American Family Woes Stir Talk of Zero-Remit Plan

Folio: The Magazine for Magazine Management, July 1, 1999 by Joanna Lowenstein

With response rates down and lawsuit settlements costing millions, observers speculate about the sweeps firm's response.

The financial trouble at American Family Enterprises could result in an unprecedented policy change that would cost publishers money as the sweeps giant tries to stabilize its financial situation. Because of a flurry of lawsuits and lower response rates, some industry sources are speculating that American Family Publishers, the sweeps arm of AFE, will lose $30 million this year.

The company, which is partly owned by Time Inc., declined to characterize its financial condition. However, sources say that to combat its losses, AFE could implement a variety of changes, including something as drastic as a zero-remit policy. This change, while still delivering subscribers to publishers, would end the company's payments for each subscription.

"If the company is doing that badly, something has to give," says one circulation consultant. "If they don't pull out, they must at least be weighing options like changing the remit structure. Right now publishers get an average of 8 percent to 15 percent remit. I could see APE trying to get publishers to go to a zero remit to recoup money.

Zero remit "too destructive"

Others, however, are skeptical that a zero-remit policy would ever be implemented. "It would be too destructive to the health of many magazines," says Linda Engel, vice president, consumer marketing for Children's Television Workshop. "Most magazines are in some way supported by circulation revenue, and this would not be a good economic formula for them." Many titles rely on sweepstakes for up to one-third of their ratebases.

If AFE does go to zero remit, it may begin to lose accounts. "We'd probably only use them for some of our titles and not for others," says Bob Cohn, vice president, consumer marketing for Times Mirror Magazines. "It would depend on how much we could substitute that volume with our own direct mail."

Lower remits an option

But for publishers already seeing weaker results from their own direct mail and telemarketing efforts, such a change on short notice would leave them with few options to meet their ratebases.

One possible alternative would be a lower-remit policy, says Howard Katz, vice president, circulation, for Mort Zuckerman-owned magazine properties such as Fast Company. "Zero would be too harsh on publishers. Some remit relief might make it easier for AFE to recoup their losses without hurting publishers as badly."

In May, the company settled lawsuits in four states, Indiana, Florida, South Carolina and West Virginia, for a total of $4 million. AFE also agreed to revise many of its business practices. Two outstanding lawsuits, with Connecticut and Washington (involving various sweepstakes companies, including Publishers Clearing House), are still in negotiations.

A federal bill regulating sweepstakes was approved by a Congressional subcommittee and is expected to be voted on before the end of the summer. The bill includes many of the same regulations included in the lawsuit settlements.

AFE dogged by bankruptcy rumors

Just weeks before APE settled the lawsuits, media reports emerged saying American Family Publishers was in serious financial trouble and might declare bankruptcy. APE CEO Susan Caughman refuted the bankruptcy reports in a letter to the publishing community. Citing "inaccurate and false reports about the dire financial situation," Caughman said AFE's owners "are strongly committed to the long-term growth of the company." She did admit that legal problems and lower response rates have hampered the company's operations.

AFE spokeswoman Jeanne Meyer said the reports are "based on rumors." She notes that while it's not "business as usual" at the company, there are plans for new initiativs in the works, such as more frequent prizes throughout the year and a well-funded millennium campaign.

Industry sources, however, paint a bleak picture and expect losses to be around $30 million this year. This is a dramatic difference from past years, when the company raked in $100 million or more in profits.

Many believe, however, that bankruptcy is still a possibility. "Circulators don't know what to think right now," says circulation consultant Stuart Jordan. "There's a good reason to believe the stories, because bankruptcy does represent a real solution for them."

Others think that the situation isn't as grim as it may seem. "The story says that they're operating at a loss, but I don't think they are," says one consumer circulation executive. "I think that Time Inc. will try to distance itself from APE, but I don't think they'll declare bankruptcy. AFE pulls in millions upon millions for them, and they'll see them through this hard time."