Why keep publishing a magazine that loses $2 million a year?
Because it’s Playboy. And without Playboy magazine, it’s harder to sell Playboy socks, Playboy T-shirts and Playboy luggage.
And so it is that the magazine, once hugely popular and a signifier of hip, is now a loss leader that exists for the sake of publisher Playboy Enterprises Inc.’s licensing and digital media operations.
“There is a legitimacy and credibility that print immediately delivers,” said Scott Flanders, chief executive of Playboy in Beverly Hills. “And so for a brand of our global reach, the magazine still plays a valuable role and is not going away.”
As Flanders attempts to steer the company out from a sea of debt, he said the magazine doesn’t need to make money – it just needs to keep the Playboy brand alive.
That brand is expanding, launching a “safe-for-work” website and app and continuing to lend its name and image to everything from luggage to a new West Hollywood bar as the publishing company started by Hugh Hefner in 1953 pivots to reposition itself as a monetizer of a lifestyle image.
Nowhere is that shift more apparent than in China, which has become the company’s biggest licensing market. Consider this: Playboy-branded products generated more than $500 million in retail sales in the country last year, despite the fact the magazine has never been sold there due to state censorship.
Those over-the-counter sales in China – of apparel, accessories, shoes, handbags and luggage carrying the company’s rabbit logo – translated into about $25 million in licensing revenue to Playboy last year. (By the way, company insiders call the logo “the rabbit head,” not “the bunny.”)
“To get so much net royalty revenue from a country where we make zero media revenues speaks to the aspirational lifestyle Hef has created,” Flanders said. “We were well-timed for the rise of the middle class in China, where the consumer feels that when they can afford Playboy-branded merchandise, they have truly arrived in the middle class.”
Downsized
When Flanders arrived at Playboy in 2009, the firm, then publicly traded, was loaded with debt and had been told by the New York Stock Exchange that its shares would be delisted, the company’s market cap having fallen below the exchange’s minimum threshold of $75 million.
Meanwhile, the magazine, which at its peak in the early 1970s was one of the most successful in the nation, selling 7 million copies a month – rivaling photo-heavy Life and easily topping news magazine Time – saw its circulation dip to 1.5 million.
Flanders and private equity firm Rizvi Traverse of Birmingham, Mich., took the company private in 2011 and looked to licensing as the way ahead.
He downsized the business, culling its workforce from 626 when he took over to 210 today, and moved the headquarters and most employees from Chicago to Beverly Hills, a move he said was aimed at boosting the Playboy brand’s potential.
“Beverly Hills offers the most sophisticated lifestyle in the world,” he said. “Borrowing the city’s brand equity for Playboy speaks to the aspirational nature of where we wish to take this brand.”
It was a logical place to move, since the company’s iconic Playboy Mansion was already in the neighborhood. Unlike the flashy mansion, Playboy Enterprises’ offices are on the second and third floors of a modern low-rise office building near Beverly Hills City Hall, with Playboy pinball machines in the lobby.
Flanders has also built up the company’s social media operation, bought back the rights to Playboy.com – which had been sold along with the firm’s adult TV channels – and slowed the bleeding at the magazine.
“We were losing a million dollars an issue, $12 million a year, on the magazine,” he said. “It’s still losing money, but nowhere near at the rate it was.”
Helping to cut those losses was a push to franchise the magazine to international partners. There are now 23 licensed international editions, which mix the content of the American edition with local features and photoshoots – material over which Playboy retains veto power.
The latest is a Spanish-language edition, Playboy Latino, which launched in December with a 75,000 print run and is targeted at the Hispanic market in the United States.
While sales of the flagship U.S. edition continue to decline, along with the rest of the magazine market, and now hover above the 750,000 mark in the latest circulation figures, Playboy’s online and mobile audience is growing all the time, according to the company.
Playboy.com is currently generating 20 million monthly unique visitors – five times more than it was prior to last summer’s relaunch in a “safe-for-work” format, meaning no nudity, giving the company opportunity to monetize a larger audience through advertising.
The same opportunities are also presented by a new nude-free app, Playboy Now, that, like the site, sprinkles advertising into its mix of lifestyle features and glamor galleries.
Playboy hopes it can grow its digital audience, especially among young consumers that advertisers crave, and eventually turn digital into as big a revenue source as its licensing business. In part, that’s because Flanders knows magazine sales will continue to fall.
“We expect the magazine sales will continue to shrink, slowly but not dramatically, but it will still be important to us,” he said. “If you were launching a media business today, a magazine wouldn’t be the first medium that you would consider in trying to reach the broadest audience.”
Bunny breeding
Playboy’s latest licensing move is to get back into the nightlife business – a scene Playboy Clubs used to be a big part of until the last one closed in 1986 – with the opening of Bar 53 on the Sunset Strip.
Taking its name from the year the magazine was launched, Bar 53 sells Playboy-branded beer and spirits, and featured Playboy bunny girls at last month’s opening-night festivities. The bar is operated, under a license with Playboy, by Lore Group, an L.A. firm that also operates nearby bars Pearl’s and Rock&Reilly’s. It’s a small deal, but every little bit helps, Flanders said.
“It’s not going to produce massive sums for us, but it’s good for the brand,” he said.
Indeed, all profitable revenue is attractive to Playboy, which is looking to extend its global licensing profits still further.
Company executives have had discussions with potential partners in Mexico, Panama and the Philippines about more Playboy-branded nightspots in those countries. Last month, the company announced an expanded licensing deal with Chinese firm Hadong United, which will add more Playboy-branded products for consumers there.
As Playboy continues to grow its licensing business, the company is still working its way out from under a massive pile of debt. It lost more than $200 million in its final two years as a public company and had more than $100 million in debt then.
Added on to that is the debt the company itself incurred as part of the 2011 transaction that took the company private.
The company last year refinanced $147 million in debt, leaving it with borrowings equal to eight times its earnings before interest, taxes, depreciation and amortization, or Ebitda, according to a report last year from credit ratings firm Standard & Poor’s.
That’s a big ratio, said Jonathan Zucker, senior vice president and head of the capital markets group at West L.A.’s Intrepid Investment Bankers, which is not affiliated with Playboy.
He said if Playboy were to look for credit today, most lenders would likely feel comfortable lending only up to five or six times the company’s Ebitda, and Playboy would likely end up paying interest in the high single digits.
Flanders would not disclose the company’s outstanding debt or earnings figures, but said the company is “absolutely profitable” and described Playboy’s debt level as “comfortable.”
“We’ve refinanced three times since 2011,” he said. “Our current facility is held by a single lender. It’s directly tied to our licensing business. We have no quarterly financial requirements for that debt and as long as we pay the interest and amortization on that debt we aren’t limited in any of our strategic flexibility.”
Zucker said if the company is profitable and has been growing its revenue, there’s a good chance its debt-to-Ebitda ratio has fallen. He also said it’s easy to see the opportunity to continue to expand the brand’s presence overseas.
“There’s a huge international market that embraces some big, big American brands later in their life cycle,” he said. “It’s probably even more powerful abroad than it is locally.”
While Flanders, a 58-year-old former tax attorney who read his first issue of Playboy when he was a 13-year-old Boy Scout, runs Playboy, he still defers to Hefner, who retains a stake in the company, on one major matter: the selection of Playmates.
“Hef is 89 and has earned the right to focus on what he’s passionate about,” Flanders said. “That’s the magazine, which he works on daily, and we’re blessed he continues to care as much as he does about it. His formal title is editor in chief and he still selects every Playmate that appears in the magazine and approves every cover.”
