Feds have questions for Time Inc.

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Time Inc.'s subpoena isn't expected to be the only one in a federal investigation into magazine circulation practices. And that puts pressure on the industry to confront flaws in the basic metric it uses to price and sell billions of dollars in advertising space.

As first reported by Advertising Age, the U.S. attorney in the Eastern District of the Court of New York is investigating sponsored-sales programs used by Time Inc., the nation's largest publisher. Although leading magazine houses contacted last week said they have not been subpoenaed, more have gone out, according to one person with knowledge of the investigation.

Time Inc. scrambled last week to inform about 150 advertisers and media agencies of the investigation and its plans to reclassify some circulation previously counted as paid-the chief factor in setting ad rates.

Sponsorship agents buy magazines in bulk for distribution in public places, like doctor's offices or airplanes, or to other groups of selected readers. As long as publishers collect even 1¢ per subscription, Audit Bureau of Circulations rules have allowed publishers to call those subscriptions "paid."

Time Inc., which was subpoenaed in July for information on its sponsored sales, said in a "Dear Advertiser" letter that some subscriptions came from sponsors that earned more money from Time Inc. than they paid for the subscriptions. Until now, use of such agents has been a common but poorly regarded way to boost circulation. The sponsors were not identified.

Diverse reactions

"We are in the process of reviewing and will be discussing with ABC whether subscriptions purchased under these circumstances should have been included in `paid' circulation or in another category of circulation under ABC rules," said the letter, which was signed by Jack Haire, exec VP, Time Inc. (Read the letter at AdAge.com QwikFIND aaq95j)

But the fact that Time Inc., long acknowledged as a circulation-practices leader, has come under scrutiny adds momentum to industry efforts to move away from rate bases and develop a metric that gauges reader engagement.

"Circulation has an important place in the way magazines are sold to advertisers, but the fact of the matter is that advertisers are really interested in the relationship between the reader and the magazine's editorial content," said Michael Drexler, CEO at Optimedia International U.S. "We support the concept of engagement because we want to know what connection readers have with the magazines so we can transfer that engagement to advertisers."

The developments have already produced diverse reactions. "I don't think any of us were comfortable with the way sponsored sales were depicted in the past," said Alec Gerster, CEO, Initiative and an Audit Bureau of Circulations board member. "But that doesn't mean in and of themselves sponsored sales were a bad thing."

Another media-agency executive predicted that some buyers will be "very angry," while others will understand the shifting ground rules of the magazine business and the difficulties facing publishers.

In the short term, though, the subpoena could leave more advertisers wondering what they paid for. Going forward, Time Inc. plans to label some of the subscriptions under scrutiny as "qualified," a category being introduced by the Audit Bureau. But it defended the "high-quality and valuable readership generated by these programs" and will still count them toward its magazines' guaranteed circulation.

At the Time Inc. magazines tracked by the Audit Bureau that have rate bases-guarantees of paid circulation-about 5% of the total circulation comes from sponsored sales.

Certain titles are far more exposed. People en Espanol, for example, reported an average paid circulation of 462,099 during the first six months of the year, comfortably above its rate base of 450,000. But the total includes 108,682 copies derived from sponsored sales, or 24.2% of the rate base. The Parenting Group titles, which reach pregnant women and new mothers, regularly send copies to doctor's offices, hospitals and prenatal classes, some of which may fall under sponsored sales.

While other subpoenas were believed to have been issued, at deadline no major publishing houses other than Time Inc. said they had received one. Those contacted included: Conde Nast Publications and sibling Fairchild Publications; Hearst Magazines; Hachette Filipacchi Media; Martha Stewart Living Omnimedia; McGraw-Hill; American Media; Meredith; Washington Post Co.; Rodale; and Ziff Davis Media.

Time Inc. said it is cooperating with the investigation.

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