ever, and we help the consumer do that.... We're more relevant than ever before."

JOEL RUSSELL

Staff Reporter