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NEW YORK — “Confusion and panic.”

That was how one circulation executive characterized the reaction of publishers to news issuing Tuesday from the Audit Bureau of Circulations, the chief organization monitoring newspaper and magazine sales in the U.S.

“Confusion” because, while ABC’s board decreed major changes in the way certain types of subscription sales will be classified moving forward, it failed to spell out many of the particulars publishers will need to know before they can come into compliance.

“Panic” because, depending on what ends up in the fine print and how auditors choose to enforce it, the impact could include higher consumer marketing costs, lower advertising revenues, fines, censure or even legal action.

The actions taken by ABC’s board at its meeting last weekend were principally aimed at tightening its rules for how and when subscriptions delivered to consumers and underwritten by a third party can be claimed as paid. These are so-called sponsored sales, typically handled by an independent agent. The new rules constitute an attempt to clean up one of the murkier areas of magazine circulation, one that has been the source of several recent circulation scandals and has even drawn attention from the U.S. Department of Justice.

That attention, along with the heightened atmosphere of corporate scrutiny ushered in by the 2002 Sarbanes-Oxley Act, provided the impetus for the rule changes, said Michael K. Moran, ABC’s executive vice president of auditing services, in a telephone press conference Tuesday.

“I think it’s fair to say the ABC board is aware of the environment in which all businesses are operating now, and of how accounting and being accountable has become an area of high sensitivity,” he said.

The cost to publishers of this new transparency remains to be seen, but it will be significant for many. “They’re going to have to change the way they do business and do it fast,” said one publishing executive with close ties to ABC. “The circulation directors are really going to have to scramble.”

The rules announced yesterday, which go into effect with January 2006 issues, mandate that, to qualify as paid, sponsored subscriptions must be sold by publishers for a positive price “net of all considerations.” Current rules make it possible for publishers to claim as paid virtually all sponsored subscriptions, even if the publisher pays more in marketing fees than it gets back in subscription revenue. The new rules also restrict eligible sponsors to companies that market directly to consumers.

This story first appeared in the July 20, 2005 issue of WWD. Subscribe Today.

Consumer marketing sources say the vast majority of sponsored subscriptions currently claimed as paid — anywhere from 80 to 95 percent — will not meet the new, more rigorous definition. Such subscriptions will henceforth have to be claimed as qualified rather than paid, a category that advertisers have tended to regard with skepticism.

One consumer marketing director estimated that most major consumer magazines now report sponsored sales of anywhere from 25,000 to 150,000. Not surprisingly, the titles with the most sponsored sales are the ones frequently found in public places such as doctors’ waiting rooms and beauty salons. Topping the list are magazines such as Newsweek (296,000), Time (284,000), Elle (130,000), Glamour (104,000) and Allure (100,000). In fact, nearly a quarter of Time’s circulation of 4 million consists of copies sold through sponsorships, marketing partnerships and frequent-flier programs.

Brian Wolfe, president of Time Consumer Marketing, said Time Inc.’s magazines, including Time, will respond to the new rules by changing the way they sell some, but not all, of their sponsored copies. “With the stuff that’s not public place, our intent would be mainly to get sponsors that have an affinity with the magazine and from whom we can get at least a penny per copy,” he said. “Our intent would be to move the public place stuff into the qualified [i.e. non-paid] line and vigorously defend it as quality circulation. Our feeling is that, even though those subscriptions are not paid for by an individual, for an advertiser they are very high quality as they get a high number of readers per copy.”

Another circulation executive agreed. “If you’re an advertiser in Allure magazine, what could be better than having a woman sitting there reading it in a beauty shop?” But whether advertisers themselves will see it that way remains a question.

In addition to mandating rule changes going forward, ABC’s board also voted to disqualify sponsored subscriptions sold through two different agents, EBSCO Consumer Magazine Services and InFlight Newspapers and Magazines Inc. The board voted at its March meeting to censure EBSCO for inadequate recordkeeping, while InFlight is the subject of a federal probe.

More than 80 consumer magazines will be affected by the decision to disqualify EBSCO-sold subscriptions reaching back to 2003. Many of those titles had applied for “exceptions,” or exemptions, allowing them to claim the disputed copies as paid, but the board voted to deny those exceptions, and to rescind exceptions already granted to Business Week and the Canadian edition of Reader’s Digest. According to a source close to ABC’s board, the decision was made after scrutiny of EBSCO’s records showed some publishers knowingly collaborated with the company to get around ABC rules.

A circulation executive estimated that EBSCO sold at least 4 million subscriptions a year. “There are going to be some publishers who miss their rate base by quite a large number” because of the EBSCO and InFlight decisions, the executive predicted.

Which publishers? ABC officials would not say, but it’s worth noting that ABC directors from Time Inc., Condé Nast, Hachette Filipacchi and National Geographic had to recuse themselves from the votes on EBSCO and InFlight because they stood to be affected by the outcome.

Time Inc.’s Wolfe acknowledged that his company had done business with both agents but said it was “a very small number in very small fashion.” He said it was unclear whether any Time Inc. titles would end up owing refunds to advertisers as a result of the disqualifications, but said it would not be more than one or two, if any.

A spokeswoman for Advance Publications (which owns Condé Nast and Fairchild Publications, parent of WWD) said, “We are studying the announcements made today by ABC. We intend to make any appropriate adjustments to our circulation and marketing programs.”

But even publishers that managed to keep clear of EBSCO and InFlight may find themselves facing similar questions before long. “There’s more to come,” said the executive with ties to ABC. “There are other agents out there that they are looking at very seriously for the same kinds of violations, about five or six of them.”

A Snapshot of Sponsored Sales
Sponsored Subscriptions
Total Circulation
Rolling Stone
All numbers are for the six-month period ended Dec. 31, 2004.
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