By  on January 13, 2005

NEW YORK — The circulation practices of Gruner + Jahr USA Publishing have come in for scrutiny once again — but this time, the fallout could extend well beyond the Bertelsmann-owned publisher.

G+J disclosed Wednesday that five of its six titles — Family Circle, Parents, Child, Inc. and Fast Company — will miss their advertising rate bases for 2004 as a result of misclassified subscriptions. Only Fitness will meet its circulation guarantee of 1.5 million.

The news marks a continuation of the company’s much-publicized circulation woes, which began two years ago with the revelation that its former title YM had inflated its rate base. The scandal spread from there, and eventually contributed to the downfall of Dan Brewster, G+J’s former chief executive officer.

G+J blamed the latest problem on a subscription-sales agent, Publishers Communications Systems of Coral Springs, Fla. In a lawsuit filed Wednesday, G+J accused PCS of failing to provide proof that subscriptions G+J had claimed as individually paid were, in fact, ever sold to anyone. G+J is seeking the return of the $725,000 it paid PCS, plus damages, including reimbursement for the rebates the company owes to its advertisers.

Russell Denson, who became ceo of G+J last May, said the total cost of rebates will be “something less than $10 million,” an amount he called “immaterial from a financial-impact standpoint.”

“We feel like we were defrauded by this third party, but, that being said, we are standing by our relationship with our advertisers,” he added.

The question is whether advertisers, who have watched the company weather one damaging revelation after another, will continue to stand by G+J. Since Brewster’s removal in January 2004, the company has made every effort to mend its image, including hiring a new consumer marketing director, Cindy Still, from Time4Media. When in July an audit revealed relatively minor problems with Parents’ subscription file, Denson promptly fired several employees who were responsible.

This latest setback, however, could erase all of G+J’s hard work.

“They have almost zero credibility,” said Peter Gardiner, chief media officer of Deutsch Inc., an ad agency. “It leaves you with the perception that you’re dealing with a company that’s not minding the store, and that bothers you.”But the problems may not be restricted to G+J for much longer. PCS serves a number of major publishers, including Time Inc. and Hachette Filipacchi Media (although spokespersons for both companies say they do not expect to find significant problems in their subscriber files).

Moreover, the relationship between G+J and PCS, under which G+J allowed PCS to keep the money from any subscriptions it sold and paid a premium on top of that, is common among subscriptions agents, according to Dan Capell, a circulation analyst. This arrangement is particularly vulnerable to abuses by agents.

“It’s hard to say how much of the rest of the industry might be affected,” Capell said.

Chip Block, vice chairman of USA Pubs, a subscription agency, went further, saying more stringent enforcement of rules by the Audit Bureau of Circulations will soon force other publishers to make similar adjustments to their circulation reports.

“I don’t think that, I know that,” he said.

For now, however, G+J remains alone under the microscope. Denson acknowledged that G+J’s checkered history makes every new disclosure that comes along that much more troubling.

“There’s a sense that we do feel like a batter up to bat with two strikes,” he said. But he stressed that, unlike past situations, the fault in this case lies with a third party, one that G+J has been working with since long before G+J’s new management was in place. He also noted that G+J has revised its policies for delegating subscription sales to agents.

“We hope we’re ultimately judged not so much by the problem as by how we handle that problem,” he said.

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