Insightful piece by Rory Maher.

Some believe the iPad will enable magazines to reverse course in the near-term, but we believe these expectations are way off the mark. In particular:

* It’s going to be years for mobile ad revenue to become material.

* As a result, in the near-term magazines will need to look to subscription revenue to drive incremental profits.

* But, even if iPad sales wildly exceed expectations and users rush to purchase lots of magazine subscriptions (we don’t think they will), this will not be enough to drive meaningful revenue at most magazines.

He does some calculations, based on assumptions that :

* iPad owners are early-adopters that consume a lot of content so let’s say 50% of them subscribe to two iPad magazines each.
* Magazine subscriptions on the iPad are higher than print subscriptions (most magazines plan to charge more initially), so assume an average $15 per monthly subscription.

His conclusion:

Even if iPad sales soar past expectations and reach, say, 16 million units over the next two years total magazine subscription revenue would equal about $2.8 billion per year under the above case scenario. That’s less than 30% of annual circulation revenue for the entire magazine industry and only about 10% of overall industry revenue (circulation + advertising).

Sobering but true. As Derek Thompson points out in The Atlantic:

It’s useful to step back and consider the long game for publishers. Magazines get money from (1) readers and (2) advertisers looking for readers. The problem today isn’t the readers, who are all over the Internet. It’s the ads. Magazine advertising has slipped in the last two years by 12%. Nobody expects print ads to rebound to their early 2000s levels, and everybody is still waiting for That Big Idea that helps publishers monetize their online content. Maybe it comes from location-based ads. Maybe it comes from cross-publisher partnerships and a Netflix model that bundles magazine subscriptions and distributes them electronically to computers and e-readers. Nobody knows.

But this is the key to the story: magazines are losing ad revenue, but they’re not losing readers. In fact most of them are gaining readers — they’re just gaining them online, where our eyeballs are poorly monetized. All publishers really want is a platform where they can charge readers for reading. The iPad gives them that opportunity. It’s fair to say publishers are being overly-optimistic with their prices for iPad apps. It’s not fair to say they’re wrong for trying.

The basic problem, I suspect, is that the traditional print newspaper and magazine businesses were cash cows for so many generations that those who were conditioned in them simply cannot conceive of a future in which returns are much more modest. They grew up in a world where a TV franchise or a big newspaper or magazine brand was a licence to print money. There is a future for journalism and publishing, but it’s one in which companies work harder, smarter and in much more diverse ways. And for lower margins.