["The hallmark of our age is the tension between aspirations and sluggish institutions." - John W. Gardner (American Writer and Secretary of Health, Education and Welfare, 1912-2002)]
By John Harrington
Last Friday, a trade publication reported that one of the major wholesalers, The Source Interlink Companies, is battling with publishers over discounts. While it is true that Source has been actively seeking additional support from suppliers, the issues are not simply a matter of discounts, or limited to relations between Source and publishers. As I was quoted in the article, “There are three large wholesalers, and I would guarantee that they’re each trying to squeeze each nickel out of publishers that they can.”
However, there are issues beyond margins beneath the surface that are rooted in a structural disconnect that threatens the stability of the entire magazine retail distribution channel. It centers around a point that The New Single Copy has come back to time and again. The economic models of publishers, national distributors, and wholesalers are not in alignment. Major publishers, where advertising is the largest revenue source, can tolerate lower efficiencies to maximize their newsstand sales and meet their rate bases. Other publishers, with lower production costs, can be profitable with below average sell-throughs. National distributors, broadly speaking, do not have physical handling costs, deriving their income from a share of the price of a sold copy.
Wholesalers bear the cost of delivering copies to retail, and the cost of bringing back unsold copies, but are rewarded only for the copies that are sold. Simply stated, at today’s efficiency level, 33%, a wholesaler handles 167 copies to sell 33. Every time that rate goes down a point, the wholesaler handles another copy and sells one fewer. Speaking to The New Single Copy in our September 26 issue, Mike Sullivan, Source Interlink CEO, said, “[We] determine the amount of product we can bring to market and the level of service we can provide, based on the margin received for a particular title.”
Everything that has happened in the newsstand universe for the last three years plus, the “Great Recession,” has exacerbated the above situation. Unit sales fell between 2007 and 2010 by more that 27%. Dollars are off by 17%. Efficiency is down five points. Everyone in the channel has had to deal with increased costs, and, with few exceptions, most are bringing in less revenues.
The magazine publishing business, AKA the magazine media business, is in a period of vast transition, rushing into a digital world that changes from morning to night. Yet, I would be surprised if anyone at the top levels of management envisions a future without a bricks and mortar newsstand. A major publisher launched a new title a few weeks ago and 90% of the print run was sent to the newsstand. For most established titles, single copy sales provide the most profitable circulation. So-called “electronic newsstands” are beginning to emerge from the various tablet manufacturers, but they are hardly places where an attractive cover is going to entice a shopper to make an impulse buy. Clearly, maintaining a viable magazine newsstand channel should be a priority for magazine media management. Yet right now, the mis-alignment of the channel’s differing economic models renders that viability uncertain. In too many instances, publishers are asking channel partners to perform tasks
that cannot be performed profitably. Perhaps, in a past when sales were growing, when efficiencies were higher, the channel partners could tolerate a few unprofitable activities to support a generally profitable business. But in today’s very difficult market, such practices are less acceptable.
Without going down a long history, the fundamental nature of magazine distribution has changed substantially, but the method of rewarding wholesalers has not. The New Single Copy has previously written that a blended model of a percentage of cover price on copies sold and fees for specific tasks might be more rational. Certainly, in a depressed retail marketplace, characterized by sharp declines and deteriorating efficiencies, the current model is not rational. A little more than two years ago, this irrationality was a contributing factor in the collapse of a large wholesaler. The disruption to the channel was profound, and the business might not survive a similar event.
Yes, I was, more than 15 years ago, the president of the wholesalers’ trade association
(it no longer exists), and my responsibility was to promote the wholesalers’ interests. But today, more of my subscribers today are publishers and national distributors than wholesalers (do the math, how many wholesalers are there?), therefore my concern now is the survival of newsstand. And I, along with more than a few other observers, think it might not survive if some of the conflicting practices of its channel partners are not addressed and resolved, soon.
By Edmund Lee
News Corp. , the media company facing an investor uprising over its business practices, was alerted to a plan to inflate circulation at the Wall Street Journal Europe almost a year before the newspaper’s publisher resigned, according to a former employee and internal documents.
Les Hinton, the former chief executive officer at the News Corp. unit that publishes the Wall Street Journal Europe, was contacted with details of the payment practice in November 2010, according to former circulation manager Gert Van Mol and e-mails he provided to Bloomberg News. Todd Larsen, president of the Dow Jones & Co. unit, was also notified.
Van Mol said in the correspondence that a Dow Jones business partner was being compensated at the same time that partner was buying thousands of copies of the Wall Street Journal Europe, effectively boosting the publication’s circulation. Andrew Langhoff, the newspaper’s publisher who stepped down last week, had approved the payments, the circulation manager said in the e-mails.
“It was a non-ethical practice,” Van Mol said in an interview. “I didn’t want to be part of it, so I contacted Hinton and Larsen.”
Bethany Sherman, a Dow Jones spokeswoman, declined to comment on whether Hinton and Larsen had been alerted to the payments last year. She said Langhoff, 49, resigned because of the perception the newspaper’s agreement with the Executive Learning Partnership could have compromised editorial integrity.
Already Under Fire
His departure, she said, had nothing to do with the payments to ELP, a Netherlands-based strategy and consulting firm, or with ELP’s bulk newspaper purchases, which the company said are legitimate. Hinton, who resigned in July after allegations of phone hacking by journalists at a different News Corp. unit he ran for 12 years, didn’t respond to calls for comment. Langhoff also didn’t return calls for comment.
London’s Guardian newspaper reported the payments to ELP and the company’s bulk purchases last week.
News Corp., based in New York, is already under fire for the phone-hacking scandal, which has led to the closing of the 168-year-old News of the World tabloid and investigations in the U.K. and U.S. At the annual shareholders’ meeting Oct. 21, Chief Executive Officer Rupert Murdoch will be confronted by investors calling for changes in governance and business practices. The proxy-advisory firm Institutional Shareholder Services has told clients to vote out 13 of 15 board members to install more effective oversight of Murdoch and his lieutenants.
Murdoch may now face additional scrutiny over the Wall Street Journal Europe, including whether it inflated circulation figures and how long executives knew about the payments to ELP. The Audit Bureau of Circulations in the U.K., which initially verified the ELP contract, said last week it’s launching a new investigation into the arrangement.
“If senior management was aware and it wasn’t a rogue operation, that’s a huge problem,” said Jeffrey Sonnenfeld, senior associate dean of the Yale University School of Management. “There’s nothing they own that compares to the reputation of a news company, especially the Wall Street Journal.”
The deal approved by the British ABC boosted the Journal’s circulation in ways that aren’t allowed in the U.S. Under the agreement, ELP bought 12,000 copies of the Wall Street Journal Europe at 1 euro cent (1.4 cents) each, compared with the 3 euro newsstand price, and the papers counted as paid circulation.
The Wall Street Journal Europe’s bulk discounted purchases, by ELP and other partners, accounted for 46,137, or 62 percent of its total average daily circulation of 74,800, according to ABC U.K.’s latest certificate on the newspaper. The Audit Bureau in the U.S., which isn’t affiliated with the British group, doesn’t count discounted bulk purchases as paid circulation.
“If I were an advertiser, I’d be concerned about how many of these copies are being read,” Rick Edmonds, a media analyst for the Poynter Institute, said in an interview. “If there are really only about 30,000 people who are paying for the paper, that’s not bad. But that’s circulation for a very small town.”
Such bulk purchasing agreements aren’t uncommon for Europe. What was unusual were the additional perks ELP was getting: The firm was receiving payments from Wall Street Journal Europe partners at the same time it was buying newspapers, and ELP had a role in coming up with story topics for the publication, according to Van Mol and Dow Jones.
Van Mol, a 45-year-old native of Antwerp who helped organize bulk purchases of the newspaper by ELP and other companies, was laid off by Dow Jones in January after nine years at the company. He said in interviews with Bloomberg News that he alerted senior people at Dow Jones because he was concerned about the ELP deal.
In one instance, the Journal Europe staged a launch party for a book written by Vineet Nayar, CEO of the Indian technology firm HCL Technologies Ltd. (HCLT) It took place at the Grosvenor House hotel in London in September 2010 and included remarks by Patience Wheatcroft, then editor of the newspaper. After the event, Langhoff asked Van Mol to make sure ELP be paid 6,000 euros for the party.
“They just sent a moderator,” Van Mol said. “I didn’t understand why Mr. Langhoff wanted me to direct profits from an event to go to ELP when they didn’t have much to do.”
After the party, Langhoff told Van Mol to direct HCL to pay 16,000 euros to a third party, magazine publisher Banking & Finance, or B&F, instead of directly to Journal Europe for the event, according to two e-mails last year.
The correspondence shows that News Corp. executives wanted B&F, which participated as a sponsor, to move the 16,000 euros to ELP, along with an additional 2,000 euros from B&F for its own role as a party sponsor. HCL should have simply paid Journal Europe for its work setting up the event, Van Mol said.
Rien van Lent, a managing director of ELP who signed the circulation contract with Journal Europe and is also a former publisher of that newspaper, said the payment was legitimate.
“A facilitator of our company prepared and moderated for that meeting,” he said in an interview. “She chaired that meeting with HCL.”
Ranjana Sharma, a spokeswoman for HCL Technologies in London, said the company sponsored an event with Wall Street Journal Europe in September 2010, though she declined to comment about how payments were made. Michel Klompmaker, the publisher of B&F, didn’t respond to calls and e-mails requesting comment.
Van Mol said he initially refused to carry out the payment plan and alerted Carol Bosack, human resources director for Dow Jones in Europe. A few months after the book event, HCL still hadn’t paid for the party, and Langhoff sent an e-mail to Van Mol addressing the invoicing plan.
“I trust that you are aware of the details of these payments, but for clarity I’ve attached a document with a schema showing how I understand the money should flow,” Langhoff wrote in an e-mail last November.
The document, reviewed by Bloomberg News, shows a diagram drawn up in Excel with HCL paying 16,000 euros to B&F, and B&F paying the 16,000 euros plus an additional
2,000 to ELP.
Sherman, the spokeswoman for Dow Jones, said in an e-mail statement the payments were “admittedly complex but nevertheless legitimate.”
Van Mol was directly involved in recruiting corporate partners to buy newspapers in bulk, boosting circulation figures. He designed the Future Leadership Institute, or FLI, the marketing program to distribute copies of Wall Street Journal Europe at events and seminars staged by the newspaper’s circulation department, in collaboration with sponsor companies, such as ELP.
Van Mol claims Langhoff altered the nature of the program through the payment structure for these events and terms that threatened to compromise editorial independence. Van Mol e- mailed Hinton and Larsen in November, asking to be removed from Langhoff’s team, according to his e-mails.
Within weeks, News Corp. sent Dow Jones lawyer Tom Maher and Bosack to meet with Van Mol to hear his allegations against Langhoff, according to both Van Mol and Dow Jones.
“They asked me to explain the money strings and the e-mail from Langhoff,” Van Mol said. “After I explained everything, a lady from their internal audit bureau said they received anonymous accusations against me, for my expenses. I couldn’t believe it. I was telling them something was wrong and they were telling me I did something wrong. I felt threatened.”
Sherman said Dow Jones had been investigating Van Mol at least six months prior to his letter to Hinton, though she declined to discuss the reason for the inquiry.
After their December meeting, Bosack contacted Van Mol in January to explain that his claims were without merit and that he would be fired.
“They said it should be considered a ‘friendly redundancy’,” Van Mol said. “And they also said it had nothing to do with my accusations about Mr. Langhoff.”
Van Mol recently hired a lawyer to seek 11 months of severance pay from Dow Jones, what he said was a legal requirement in Belgium when an employee is terminated.
Sherman confirmed Van Mol’s position was eliminated and declined to comment on his statement that he felt threatened.
The newspaper’s contract also calls for ELP involvement in articles. It includes a provision that Wall Street Journal Europe publish at least “three (3) special reports included as a supplement within WSJE” featuring data and information from ELP. While the contract includes a clause that gives the Wall Street Journal Europe the right to decline to publish any article, the newspaper published two stories that were based on data from ELP and included interviews with ELP executives, including van Lent.
Dow Jones recently appended the articles with a clarification explaining the impetus for writing the stories was the ELP agreement, though the reporting and writing was handled solely by the news department.
Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.
News Corp. continues to deal with fallout from the phone- hacking scandal. James Murdoch, deputy chief operating officer and the CEO’s son, has been asked to return to Parliament to respond to allegations by former employees that they told him in 2008 the phone hacking went beyond one rogue employee. Hinton, the former head of Dow Jones and the unit that included the News of the World, will be questioned by the U.K. House of Commons Culture, Media and Sport Committee on Oct. 24.
“These issues keep coming,” said Julie Tanner, assistant director of socially responsible investing for New York-based Christian Brothers Investment Services Inc., a News Corp. shareholder. “There needs to be some real changes.”
Attempt to Silence?
Van Mol, who recently joined Belgian television station Life!TV, was named by the Wall Street Journal in a recent article on the circulation deal with ELP. He said he was identified without his consent, a move he sees as News Corp.’s attempt to silence him.
“It’s so dangerous,” Van Mol said. “Suppose there’s another employee who sees a problem, and if you bring that problem to the table, your name will be in the newspaper? This is dangerous to the company culture.”
Sherman, the Dow Jones spokesman, said Van Mol’s assertion is incorrect. His name was uncovered through the standard reporting process and the terms of the interview were clearly communicated, she said.