NEW YORK — With Gruner + Jahr again in the headlines over a circulation scandal, it would be easy to write the story off as simply the latest wrinkle in the publisher’s well-documented history of similar blunders.
But that would be the wrong conclusion. To be sure, the episode is part of a pattern, but it’s a pattern that encompasses virtually the entire magazine industry: the reliance on a multitude of subscription agents whose practices range from opaque to sloppy to criminal at times.
G+J’s patronage of subscription agent Publishers Communications Systems of Coral Springs, Fla., led to the publisher’s disclosure 10 days ago that five of its six titles would miss rate base for 2004 following the Audit Bureau of Circulations’ decision to reclassify 165,000 PCS-supplied subscriptions. G+J is currently suing PCS in the U.S. District Court of Southern Florida to recoup the $10 million in refunds owed to advertisers.
The suit, if it proceeds, could shed light on a widespread industry practice that has been largely invisible until now. Agents produce more than 60 percent of all new subscriptions, according to circulation analyst Dan Capell, editor of Capell’s Circulation Report, and that percentage will only rise while industry-wide newsstand sales continue their decline.
In the most recent CircTrack survey of circulation executives, more than 80 percent of those polled reported using direct-mail agents (those who send mailings to potential subscribers), and 60 percent used “cash field” agents (telemarketers and other types). Those numbers are up from 70 percent and 40 percent, respectively, seven years ago.
“This is not just a problem for G+J,” said Chip Block, a circulation consultant and vice chairman of USA Pubs, a subscription agency. “There are a bunch of different agents that are in the same boat as this one, and it impacts a lot of other publishers.”
Interviews conducted over a period of months with numerous current and former circulation executives and agents revealed much about how numerous junk subscriptions find their way into magazines’ subscription files every year. Now, as the ABC, under pressure from advertisers to scrutinize filings more carefully, begins delving for the first time into the agent side of the business, much of this knowledge may soon become public — quite possibly, industry executives say, in the form of additional circulation scandals like the one at G+J.
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Across the magazine industry, a rising tide of subscriptions are being mailed to readers who don’t ask for them and who pay little or nothing to get them. These agent-sold subscriptions may even cost publishers as much as $5 per person — and that on top of the printing and mailing costs of each copy. The result is an economic model where publishers’ health is increasingly — and dangerously — dependent on the advertising side subsidizing the circulation side.
“Publishers have at times used these methods to essentially build rate bases when they should be taking them down,” said Time Inc. executive vice president John Squires, who oversees the company’s circulation strategy. “I think we would all like to see inflated rate bases come down.”
But, in fact, the magazine industry’s current state of overreliance on agents has its roots in publishers’ refusal to deflate rate bases when they had the chance. In the late Nineties, sweepstakes firms such as Publishers Clearing House were forced to curtail their subscription sales in the face of massive litigation. During their peak year of 1992, PCH and American Family Publishers combined to produce an estimated 70 million subscriptions — subscriptions that publishers then had to replace. Faced with the choice of scaling back rate bases or upping their reliance on agents, publishers chose the latter.
Sensing publishers’ desperation, the agents rapidly raised the stakes, a number of executives said. All agents pay themselves by keeping an agreed upon percentage of subscribers’ checks. The rest is passed along to the publishers — what’s known in industry parlance as a “remit.” Today, many agents are asking for the entire check as payment — what’s called the “zero remit.” The most brazen agents demand that publishers let them keep the checks and then pay them on top of it as well — a $2 to $5 bonus per subscriber that’s known as a “negative remit.” The disputed subscriptions that G+J bought from PCS were of this type.
The negative remit practically guarantees agents will turn a profit, even if they simply copy names and addresses at random from a phone book and turn them in. Some agents do just that, or the equivalent, and hand over to publishers “junk” subs — that is, lists of names and addresses to which publishers mail magazines without ever seeing a check. Because ABC regulations forbid publishers from counting mass-mailed, unsolicited copies as individual subscriptions, the publisher and its agent engage in what circulation executives refer to as “check swapping”: the agent sends the publisher a check that’s ostensibly the money those subscribers paid, and the publisher sends a check right back for the same amount. The ABC never hears about the second payment because it doesn’t audit the agents, just the publishers and the publishers’ books show only “paid” subscriptions.
To be sure, not all agents utilize such practices. Among those with solid reputations are some of the largest, including Time Inc.’s Synapse and USAPubs. “At least 50 percent of agents’ subscriptions are sold at full price,” noted Capell.
Still, the lure of being paid $5 for a name and an address, regardless of whether that person even wants a magazine, has inexorably led to the kinds of abuses alleged in the G+J case.
Further encouraging such abuses is the widespread practice of subcontracting subscription sales to smaller agents. A former circulation director of an independent magazine explained, “Most publishers have a very good relationship with a small number of agents. They’ll tell them: ‘I need 25,000 orders and I’ll pay up to $5 a head.’ The agent may or may not have the resources to fulfill that. They may offload the order to a subagent to help fill the need.”
Deals are then made inside of deals. The guaranteed money of negative remits provides the motivation to sell subscriptions at almost any price. Say a subcontractor is promised only $3 per subscriber by an agent. The subcontractor thus has an incentive to do whatever it takes to sell it at any price above $3, even if that means selling it at $4 and passing it along to the main agent, who keeps only the $1, but has done little or no work.
The result is that the publisher receives a subscriber who isn’t motivated to spend much more than $5 on a year’s worth of its magazine — not exactly someone the advertisers would be thrilled to reach.
“That’s something the publishers would love to stop, but until they stop doing zero remits, they won’t,” a former circulation director said.
The more aggressive agents don’t even wait for a call from their bigger peers — they sell subscriptions they haven’t been authorized to and launder them afterward, sources said, calling up the authorized agents and offering them the names. “That’s bad stuff,” said the former consumer circulation chief.
It gets worse. The most unscrupulous agents of all are suspected of committing outright fraud. Some have hit upon the idea of sending fake renewal notices to magazines’ real subscribers — when the readers pay up, the agents either pocket the check or overcharge and skim a little off the top before passing the renewal along to the publisher. Industry executives said publishers are usually loath to give out subscribers’ names to agents they don’t fully trust, so the agents resort to either starting dummy companies that publishers will unwittingly do business with or stealing the names outright with the help of a man on the inside.
“They literally have moles inside the fulfillment companies,” said the former independent circulation director. “Somehow, somewhere, the agents get their hands on active subscriber lists. They fake list rental orders, then they basically solicit the names on the lists.”
Occasionally, unscrupulous agents get caught. Two agents and their inside man pleaded guilty to one count each of conspiracy to commit mail fraud in November 2002 in a U.S. Federal Court in Phoenix. The agents, Dennis James Ward and Michael O’Malley McKee, sold unauthorized renewals between 1997 and 2000 totaling $236,748, but passed along only $51,089 to publishers to pay the real renewal rate. According to documents used in the case, the pair invented companies with names like Sport Apparel Ltd. and Leisure Services and petitioned publishers to rent subscriber lists for marketing purposes. Using this method, they obtained 40,000 Playboy subscribers, 30,000 Forbes subscribers, and 30,000 Family Circle subscribers, among others.
But successful prosecutions are the exception. Agents with a bent toward playing fast and loose with publishers often manage to be everywhere and nowhere at the same time. “They change addresses, they change business names, they work out of boiler rooms, they work out of empty garages, they work from cell phones,” said a former sweepstakes executive. “They move from state to state, they change the names of their companies, and the agency just goes away.”
But even more routine types of infractions — such as the breach of contract G+J alleges PCS committed by failing to keep records of its sales — are difficult to prove in court owing to the invisible connections between agent and subagent. “There’s nobody you can sue,” the former independent circulation director said, “because you can never get down the chain far enough.”