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THE NATION’S NEWSPAPER Special Reprint Edition As seen in Money November 14, 2005 Can Mansueto turn magazine publishing bust into a boom? Publishing ‘isn’t a hobby’ for Morningstar founder By Mindy Fetterman USA TODAY CHICAGO — This story about Joe Mansueto is not going to start with the tale of how he founded mutual fund research company Morningstar, now with nearly $200 million in annual revenue, in a one-bedroom apartment here 21 years ago with $80,000. (Although he did.) It is not going to start with how he sought the help of legendary designer Paul Rand to develop a logo for his young company, and Rand made a rising sun out of the "o" in Morningstar to play off the Henry David Thoreau quote that Mansueto named the company after: "The sun is like a morning star." (Although he did.) It is not going to start with how he took the company public in May, making his stake worth more than $800million. (Although he did.) And it is not going to start with how one day in May he got an e-mail from a colleague who said he should buy two struggling business magazines, Inc. and Fast Company, and three weeks later bought them for a bargain price of about $35million. (Although he did). No, no, no, no. This story about Joe Mansueto, 49, is going to start with a few words from Mansueto, described by the editor-in-chief of Inc. as "a very zenlike guy, even though he is from Muncie, Ind.," about how to be a successful entrepreneur. "Read all of Berkshire Hathaway's annual reports, and then read them again." Of course, there's more to it than just studying the folksy, very direct words of his hero, investor Warren Buffett, the second-richest man in America. And Joe, as everyone calls him, knows that. Now Mansueto (pronounced manSWEH-to) will try to bring an entrepreneur's sensibilities to an established, some would say moribund, industry: magazine publishing. Will entrepreneur-speak work in a business where advertising sales have declined year after year, where the market's crowded with 500 new titles a year, and where profits can be so tough to make that even well- About Joseph 'Joe' Mansueto Age: 45. Daniel Title: Founder, chairman and CEO of Morningstar. Family: Married, three children. Education: Business administration, University of Chicago; MBA, University of Chicago Graduate School of Business. Among honors: SmartMoney magazine power broker, 2001; Distinguished Entrepreneurial Alumnus Award, University of Chicago Graduate School of Business, 2000. Salary: $100,000 a year. known magazines such as The New Yorker go nearly 20 years without a profit? "It's a very tough business with an uncertain future," admits John Koten, named by Mansueto to be editor-inchief of Inc. and CEO of both magazines. Will his focus on building a strong brand, his emphasis on choosing the Reprinted with permission. All rights reser ved. AS SEEN IN USA TODAY’S MONEY SECTION, NOVEMBER 14, 2005 A tough decade, so far The number of ad pages has declined for Inc. and Fast Company: owner would have killed Fast Company, he says. Some argue it's not quite fair to compare today's ad climate with the pre-tech-bubble-bust days, because everything was so crazy back then. Still, the numbers are grim. Inc.'s ad pages fell 46% from 2000 to 2004. Fast Company's fell 72%. It is now "in the advertising toilet," says Steven Cohn, editor of Media Industry Newsletter. "They have to compete with BusinessWeek, Forbes and Fortune," Cohn says. "It's a sharks' lair." Is it at the bottom? Buying two magazines isn't completely out of Mansueto's realm. He owns 50% of a weekly entertainment magazine in Chicago called TimeOut Chicago and tried to buy Chicago magazine. If you think about it, Mansueto says, Morningstar is a publishing firm. He started the company as a monthly newsletter of statistical data on mutual funds and an annual megabook of statistics with five-star ratings. The design of the numerical grids and ratings was a key part of the guides' success. It was much more user-friendly than traditional financial agate tables. "We look at every square inch of the page," he says. Morningstar, now with websites and software programs for stock and mutual fund analysis and investment planning, has grown to more than 800 employees in the USA and 17 other countries. Its third-quarter profit rose 83% to $7.5 million, or 17 cents a share. The stock (ticker: MORN) traded Thursday at $30.65, up from $18.50 a share when it went public May3 on the Nasdaq exchange. It may turn out that Mansueto has bought at — or very near — the bottom of the business-magazine bust. One sign is that Conde Nast, publisher of Vogue, Vanity Fair, The New Yorker and Wired, among others, announced in August that it will launch a business magazine, likely in 2007. "It's like trying to time the stock market; it doesn't work. The fact that the ad market is up or down so many points doesn't matter to us," says David Carey, president Inc. Number of ad pages 2,000 Leading business magazines Top business magazines, by 2004 paid circulation, in categories: General interest BusinessWeek 982,790 Forbes Fortune 1,735 928 1,000 0 ’00 ’04 The Economist Harvard Business Review Entrepreneur/small business FSB 1 million Fast Company Inc. Business 2.0 Entrepreneur Black Enterprise Personal finance Money Kiplinger’s Personal Finance Smart Money Barron’s Worth 924,908 897,401 482,314 240,222 Fast Company Number of ad pages 720,998 656,182 585,093 560,895 508,552 1.9 million 1 million 819,844 300,635 125,000 By Marcy E. Mullins, USA TODAY 2,126 2,000 595 1,000 0 ’00 ’04 Source: Magazine Publishers Association right people and letting them just do their jobs, his love of design, his ability to adapt new technologies and his philosophy that the best way to grow a business is to invest in it — will any of that work in the magazine biz? Total ad pages in the magazine industry plummeted after the tech bubble burst in 2000, and the 9/11 terrorist attacks hurt the business further, particularly business magazines. The drop continues for the big three — BusinessWeek, Fortune and Forbes saw ad pages drop 11.3%, 14.7% and 4.5%, respectively, through Oct.31, says Mediaweek Editor Michael Burgi. The two magazines Mansueto bought were even more closely identified with the hot, hot business climate of the '80s and '90s. "Fast companies have come and gone," says Samir Husni, a magazine professor at the University of Mississippi. "These are two of the luckiest magazines in the world because they found Joe Mansueto, and Joe Mansueto found them," Burgi says. Without him, it's likely any new Reprinted with permission. All rights reser ved. Page 2 AS SEEN IN USA TODAY’S MONEY SECTION, NOVEMBER 14, 2005 Mansueto offers tips for entrepreneurial success Create a strong brand "It's hard to do, but people do value Coca-Cola over other brands. When we started Morningstar, we essentially created our own industry even though there were competitors. But we innovated and defined our business on our own terms. We developed a core of users, very loyal users, and that helped us grow." instance. Most consumers just look for the cheapest seats, hence we have a lot of bankrupt airlines. Our moat was our brand, our large number of loyal users, our unique databases, our proprietary analysis of funds and our star ratings." Ours was four issues for $110. Pretty soon, the money was coming in, I leased office space, and now we have $60million a year in paid subscriptions. You get the money upfront to produce your product." Stay close to your customers "When we started, we were all in one big room (in his apartment). We all answered the phones; we all did the work. If a customer suggested we do something, like ABC, we'd add it in the next issue. Just like that. "We developed a very tight bond with our audience." Keep plowing money back in "Our first year, we had revenue of $97,000. Our second year, $120,000. Our third year, $180,000. Our fourth year, $400,000 and on and on until $1million. This year we'll have more than $200million in revenue. And we got there by putting one foot ahead of the other. It's like running a marathon. You don't start out saying, 'Oh my gosh, I've got 26 more miles to run.' You run the first mile, then the second mile, then the third. It's like the law of compounding. You can build a sizable firm if you just stay focused." Build a moat around your business "A good business has a wide moat around it, a defensible position, a uniqueness, an expertise. Microsoft did it with a network; eBay did it (by getting) a large number of users. A bad business is a commodity business, like selling airline seats, for Get paid first, then deliver "The good thing about publishing is your customers pay for a subscription. That allowed us to grow the business without outside money. New ideas And, of course, Mansueto has some ideas about that to do with his two titles. After five years of being owned by Gruner + Jahr USA Publishing, a division of German publishing giant Bertelsmann, the staffs were "demoralized, wrung out and exhausted," Koten says. Photos by Inc. and Fast Company paid). After the publishing bust, they couldn't get the return on investment, so they started cutting back here, cutting back there," he says. The magazines were "being managed by a subsidiary of a subsidiary. No one paid that much attention to them." Mansueto increased the number of editorial pages in Fast Company by 10 for the first edition under his ownership, and 10 more for the next. At Inc., they're using better — more expensive — paper for the Bought: Inc. and Fast Company face rebirth of the new Conde Nast business publication division and former publisher of The New Yorker. "There's always room in every (magazine) category for a fresh and unique take." The former owner "systematically underinvested" in the publications, Mansueto says. They "paid a lot of money for them ($550 million, more than 15 times what Mansueto Reprinted with permission. All rights reser ved. Page 3 AS SEEN IN USA TODAY’S MONEY SECTION, NOVEMBER 14, 2005 cover and inside pages. The Inc. 500 edition this month was "the biggest since 1999," he says. Koten says Mansueto has been fairly hands-off so far. "He has a very light touch. He provides a lot of subtle wisdom, and he's not dictatorial at all," Koten says. Since "I don't like working for other people that much," he says, their relationship is working out fine. The two magazines have had to focus on setting up a back office — accounting, circulation, even "installing our own (computer) servers," Koten says. When they were part of Gruner + Jahr, those things were handled by the larger company. "Joe didn't buy a completely functional business," Koten says. The two titles also must refocus their missions. Inc.'s is more clear: to serve readers who own a company or want to. Fast Company's is murky. Koten says it's going to focus on new ideas bubbling up from "the creative class," the designers, innovators and thinkers in industries such as film, fashion, video games, communication, marketing, advertising and technology. "In December, we'll have a filmmaker on our cover," he says. "It should be striking and startling." Mansueto says the magazines are going to focus on stronger journalism, better design and better photography. "Someone willing to invest for the long term is a breath of fresh air," Mansueto says. He says magazine ownership "isn't a hobby" for him, although some in the industry think that it is. He says he'll make money because readers and advertisers will return to Inc. and Fast Company when they see the coming improvements. "The time to buy," he says, "is when things are out of favor." (And he did.) Entrepreneurship Can he turn magazine bust into a boom? ip, entrepreneurship, analysis APPLICATIONS: business, leadersh to’s VOCABULARY 1. stake 2. zenlike 3. moribund 4. respectively 5. agate 6. subsidiary name of Joe Mansue DISCUSSION: What inspired the to John Koten, editor-incompany, Morningstar? According s it take to be a successful chief of Inc. magazine, what doe nt to create a strong brand? entrepreneur? Why is it importa osophy? What will his magWhat is Mansueto’s business phil azines focus on in the future? tips for entrepreneurial sucACT IVI TY: In the sidebar about good business has a wide cess, Mansueto contends that “a iness or industry that is moat around it.” Choose one bus s and another that is in experiencing tremendous succes a diagram for each (see financial straits. Then, create ude the busipossible example at right). Incl Moat components components ness or industry’s name, and the Business “moat” that or strategies in the company’s name/type of essful. product or make it either successful or unsucc Moat components Moat components service offered © Copyright 2005, USA TODAY, a division of Gannett Co., Inc. Moat components Page 4