2020 Print Forecast: The Quad-LSC Merger Is Off, but Competition Might Still Suffer

Though the merger of megaprinters Quad and LSC Communications has been called off, publishers may still find it harder to strike a favorable printing deal in the coming months.

Calling magazine and catalog printing “a broken part” of LSC, Tom Quinlan, the CEO, indicated earlier this month that LSC would be scaling back that part of the business and engaging in “something that I’ll call game theory.”

The announced closure of LSC’s Torrance, Calif., plant – which used to produce West Coast copies for all of the once-mighty Time Inc. weeklies – is just the first of several shutdowns that will generate cash and reduce LSC’s printing capacity, he indicated during the company’s quarterly earnings call with stock analysts.

Quinlan didn’t explain his cryptic “game theory” comment, so we have to read between the lines – as no doubt Quad executives already have.

One of the most common applications of game theory to the business world is to show that, in oligopoly markets (such as the printing of large-circulation U.S. magazines), companies can be more profitable by not competing aggressively. It’s better, the theory says, to let a competitor retain a client than to lure it away with aggressive prices; that just causes the competitor to lower its prices as well.

Game theory is especially effective when the competitor understands the game – and also decides to switch from “lose-lose” to “win-win” mode.

The U.S. Justice Department’s lawsuit opposing Quad’s acquisition of LSC focused on the “intense rivalry” between the two printers that has contributed to the multi-year trend of gradually declining prices for publication printing.

“They bid aggressively against each other by leveraging their scale and scope, and by undercutting one another’s prices,” Justice wrote. “As competition between the two reduced their margins, Quad and LSC contemplated a merger that would dramatically consolidate the industry.”

The aborted deal left LSC a damaged company. During the nine months when it appeared to be headed to the altar with Quad, it lost salespeople and customers, could make few strategic moves, and tried to prop up its stock price with unsustainable dividends.

After Quad and LSC called off the deal last month, LSC’s stock price dropped below $1, as investors worried that its high debt levels and low profit margins would eventually do it in.

The real winners from the Quad-LSC affair are the smaller printers that compete with the two giants. Their phones were reportedly ringing off the hook when Quad and LSC announced the deals, as publishers scurried to find alternatives to what they feared would be Quad’s near-monopoly market power. The new multi-year deals that resulted may make these smaller printers less inclined to price aggressively for even more new business.

A Calmer Paper Market

Last year at this time, the big worry for print publishers was paper, both shortages and rising prices.

The concern about shortages were real. Late in 2018, some publishers were printing on whatever paper they could get, even if it differed drastically in quality or price from their usual stock. Some ended up with “zebra books”: When you look at a trimmed edge of a closed copy, the varying shades of paper in different sections creates stripes from top to bottom (see below).

The shortages abated by early this year. In fact, there was a glut that led to the permanent closure of a U.S. magazine-paper mill. But, in contrast to previous paper-market cycles, prices have only inched down rather than crashing.

That’s the new normal: As the magazine and catalog businesses shrink, paper companies are adjusting their machines to make packaging papers and other products that have growing demand.

In theory, they can now calibrate production to make just enough magazine paper to meet demand at relatively high and stable prices. The danger for publishers is that someone miscalculates, such as one company switching a machine entirely to packaging papers without realizing that another is doing the same thing.

Fortunately for publishers, the high prices and strong dollar make the U.S. an attractive market for foreign mills, especially those in Western Europe. In fact, if the dollar remains strong versus other currencies next year, competition from imports is likely to force some further price declines in the U.S.

The U.S. Postal Saga

The U.S. Postal Service seems likely to raise postage rates in January slightly more than 2%. By law, rate increases are capped based on changes in the rate of inflation.

The big question is what happens after that. The USPS’s increasingly dire financial situation has spurred more proposals to remove the price cap in general and to raise rates, in particular for the money-losing Periodicals class.

Any day now, the Postal Regulatory Commission will issue its 10-year review of the law governing postal rates, and the Postal Service will release its long-term strategic plan. Despite all the studies, commissions, and 10-year plans, any significant change to the rate structure would probably need the approval of Congress. That’s where postal legislation goes to die, except for those all-important proposals to rename post offices. And nothing controversial is likely to pass until after next year’s presidential and Congressional elections.

But with the Postal Service on an unsustainable path, things will eventually come to a head. And that could mean an end to the special postage rates that the Periodicals mailing class enjoys.

Since the time of Ben Franklin, postal rates have been favorable to periodicals. By law, publications with editorial content that meet certain other criteria, such as magazines, pay lower rates than physically similar but purely commercial items, such as catalogs.

Congress has shown little inclination to change the law, partly because too many members fear the wrath of newspapers back home that would vilify them if they threatened this sacred cow. (Daily newspapers usually handle their own deliveries, while weeklies typically use the Postal Service.)

But as declining circulations and competing media reduce the influence of weekly newspapers, or cause them to shut down, the remaining Periodicals mailers may have trouble maintaining their special status.

As for 2020, the forecast for the 'Three Ps' of magazine publishing looks like slightly lower paper prices, stable printing prices, and slightly higher postal rates.