This article was downloaded by: [Laurentian University]On: 08 April 2013, At: 01:51Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registeredoffice: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

Journal of Media EconomicsPublication details, including instructions for authors andsubscription information:http://www.tandfonline.com/loi/hmec20

The Nonprofit Business Model: EmpiricalEvidence From the Magazine IndustryMiles Maguire aa Department of Journalism, University of Wisconsin, OshkoshVersion of record first published: 17 Sep 2009.

To cite this article: Miles Maguire (2009): The Nonprofit Business Model: Empirical Evidence From theMagazine Industry, Journal of Media Economics, 22:3, 119-133

To link to this article: http://dx.doi.org/10.1080/08997760903129333

PLEASE SCROLL DOWN FOR ARTICLE

Full terms and conditions of use: http://www.tandfonline.com/page/terms-and-conditions

This article may be used for research, teaching, and private study purposes. Anysubstantial or systematic reproduction, redistribution, reselling, loan, sub-licensing,systematic supply, or distribution in any form to anyone is expressly forbidden.

The publisher does not give any warranty express or implied or make any representationthat the contents will be complete or accurate or up to date. The accuracy of anyinstructions, formulae, and drug doses should be independently verified with primarysources. The publisher shall not be liable for any loss, actions, claims, proceedings,demand, or costs or damages whatsoever or howsoever caused arising directly orindirectly in connection with or arising out of the use of this material.

Journal of Media Economics, 22:119–133, 2009

Copyright © Taylor & Francis Group, LLC

ISSN: 0899-7764 print/1532-7736 online

DOI: 10.1080/08997760903129333

The Nonprofit Business Model: EmpiricalEvidence From the Magazine Industry

Miles MaguireDepartment of Journalism

University of Wisconsin, Oshkosh

This article seeks to shed some light on the nonprofit business model by considering empirical

data from one area of the media industry where nonprofits make up a sizable segment: periodical

publishing. The primary context for this study is the body of economic research into the effects

of organizational structure on firm behavior, which is used to propose hypotheses about nonprofit

periodicals. The results highlight management challenges that nonprofits face.

The possibilities of what has been called the “nonprofit business model” have piqued the interest

of commentators ranging from bloggers to former newspaper executives, media scholars,

investment managers, and even members of Congress. For example, Salmon (2009) argued that

a nonprofit approach is “for anybody who wants to put journalism first and have the business

side of the operation serve the editorial side, rather than the other way around.” Swensen andSchmidt (2009) contended tax-exempt structures and philanthropic endowments would ensure

“enhanced independence” so that newspapers could serve “the public good more effectively”

(p. 31A). McDermott (2009) cited two “tax code vehicles”—one for charities and the other

for social welfare organizations—that could provide options for news outlets that “are fighting

for their very survival.” Cardin (2009) argued for placing newspapers in a special category ofnonprofit organizations “to save local coverage by reporters who know their communities, work

their beats and dig up the stories that are important to our daily lives.” In sum, nonprofit status

has been touted as insulating media companies from unreasonable expectations of investors

and advertisers, redirecting journalistic attention toward serious matters of public policy, and

attracting deep-pocketed support and financial stability. What is missing from these discussions,however, has been an empirical examination of how nonprofit publishers are structured, how

they derive their income, and what their track record has been.

Correspondence should be addressed to Miles Maguire, Department of Journalism, University of Wisconsin,

Oshkosh, 800 Algoma Blvd., Oshkosh, WI 54901. E-mail: maguirem@uwosh.edu

119

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

120 MAGUIRE

Despite concerns that nonprofits may have certain characteristics that would limit their role in

journalism, advocates are confident that nonprofit funding of media efforts or direct publishingby nonprofits will have a positive impact (Guensburg, 2008). However, the amount of scholarly

research on nonprofit forms of media is scant, particularly when compared to the volume of

work that has been done on for-profit operations. This neglect leaves the nonprofit sector of

the American media as a vast but little-explored and little-understood segment of the industry,

although nonprofit media include the country’s largest circulation standalone magazine, anextensive range of book publishers, a handful of influential newspapers, a national system of

radio and television broadcasters, and the largest news-gathering operation in the world (the

Associated Press). Scholarship that touches on nonprofit media is generally limited to a narrow

topic, such as the high cost of academic journals (Bergstrom, 2001).

This article seeks to shed some light on nonprofit media by focusing on one area of the

media industry where nonprofits make up a sizable segment: periodical publishing. The primarycontext for this study is the body of economic research into the effects of organizational

structure on firm behavior, which is used to propose hypotheses about nonprofit periodicals.

These hypotheses are then tested using several sets of empirical data. The first of these consists

of 10 years of revenue data for the largest nonprofit periodicals, those that are included in

Advertising Age’s annual Magazine 300. These statistics are used to analyze the performanceof these nonprofit periodicals as compared to that of other large magazines, specifically the

ones that are operated on a for-profit basis and that are referred to in this article as “proprietary”

publications. A second set of data is drawn from the Internal Revenue Service’s (IRS) Statistics

of Income program, and these statistics are used to examine the periodical income of large,

nonprofit magazines in relation to the overall revenue streams, including membership dues,of their parent organizations. The findings are not intended to provide a definitive answer as

to whether nonprofit status can solve the business challenges facing media companies but,

rather, to illuminate some of the complexities that surround the issue of organizational form.

The article begins with background information about the nonprofit sector, generally, and then

reviews relevant communications and economics research before analyzing the performance of

nonprofit magazines.

THE NONPROFIT SECTOR

General studies of the media industry rarely acknowledge the nonprofit sector, even when the

focus is specifically on media economics. The term nonprofit does not appear in the index ofleading texts on media economics, including Picard (1989), Albarran (2002), Doyle (2003), and

Alexander, Owers, Hollifield, and Greco (2004). In fact, however, statistics from the federal

government indicate that nonprofit magazine publishers represent a significant portion of that

industry. Data from the IRS show that in 2003 an estimated 8,346 organizations reported $1.3

billion in periodical advertising revenue, an average of $153,486 per organization (Riley, 2007).Similar statistics from 2002, when the IRS also found nonprofit advertising income of $1.3

billion (Riley, 2006), make it possible to estimate the relative size of the nonprofit magazine

sector by using Census Bureau data from the same year on the overall size of the magazine

industry. Census data show that periodical publishers, both taxable and tax exempt, sold $17.4

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

NONPROFIT BUSINESS MODEL 121

billion of advertising in 2002, indicating that nonprofit magazines in the United States have a

market share of at least 7.4% (U.S. Census Bureau, 2004).That nonprofit publishers would be responsible for this portion of the overall magazine

market is consistent with statistics on the relative size of the nonprofit sector in the U.S.

economy. As of 2006, the nonprofit sector of the U.S. economy was estimated to comprise

about 1.5 million organizations, accounting for 5.2% of gross domestic product and 8.3%

of wages and salaries. The U.S. tax code recognizes more than 30 different kinds of tax-exempt organizations, although some are much more common than others. For example, slightly

more than one fourth of all tax-exempt organizations are religious congregations. More than

60% of tax exempt-organizations are registered as public charities under Section 501(c)3 of

the tax code, but these can come in different forms, including private foundations. Within

the public charity category, the most common types of organizations are human service,

education, and health care groups. Some of the other kinds of nonprofit organizations includecivic leagues, chambers of commerce, social clubs, and war veteran groups (Urban Institute,

2006).

To obtain nonprofit recognition from the IRS, an organization must operate for specifically

enumerated exempt purposes that are listed in the Internal Revenue Code and that range

from serving the poor to funding political campaigns (IRS, 2008). Producing a magazineis considered an allowable activity but, in the view of the IRS, selling advertising is most often

an activity that is unrelated to an organization’s exempt purposes and, therefore, subject to tax.

Out of concern that nonprofits could exploit their tax-exempt status to achieve a competitive

advantage over proprietary firms, Congress enacted the Unrelated Business Income Tax in

1950. This provision requires tax-exempt firm to pay taxes on income derived from activitiesthat are not related to their charitable purposes. In many cases, although not all, publishing

a periodical and selling advertising would generate unrelated business income. Hines (1998)

argued that the tax does discourage nonprofits from engaging in unrelated activities, although

IRS data show that relatively little is collected from this tax.

One obstacle to understanding the nonprofit segment of the economy is terminology because

two of the terms used most frequently to describe this sector are misleading or incomplete. Theword nonprofit implies a kind of organization that stands outside the laws of economics—one

that is exempt from the requirement to generate more cash than it spends. Obviously, no such

organization can exist for long. Tax-exempt is a term that is often used interchangeably with the

word nonprofit, but tax-exempt organizations are not completely sheltered from federal levies.

Many of them are subject to a tax aimed explicitly at their publishing operations. Nonetheless,nonprofits do have certain legal characteristics that alter their behavior in, and shelter their

operations from, the mainstream economy. Weisbrod (1988) identified these characteristics as

the exemption from corporate taxes on certain revenues, the ability in many cases to accept

tax-deductible donations, and the inability to distribute profits to managers or owners in the

form of dividends or stock. In general, nonprofit status provides a mix of greater and lesserflexibility. On the one hand, nonprofits have the opportunity to function with lower costs

and to tap tax-advantaged forms of funding in the form of charitable gifts; however, on the

other hand, they are unable to raise capital through the sale of stock or to use stock as a

recruitment and incentive tool for employees. Because of these characteristics, nonprofit media

firms, like their counterparts in other industries, present a challenge to traditional economic

analysis.

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

122 MAGUIRE

LITERATURE REVIEW

Expressions of concern about “growing pressures” on American media outlets due to financial

considerations are nothing new (Herrick, 2003). However, with increasing frequency over the

last 15 years, a recurring theme in media criticism and scholarship has been the supposedly

pernicious effect of the profit motive on content quality. One indication of how significant

the issue has become was that an entire special issue of the Newspaper Research Journal

(Winter of 2004; Lacy, Thorson, & Russial, Eds.) was devoted solely to an analysis of this

topic. Media critics and scholars have begun to turn their attention to nonprofit alternatives

as a way of offsetting financial pressures (Hamilton, 2004; Kennedy, 2007; Overholser, 2006)

and countering the excesses of commercial publishers (Boismenu & Beaudry, 2004). Baker

(2007) saw even greater stakes—specifically, the future of American democracy—and noted

that “media-specific tax and corporate legal policies” (p. 199) could encourage a greater rolefor nonprofits in shaping public discourse.

Several commentators, including a tax lawyer and the president of a journalism school funded

by a nonprofit newspaper publisher, have urged caution about viewing nonprofits as a panacea,

warning that nonprofit status does not necessarily ensure quality (Manship School, 2004).

Friedman and Richter (2006) noted potential ethical problems arising from “excessive anddisproportionate advertising” in nonprofit medical journals. Jeon and Rochet (2007) developed

a model of nonprofit publishing in which efforts to counteract price maximization strategies by

commercial publishers lead to declines in quality and, in some cases, circulation for nonprofit

publishers. The Congressional Research Service (2009) raised concerns about whether the

doctrine of commerciality, under which the IRS has refused to grant tax-exempt status topublishing organizations because it saw them as indistinguishable from ordinary businesses,

would limit the ability of media entities to operate as nonprofits.

Hansmann (1987) identified several “sometimes competing and sometimes complementary”

(p. 28) theories for how nonprofit groups function in the economy and for why they organize

on a nonprofit basis. These include the public goods theory, which states that nonprofits

operate to meet a demand for public goods not provided by government; the contract failuretheory, which states that nonprofits spring up in areas where consumers feel they are unable

to evaluate the extent to which that profit incentives may tempt service providers to deliver

lower quality than promised; the subsidy theory, which states that tax exemptions and other

governmental incentives encourage the development of nonprofit operations; and the consumer

control theory, which states that the formation of nonprofits is driven by consumer desires toexert greater control over suppliers of services ranging from banking and insurance to leisure

activities.

Studies have been conducted in non-media industries, comparing nonprofit and for-profit

operators in an effort to identify key differences in operations, strategy, service quality, and

customer satisfaction. Weisbrod (1988) raised the question of whether nonprofit organizationsare “largely for-profits in disguise” (p. 143) and was unable to come to an unambiguous

conclusion. He examined data from nursing homes, psychiatric hospitals, and facilities for the

handicapped, and said the evidence “does not permit broad generalizations about systematic

differences between proprietary and nonprofit organizations throughout the economy” (p. 155).

Overall, he found that nonprofits’ behavior was different from that of proprietary firms and

consistent with an effort to emphasize public goods. Schlesinger (1998) looked at hospitals

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

NONPROFIT BUSINESS MODEL 123

and found that, although nonprofits exhibit altruistic tendencies, these organizations can be

influenced by other factors such as competition, large-scale purchases of services by publicentities, and governmental regulation. Studies in the day care industry have come to similar

conclusions, finding higher measures of quality associated with nonprofits but also noting the

importance of factors other than ownership structure (Krashinsky, 1998; Mauser, 1998).

Scholars who study the nonprofit sector caution against making overly simplistic generaliza-

tions about how nonprofit status may affect firm behavior. There are simply too many differentkinds of nonprofits operating in different product and service markets with different sets of

external constraints. However, a basic model of organizational behavior, used by Weisbrod

(1998), differentiates between profit maximizing firms and “bonoficing” organizations, the

latter being defined as organizations that provide some collective good even at the expense of

financial gain. Weisbrod (1998a) argued that nonprofits operating as bonoficers function in two

ways that are significantly different from how proprietary firms operate. First, such nonprofitswill have goals beyond maximizing profit and, second, will benefit from revenues that derive

from activities other than sales transactions involving private goods.

Schlesinger (1998) described three ways in which ownership affects organizational behavior.

These processes involve incentives for nonprofit executives and employees, perceptions from

those who purchases services from nonprofits, and differences in regulatory treatment, includingtaxation. Employment incentives at nonprofits are shifted away from financial rewards with

the effect that nonprofit workers are less concerned with the financial performance of their

employer. However, these workers are likely to be concerned with how potential donors perceive

their organization because positive perceptions can reduce the need for marketing efforts to

attract members and other supporters. Finally, the regulatory environment may not be as purelybeneficial as the limitations on tax liability may imply. Nonprofits face multiple constituencies,

including customers, donors, and members, with standards and expectations that may conflict

and that may discourage organizations from developing new strategies or practices.

How economic theory about nonprofits, in general, can translate into the media industry is

unclear, mostly because of the lack of scholarship in this area. Picard and van Weezel (2007)

presented a survey of economic and managerial theory as it relates to different ownershipstructures for newspapers. Their conclusion was that for-profit private ownership presented the

best alternatives but called for more study of actual firms and their performance to test this

view. Their study did not include empirical data.

In the eyes of the IRS, a nonprofit group that produces periodicals is pursuing a tax-exempt

purpose when it produces editorial content for magazine but is engaging in “the exploitation ofan exempt activity” when it sells advertising (Riley, 2007, p. 96). Thus, a magazine can be seen

as providing both private goods, in the form of giving advertisers access to a target market,

and public goods, in the form of editorial content that supports a group’s tax-exempt mission.

Weisbrod (1998b) made the case that nonprofit organizations, because they provide services

with social value, are dealing in both public and private goods. The provision of collectivegoods can mean a “greater availability of revenue from donations, which depend, at least in

part, on the organization’s actions” (Weisbrod, 1998, p. 74).

A key concern for nonprofit managers is how their revenue raising businesses may affect the

willingness of supporters to provide donations. Yetman and Yetman (2003) found that some

kinds of nonprofits, but not all, suffer a tradeoff when they engage in commercial activities, such

as selling magazine advertising. For every dollar that arts, culture, and humanities organizations,

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

124 MAGUIRE

as well as human services and public benefit groups, raise from commercial activities, they see

a decline of $0.55 in donations. Educational and medical nonprofits, however, do not see thiseffect.

Young (2007) described the challenge of financing nonprofits as a “jigsaw puzzle” with

many pieces that can go together in different ways (p. 339). He identified the major sources of

operating income as donations, fees, government funding, investments, and in-kind gifts. These

sources of funds can be complemented with long-term capital, but nonprofits face limitationson securing capital and borrowing. As a result, each nonprofit is likely to come to a different

solution in developing a “strategy that will enable it to capture the income mix that best

accomplishes its social mission” (p. 7).

RESEARCH HYPOTHESES

These observations about nonprofits and proprietary forms of organization lead to three hy-

potheses:

H1: Over time, revenues at nonprofit periodicals will not grow as much as revenues at

proprietary publications.

This hypothesis follows most clearly from the notion that nonprofit organizations are not profit

maximizers; therefore, it would be logical that they not would put as much emphasis on

revenue growth as would proprietary entities seeking to achieve maximum profits by way of

higher revenues. Another important factor is that the nonprofit form does not allow for profit

sharing as a form of compensation and may discourage other kinds of financial incentives.As a result, workers at nonprofit publications will be less concerned with increasing income

compared to workers at a publication where increased income can lead to personal financial

gain.

H2: Advertising income, in most cases, will be a fraction of the amounts obtained throughother sources such as public contributions, membership dues, and revenues from pro-

grams.

As a general rule, subscribers to nonprofit publications are members of an association that

sponsors the magazine, and a portion of their membership fees is counted as circulation income.

However, most associations do not directly report their circulation income and enjoy someleeway in the assumptions they use to derive it—a calculation that is affected by the size

of their other tax-exempt activities. In this context, membership dues and assessments can

be considered a form of a donation, although a portion of membership dues are in most

cases the equivalent of a magazine subscription payment. In addition to membership dues,

nonprofits have other revenue sources, including gifts and grants, as well as the sale of goodsand services. However, as prior research has indicated, nonprofits that put an emphasis on

commercial activities, such as selling advertising, risk losing other forms of financial support.

For this reason, it is unlikely that advertising, no matter how inherently profitable, will be the

most important revenue source for a nonprofit.

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

NONPROFIT BUSINESS MODEL 125

H3: Nonprofit publishers will function with a greater degree of stability than proprietary

publishers as measured in less revenue fluctuation from advertising.

This stability should result from two factors. First, because they must operate for exempt

purposes, nonprofits have limited leeway in terms of the activities that they can undertake. Inaddition, because of the need to maintain a positive public image and to satisfy the demands of

multiple constituencies, nonprofits are likely to be reluctant to innovate. If they are successful

in maintaining a positive image in the public sphere, however, nonprofits may enjoy a benefit

in that supporters will not react purely to financial considerations and may contract for services

both for economic and noneconomic reasons.

DATA AND METHOD

The magazines chosen for inclusion in this study were those that appeared on the Magazine

300 list published annually by Advertising Age during the 10 years from 1997 to 2006. These

publications were not selected as necessarily representative of all nonprofit magazines but,

rather, because of their comparability, at least on the basis of size, to the proprietary part of the

magazine sector. It is important to note that, although data are used to shed light on the hypothe-

ses, the data are not used to conduct classical hypothesis tests because the data are not from arandom sample. Any inferences drawn from the data should be treated accordingly. During the

period covered by this study, 26 nonprofit magazines appeared in the Magazine 300, and 15 were

on the list for the entire period. The ones that made the list each year were (with previous titles

in parentheses): AARP The Magazine (Modern Maturity), ABA Journal, American Rifleman,

Boys’ Life, Chemical & Engineering News, Consumer Reports, Guideposts, Harvard Business

Review, the Journal of the American Medical Association, Journal of Accountancy, National

Geographic, National Geographic Traveler, New England Journal of Medicine, Science, and

Smithsonian. Other magazines that made the list were American Family Physician, American

Legion Magazine, American Hunter, National Geographic Adventure, National Geographic

Kids, VFW Magazine, AOPA Pilot, Sesame Street Parents, HR Magazine, Nation’s Business,

and American Medical News.

The organizations that published these magazines were organized under different sections

of the tax code and were focused on a variety of purposes. Using the magazines that made the

list in 2003 as an illustrative case, it appears that most large publications were issued by public

charities, business groups, and social welfare organizations. When the sponsoring organizations

are classified according to the National Taxomy of Exempt Entities, a classification systemdeveloped by the National Center for Charitable Statistics and adopted by the IRS, the most

common areas of focus are health and social benefit (see Table 1).

For each of the 10 years in this study, the nonprofit magazines that made the list were

entered into a spreadsheet along with their total revenues as reported by Advertising Age. To

account for the fact that different magazines made the list in different years and to allow foryear-to-year comparisons, each year, revenue was averaged across publications, both for the

magazines in the nonprofit category and those in the for-profit category.

When this study was started, the most recent available data from the IRS was for the

2003 tax year. To obtain financial information about nonprofit publishers that sponsored the

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

TA

BLE

1C

lassifi

catio

nof

Larg

e,

Nonpro

fitP

ublis

hers

in2003

by

Magazin

e300

Rank,

Tax

Code

Sectio

n,

NT

EE

Org

aniz

atio

nM

agaz

ine

Mag

azin

e

30

0R

ank

Tax

Co

de

Sec

tio

nN

TE

EC

lass

ifica

tio

n

AA

RP

AA

RP

:T

he

Ma

ga

zin

e4

95

01

(c)4

.R

25

:S

enio

rs’

rig

hts

Am

eric

anA

cad

emy

of

Fam

ily

Ph

ysi

cian

s

Am

eri

ca

nF

am

ily

Ph

ysi

cia

n2

64

50

1(c

)6.

E0

3:

Hea

lth

care

and

pro

fess

ion

al

soci

etie

san

das

soci

atio

ns

Am

eric

anA

sso

ciat

ion

for

the

Ad

van

cem

ent

of

Sci

ence

Scie

nce

18

55

01

(c)3

.U

03

20

:S

cien

cean

dte

chn

olo

gy

;

pro

fess

ion

also

ciet

ies

and

asso

ciat

ion

s

AB

AA

BA

Jou

rna

l2

33

50

1(c

)6.

I03

:C

rim

ean

dle

gal

-rel

ated

;

pro

fess

ion

also

ciet

ies

and

asso

ciat

ion

s

Am

eric

anC

hem

ical

So

ciet

yC

hem

ica

l&

En

gin

eeri

ng

New

s

24

35

01

(c)3

.U

03

33

:S

cien

cean

dte

chn

olo

gy

;

pro

fess

ion

also

ciet

ies

and

asso

ciat

ion

s

Am

eric

anIn

stit

ute

of

CPA

sJo

urn

al

of

Acco

un

tan

cy

26

15

01

(c)6

.S

41

:C

ham

ber

so

fco

mm

erce

and

bu

sin

ess

leag

ues

Am

eric

anM

edic

al

Ass

oci

atio

n

JAM

A2

02

50

1(c

)6.

E0

3:

Hea

lth

care

and

pro

fess

ion

al

soci

etie

san

das

soci

atio

ns

Am

eric

anL

egio

nA

meri

ca

nL

egio

nM

ag

azi

ne

26

95

01

(c)1

9.

W3

0:

Mil

itar

yan

dv

eter

ans’

org

aniz

atio

ns

Bo

ys’

Sco

uts

Bo

ys’

Lif

e2

26

50

1(c

)3.

O4

1:

Bo

yS

cou

ts

Co

nsu

mer

sU

nio

nC

on

sum

er

Rep

ort

s8

95

01

(c)3

.W

90

:C

on

sum

erp

rote

ctio

n

Dia

bet

esF

ou

nd

atio

nD

iab

ete

sF

ore

ca

st2

92

50

1(c

)3.

G7

0:

Vo

lun

tary

hea

lth

asso

ciat

ion

san

d

med

ical

dis

cip

lin

es;

dig

esti

ve

dis

ease

san

dd

iso

rder

s

(co

nti

nu

ed

)

126

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

TA

BLE

1

(Continued

)

Org

aniz

atio

nM

agaz

ine

Mag

azin

e

30

0R

ank

Tax

Co

de

Sec

tio

nN

TE

EC

lass

ifica

tio

n

Gu

idep

ost

sA

Ch

urc

h

Co

rpo

rati

on

Gu

idep

ost

s1

24

50

1(c

)3.

X2

0:

Ch

rist

ian

ity

Har

var

dB

usi

nes

sS

cho

ol

Pu

bli

shin

gC

orp

ora

tio

n

Ha

rva

rdB

usi

ness

Revie

w1

70

50

1(c

)3.

A3

3:

Pri

nti

ng

and

pu

bli

shin

g

Mas

sach

use

tts

Med

ical

So

ciet

y

New

En

gla

nd

Jou

rna

lo

f

Med

icin

e

13

75

01

(c)6

.E

03

:H

ealt

hca

rean

dp

rofe

ssio

nal

soci

etie

san

das

soci

atio

ns

Nat

ion

alG

eog

rap

hic

So

ciet

yN

ati

on

al

Geo

gra

phic

,N

G

Ad

ven

ture

,N

GK

ids,

and

NG

Tra

vele

r

22

,2

47

,2

54

,an

d1

75

50

1(c

)3.

C6

0:

Env

iro

nm

enta

led

uca

tio

n

Nat

ion

alR

ifle

Ass

oci

atio

nA

meri

ca

nH

un

ter

and

Am

eri

ca

nR

iflem

an

20

6an

d2

45

50

1(c

)4.

R6

0:

Civ

illi

ber

ties

Sm

ith

son

ian

Inst

itu

tio

nS

mit

hso

nia

n7

65

01

(c)3

.A

50

:M

use

um

s

Vet

eran

so

fF

ore

ign

War

sV

FW

Ma

ga

zin

e2

72

50

1(c

)19

.W

30

:M

ilit

ary

and

vet

eran

s’

org

aniz

atio

ns

No

te.

So

urc

e:In

tern

alR

even

ue

Ser

vic

e(I

RS

)d

ata

and

the

Nat

ion

alC

ente

rfo

rC

har

itab

leS

tati

stic

s.T

he

foll

ow

ing

isw

hat

the

IRS

cod

ese

ctio

ns

cov

er:

50

1(c

)3D

reli

gio

us,

edu

cati

on

al,

char

itab

le,

scie

nti

fic,

or

lite

rary

org

aniz

atio

ns

and

test

ing

for

pu

bli

csa

fety

org

aniz

atio

ns;

50

1(c

)4D

civ

icle

agu

es,

soci

alw

elfa

reo

rgan

izat

ion

s,

and

loca

las

soci

atio

ns

of

emp

loy

ees;

50

1(c

)6D

bu

sin

ess

leag

ues

,ch

amb

ers

of

com

mer

ce,re

ales

tate

bo

ard

s,an

dli

ke

org

aniz

atio

ns;

50

1(c

)19

Dp

ost

so

ro

rgan

izat

ion

s

of

pas

to

rp

rese

nt

mem

ber

so

fth

ear

med

forc

es.

NT

EE

DN

atio

nal

Tax

on

om

yo

fE

xem

pt

En

titi

es;

AA

RP

DA

mer

ican

Ass

oci

atio

no

fR

etir

edP

erso

ns;

AB

AD

Am

eric

anB

arA

sso

ciat

ion

;C

PAD

cert

ified

pu

bli

cac

cou

nta

nt;

JAM

AD

Jou

rna

lo

fth

eA

meri

ca

nM

ed

ica

lA

sso

cia

tio

n;

NG

DN

ati

on

al

Geo

gra

ph

ic;

VF

WD

Vet

eran

so

fF

ore

ign

War

s.T

he

IRS

site

for

no

np

rofi

ts:

htt

p:/

/ww

w.i

rs.g

ov

/tax

stat

s/ch

arit

able

stat

s/ar

ticl

e/0

„id

=9

717

6,0

0.h

tml

Th

eN

atio

nal

Cen

ter

for

Ch

arit

able

Sta

tist

ics:

htt

p:/

/ncc

s.u

rban

.org

/

127

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

128 MAGUIRE

magazines in this study, the starting point was the IRS file showing all of the charitable

organizations that it included in its analysis of the annual tax returns shown on Form 990filed in 2003 by organizations that were exempt under Section 501(c)(3) to Section 501 (c)(9).

This file includes about 20,000 organizations that were selected to represent a population of

about 380,000 entities. This is not a random sample but, rather, a weighted sample with an

emphasis on larger groups. The largest groups ranked by assets are sampled at a rate of 100%,

so that this file includes all nonprofit charities with assets of $50 million or more and allnonprofit civic leagues, labor organizations, business groups, social clubs, fraternal societies,

and voluntary employee benefit associations with assets of $10 million or more. Individual

990s were consulted for two organizations that were not in the IRS file.

RESULTS

As shown in Table 2, the average per-publication revenues of large, nonprofit magazines

grew from $52 million in 1997 to $66.3 million in 2006. By contrast, the large proprietary

publications reported a gain from $88.3 million to $129 million. Nonprofits grew by 27.5%,

whereas the for-profits grew 46.1%. The absolute gain over the decade was an average of

$14.3 million for the nonprofits and $41 million for the proprietary publications. Thus, H1 issupported. Nonprofit magazines do not, on average, produce as much revenue as for-profits

and do not grow as rapidly.

One of the reasons why advertising revenues at nonprofit magazines may not grow as quickly

as they do in the rest of industry is that nonprofit publishers have access to sources of income

that are not available to proprietary publishers—namely, public contributions and membershipdues. In addition, many organizations that publish periodicals provide other kinds of services

that may generate revenues, as shown in Table 3.

For a nonprofit magazine, a portion of membership dues can be likened to the subscription

cost or purchase price of a nonprofit magazine, but usually a magazine is only one of the benefits

of joining an association. In at least some cases, the voluntary membership payment is given

without expectation of receiving a tangible return of like amount and so can be seen as partlya donation. When advertising revenues for large nonprofits are compared to the membership

dues and other contributions that they receive, it is clear that in most cases advertising is not

the major source of funding. However, there is considerable variation, some of which may

be caused by data problems. For example, Harvard Business School Publishing reported no

program service revenue, although it reported advertising income, which would typically be

TABLE 2

Average Per Publication Revenues for Magazine 300 Publications (Constant 1997 $000s)

Variable 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Nonprofit 51,980 54,941 52,737 58,732 54,299 49,603 53,328 55,825 54,781 57,474

Proprietary 88,323 91,231 97,114 102,114 83,620 93,147 101,353 107,423 111,466 118,893

Note. Source: Advertising Age. Figures shown are calculated from data found at http://adage.com/datacenter/

article?article_id=106353

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

NONPROFIT BUSINESS MODEL 129

TABLE 3

2003 Selected Income Sources for Major Nonprofit Magazine Publishers (in Dollars)

Group Advertising Dues

Public

Support

Program

Services

AARP 78,591,010 210,789,515 5,940,963 375,271,853

American Bar Association 53,770,370 77,480,876 298,786 36,527,338

American Academy of Family

Physicians

20,961,185 16,607,732 0 48,650,612

Boys’ Scouts 23,783,501 114,434,506 3,015,867 327,738

American Chemical Society 15,495,697 12,247,225 158,589 333,595,055

Consumers Union 0 0 11,013,554 148,821,161

Diabetes Foundation 11,177,711 1,598,741 145,971,041 29,432,825

Harvard Business School

Publishing Corporation

9,556,267 0 0 0

American Medical

Association

41,123,622 48,994,777 0 91,154,007

American Institute of CPAs 8,523,790 70,067,790 0 65,566,240

National Geographic Society 72,035,228 177,624,873 6,204,246 208,591,258

Massachusetts Medical

Society

19,836,644 1,643,382 0 82,037,124

American Association for the

Advancement of Science

23,598,217 13,879,100 13,857,770 37,042,718

Smithsonian Institution 24,101,730 22,918,805 122,431,434 48,925,732

Veterans of Foreign Wars 3,784,995 10,635,878 46,805,661 12,049,179

Note. Source: Internal Revenue Service. AARP D American Association of Retired Persons; CPA D certified

public accountant. Figures shown are calculated from data found at http://www.irs.gov/taxstats/charitablestats/article/

0„id=97176,00.html

considered a form of program service revenue. For some organizations, advertising income

is less than 10% of the funds derived from dues and contributions. In a few cases, however,

advertising is more than dues and contributions; but, even in those cases, advertising is notthe leading source of income. Three organizations that report advertising greater than dues

and contributions also have other programs that generate extensive revenues. Thus, H2 is also

supported.

To test the idea that nonprofit status somehow insulates organizations from normal economic

fluctuations, two tests were conducted. First, a standard deviation was calculated on the annual

change in revenues for nonprofit and proprietary magazines. By this indicator, there is lessfluctuation in the nonprofit sphere than in the proprietary market. However, because nonprofit

revenue grew by a lesser amount during the study period, the lower fluctuation may not be

fully indicative of an underlying stability (see Table 4).

A second analysis was conducted by calculating the year-to-year changes in revenues for

nonprofit and proprietary magazines. This revealed that nonprofits may encounter greaterfluctuations. In three of the study years, nonprofits suffered year-to-year declines in revenues,

whereas proprietary magazines did so only once. For the nine yearly changes, proprietary

magazines had a greater change five times and nonprofits four times. H3 is not supported by

the data.

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

130 MAGUIRE

TABLE 4

Year-to-Year Change in Revenues for Magazine 300 Publications

Variable 2006 2005 2004 2003 2002 2001 2000 1999 1998 STDP

Nonprofit 4.8% 1.0% 6.1% 9.3% (7.0%) (5.4%) 13.6% (2.8%) 7.0% 4,459

Proprietary 1.9% 5.1% 7.4% 10.6% 3.0% (7.8%) 7.3% 7.8% 4.6% 13,405

Note. Source: Advertising Age. STDP D standard deviation of the population. Figures shown are calculated from

data found at http://adage.com/datacenter/article?article_id=106353

DISCUSSION

For those who believe that nonprofit forms of media could emerge to supplement and counter-balance proprietary ones, these findings start to provide a fuller picture of how such a scenario

could play out. The data can be interpreted in multiple ways, suggesting both opportunities

and constraints for nonprofit media.

For example, as predicted, nonprofit magazine revenues have not grown as rapidly as those

for other large magazines. This finding could be an indication of limited revenue potential fornonprofits, or it could be an indication that magazines can be published over long periods of

time without making revenue growth an overriding goal.

The finding that revenues from private goods (i.e., advertising) are usually only a fraction of

revenues from public goods (i.e., memberships and contributions), again, may indicate a major

limitation on the ability of nonprofit media to tap into this important income stream. On theother hand, the clear need for nonprofit media to deal in a public goods market may, in the

long run, transfer into business and editorial strategies that create a kind of goodwill, in the

traditional rather than the accounting sense of the term, which can sustain a publication over

time.

This study makes clear that the revenue profiles of nonprofit publishers differ from organi-

zation to organization. Some put greater emphasis on revenues raised from program services,whereas others are more dependent on general public support. The relative impact of mem-

bership dues also varies. This suggests that the notion of a single “nonprofit business model”

is erroneous in that there may be multiple available business models for news organizations, a

possibility that bears further study.

The fact that nonprofit magazines have seen declines in revenues about one third of thetime in the last decade should raise concerns about the likelihood of nonprofits emerging as

a counterbalance to proprietary media. Nonprofits appear to be as vulnerable to economic

conditions as proprietary publications, if not more so. Whereas public good revenues may

serve as a cushion for those times when private good revenues are flagging, it is probably also

true that, because of this mix, nonprofits face a more challenging environment and may bemore complicated to manage.

This study has focused on available financial data and has not taken into account other

important factors that could account for some of the differences observed here. Circulation

size and editorial focus areas have not been controlled for. Similarly, there has been no attempt

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

NONPROFIT BUSINESS MODEL 131

to analyze the differences in overall strategies that organizations pursue and how this might be

reflected in the way that a publication is managed.Those who would like to see nonprofit media take on a greater role may have to consider

whether changes in policy, including tax law, may be necessary for that to happen. Because

tax law already recognizes more than 30 different kinds of nonprofits, it may be feasible to

create a new category for nonprofit media, perhaps going beyond the Cardin (2009) proposal.

Organizations that fall into this category might, for example, be exempted from the currenttax on advertising income from periodical publications if advertising income were directed to

support public service journalism.

The size and persistence of the nonprofit magazine sector show that media enterprises have

options other than relying exclusively on private transactions for operating income and on

investment markets for capital. However, the pursuit of nonprofit alternatives would entail

significant challenges both in making a conversion and in managing the business under a newform of organization.

For an existing magazine company to convert to nonprofit status, it would first of all have to

address the IRS requirements for obtaining tax-exempt status, which might entail transferring

ownership to an existing nonprofit entity or making a successful argument that its purpose is

truly noncommercial. Once this legal threshold is cleared, the company would have to structurethe financial terms of the conversion in a way that convinces existing shareholders to approve

the deal, which might, for example, involve identifying a deep-pocketed philanthropist to pay

off existing obligations and provide working capital. As a nonprofit the magazine’s executives

would face the traditional management challenges of attracting advertising and circulation

revenue while also trying to tap into funding sources such as membership dues, foundationgrants, and private gifts that would become available. Just as advertisers have been known to

try to exert pressure on editorial decision making, new sources of funding—such as individual

donors or philanthropic groups—could also think that they have purchased influence with their

contributions and would need to be addressed. At the same time, the new nonprofit could face

increased scrutiny from customers and competitors, which would further heighten the challenge

of finding the optimal mix of revenue streams.In the end, media managers cannot expect to swap their existing business models for

nonprofit ones without a fundamental rethinking of their mission and goals. As Young (2007)

pointed out, “nonprofits must understand how what they are providing is of value to those

who might support them” (p. 341). The financial crisis that so many media companies face

today ultimately is an indication of their inability to understand how value creation, delivery,and consumption have changed in their existing markets. It remains unclear how solving this

problem would be easier to accomplish in a nonprofit environment.

REFERENCES

Albarran, A. B. (2002). Media economics: Understanding markets, industries and concepts. Ames: Iowa State Uni-

versity Press.

Alexander, A., Owers, J., Hollifield, C. A., & Greco, A. N. (Eds.). (2004). Media economics theory and practice.

Mahwah, NJ: Lawrence Erlbaum Associates, Inc.

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

132 MAGUIRE

Baker, C. E. (2007). Media concentration and democracy: Why ownership matters. Cambridge, England: Cambridge

University Press.

Bergstrom, T. C. (2001). Free labor for costly journals. Journal of Economic Perspectives, 15, 183–198.

Boismenu, G., & Beaudry, G. (2004). Scholarly publishing and public service. Canadian Journal of Communication,

29, 343–358.

Cardin, B. (2009, April 3). A plan to save our free press. The Washington Post. Retrieved May 20, 2009, from

http://www.washingtonpost.com/wp-dyn/content/article/2009/04/02/AR2009040203310.html

Congressional Research Service. (2009, January 21). Analysis of whether a newspaper could qualify as a §501(c)(3)

or §501(c)(4) organization [Memo to Rep. Jim McDermott, Washington, DC].

Doyle, G. (2003). Understanding media economics. London: Sage.

Friedman, L. S., & Richter, E. (2006). Excessive and disproportionate advertising in peer-reviewed journals. Interna-

tional Journal of Occupational Environmental Health, 12, 59–62.

Guensburg, C. (2008). Nonprofit news. American Journalism Review, 30(1), 26–33.

Hamilton, J. T. (2004). All the news that’s fit to sell: How the market transforms information into news. Princeton,

NJ: Princeton University Press.

Hansmann, H. (1987). Economic theories of nonprofit organization. In W. W. Powell (Ed.), The nonprofit sector: A

research handbook (pp. 27–42). New Haven, CT: Yale University Press.

Herrick, D. F. (2003). Media management in the age of giants: Business dynamics of journalism. Ames: Iowa State

University Press.

Hines, J. R., Jr. (1998, December). Nonprofit business activity and the unrelated business income tax (Working Paper

No. 6820). Cambridge, MA: National Bureau of Economic Research.

Internal Revenue Service. (2008). Tax-exempt status for your organization. Washington DC: U.S. Department of the

Treasury.

Jeon, D., & Rochet, J. (2007, March 8). The pricing of academic journals: A two-sided market perspective (Working

Paper No. 1025). Barcelona, Spain: Universitat Pompeu Fabra, Department of Economics and Business.

Kennedy, D. (2007). Disappearing ink. CommonWealth, 12(2), 37–43.

Krashinsky, M. (1998). Does auspice matter? The case of day care for children in Canada. In W. Powell & E. Clemens

(Eds.), Private action and the public good (pp. 114–123). New Haven, CT: Yale University Press.

Lacy, S., Thorson, E., & Russial, J. (Eds.). Good journalism, good business [Special issue]. Newspaper Research

Journal, 25(1).

Manship School of Mass Communication, News in the Public Interest: A Free and Subsidized Press. (2004 March

20). Proceedings of the Breaux Symposium. Baton Rouge, LA: Louisiana State University.

Mauser, E. (1998). The importance of organizational form: Parent perceptions versus reality in the day care industry. In

W. Powell & E. Clemens (Eds.), Private action and the public good (pp. 124–133). New Haven, CT: Yale University

Press.

McDermott, J. (2009, February 2). Rep. McDermott releases Congressional Research Service report on newspapers

[Press release]. Retrieved March 5, 2009, from http://www.house.gov/mcdermott/pr090202.shtm

Overholser, G. (2006). On behalf of journalism: A manifesto for change. Philadelphia: Annenberg Public Policy Center.

Retrieved September 27, 2007, from http://www.annenbergpublicpolicycenter.org/Downloads/Overholser/20061011_

JournStudy.pdf

Picard, R. G. (1989). Media economics: Concepts and issues. Newbury Park, CA: Sage.

Picard, R. G., & van Weezel, A. (2007, August). Capital and control: Consequences of different forms of newspaper

ownership. Paper presented at the annual conference of the Association for Education in Journalism and Mass

Communication, Washington, DC.

Riley, M. (2006). Unrelated business income tax returns: 2002, financial highlights and special analyses of exempt-

organization reporting quality. SOI Bulletin, 25, 57–90.

Riley, M. (2007). Unrelated business income tax teturns: 2003, financial highlights and a special analysis of nonprofit

charitable organizations’ revenue and taxable income. SOI Bulletin, 26, 88–115.

Salmon, F. (2009, February 3). Nonprofit newspapers: Worth a try. Portfolio.com: Market Movers. Retrieved March 5,

2009, from http://www.portfolio.com/views/blogs/market-movers/2009/02/03/nonprofit-newspapers-worth-a-try

Schlesinger, M. (1998). Mismeasuring the consequences of ownership: External influences and the comparative

performance of public, for-profit, and private nonprofit organizations. In W. Powell & E. Clemens (Eds.), Private

action and the public good (pp. 85–112). New Haven, CT: Yale University Press.

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13

NONPROFIT BUSINESS MODEL 133

Swensen, D., & Schmidt, M. (2009, January 28). News that you can endow. The New York Times, p. 31A.

Urban Institute. (2006). The nonprofit sector in brief: Facts and figures from the nonprofit almanac 2007. Washington,

DC: Urban Institute.

U.S. Census Bureau. (2004). Service annual survey: 2002. Washington, DC: Author.

Weisbrod, B. A. (1988). The nonprofit economy. Cambridge, MA: Harvard University Press.

Weisbrod, B. A. (1998). Institutional form and organizational behavior. In W. Powell & E. Clemens (Eds.), Private

action and the public good (pp. 69–84). New Haven, CT: Yale University Press.

Yetman, M. H., & Yetman, R. J. (2003). The effect of nonprofits’ taxable activities on the supply of private donations.

National Tax Journal, 56, 243–258.

Young, D. R. (2007). Financing nonprofits: Putting theory into practice. Lanham, MD: AltaMira.

Dow

nloa

ded

by [

Lau

rent

ian

Uni

vers

ity]

at 0

1:51

08

Apr

il 20

13