NEW YORK (AdAge.com) -- Gruner & Jahr USA Publishing today announced that 165,000 subscriptions across its magazine portfolio in late 2003 were incorrectly identified as "paid."
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The subscription snafu, the company said, meant that parenting titles Parents and Child would miss their rate base, the circulation magazines guarantee to advertisers, for the second half of 2003 by about 0.8% and 2.7%, respectively. But the company said it expected to take a much greater hit for full-year 2004, with almost all its titles expected to miss their respective rate base.
Missed rate bases
G&J estimated that for 2004 Parents will miss the rate base by 3.4%; Child by 9.9%; Family Circle by 2.8%; Inc. by 3.8%; and Fast Company by 2.5%. Fitness, on the other hand, is expected to deliver its 2004 rate base.
The company said the problem stemmed from "an independent subscription-selling agent [that] failed to provide sufficient documentation" as required by the Audit Bureau of Circulations, which audits sales numbers for virtually every major consumer magazine. G&J said it was filing a lawsuit against this agent, identified as Publishers Communication Systems of Coral Springs, Fla., claiming PCS breached its contract to provide "individually paid subscriptions," as magazine subscriptions ordered by individuals (as opposed to bulk orders coming from business concerns) are known in Audit Bureau parlance.
Looking for 'documentation'
"What we were looking for, in general, was documentation that some individuals had ordered [the magazines], and had paid," said Russell Denson, G&J's CEO. "At that level of documentation, [PCS] failed."
In its complaint, G&J alleged that between April and December of 2003, PCS sold 400,000 subscriptions to its titles, for which PCS pocketed bonus payments of more than $725,000. But, the complaint contends, "despite repeated requests" by G&J and ABC, "PCS failed to provide the documentation that would establish" these subscriptions were "sold to, and paid for, by individuals." The suit seeks damages for fraud and breach of contract.
A call for comment placed to PCS' CEO, Walter Stevens, was not immediately returned.
Agents such as PCS typically sell subscriptions to magazines across several publishing companies. David Leckey, senior vice president for consumer marketing at Hachette Filipacchi Media US, said PCS "was an authorized agent for Hachette" but was a "small-volume producer" for the publisher.
Around a year and a half ago, magazine executives said, ABC began taking a much harder look at agent-generated subscriptions, and savvy circulators have said for some months that situations analogous to G&J's were brewing. "It's probably an assumption on the part of a lot of us that, as [ABC]" increases such scrutiny, said Mr. Leckey, an ABC board member, "we may see situations in which [circulation] deductions are made. I might add, they are being made on an ongoing basis even as we speak."
80% of G&J's subscriptions
The misclassified subscriptions accounted for around 80% of G&J's subscriptions obtained through PCS, according to an executive familiar with the situation.
G&J has suffered through a spate of circulation-related scandals. It previously overstated newsstand sales of now-defunct titles Rosie and YM, as well as its lagging new-economy title Fast Company, and another hit to its ad revenues can be ill-afforded by the company, which suffered through a tough 2004.
'An unfortunate situation'
"This is an unfortunate situation that had its genesis before new management practices were in place," said Mr. Denson, who last year replaced Dan Brewster as CEO. Mr. Denson conceded that owing to past G&J disclosures, today's news meant the "collateral damage could be worse" among advertisers and industry peers than if today's situation arose elsewhere.
"We hope to overcome that with candor and full disclosure."