Thursday, October 13, 2011

Wall Street Journal Circulation Scam - Will Anyone Really Care?

Robbery, rape, murder are all easy to understand.  Someone uses violence or the threat of violence to take someone's money, body, or life.  Proving who did it may not be easy, but the concepts can be grasped by most anyone.  It's easy to report and for readers to grasp.

Fraud, on the other hand, if done cleverly, requires a lot more work to detect.  The victim may be unaware, so no one is even reporting a problem.  Think of Enron.  While pulling off the US's then largest fraud ever, they were repeatedly named Company of the Year by top business journals.

How were average citizens supposed to know what was happening if 'freedom's watch dogs' were so enamored?  And everyone knows how hard it is to turn the banking ripoff into evening news sound bites.  While more people are getting the point that the rich guys got richer while the average guy got poorer, I'd bet most people couldn't explain how it all worked.  Or understand that there were some rich good guys and some unsavory average folks.
So, how difficult is it to understand the Wall Street Journal's circulation fraud?  Not that hard. 

Basic Assumption Needed to Understand

Circulation is the newspapers' equivalent to ratings.  Circulation means everything to the business types in the media.  The higher the circulation the more attractive a newspaper is to advertisers and the more they can charge. 

They don't make money by selling papers.  They make money by selling ads.  They sell ads and set the prices based on circulation.

So if your advertising price is for, say, 75,000 subscriptions per day, but you really only have  44,000, you're essentially charging your customers for a lot more eyeballs than actually see their ads.  Sort of like selling a fake Rolex at real Rolex prices. And at a large newspaper over a a couple of years, that could add up to quite a bit of 'stolen' money.  But for many people it doesn't quite seem like theft.  And while someone who steals $200 from an ATM machine might get a number of years in prison, how may newspaper executives go to prison for scamming for millions?

The Wall Street Journal Scheme (According to the Guardian)

1.   The WSJ sold papers below cost to European companies that gave the papers to students.  In return the WSJ had features which highlighted the companies.  This practice accounted for a whopping 41% of their European circulation.
"The Journal's decision to secretly purchase its own papers began with an unusual scheme to boost circulation, known as the Future Leadership Institute. Starting in January 2008, [remember this date] the Journal linked up with European companies who sponsored seminars for university students who were likely to be future leaders. The Journal rewarded the sponsors by publishing their names in a special panel published in the paper. The sponsors paid for that publicity by buying copies of the Journal at a knock-down rate of no more than 5¢ each. Those papers were then distributed to university students. At the bottom line, the sponsors enjoyed a prestigious link to the Journal, and the Journal boosted its circulation figures.
The scheme was controversial. The sponsoring companies were not reading the papers they were paying for; they were never even seeing them; and they were buying at highly reduced rates. The students to whom they were distributed may or may not have read them; none of the students paid for the papers they were being offered. But the Audit Bureau of Circulation ruled that the scheme was legitimate and by 2010, it was responsible for 41% of the European edition's daily sales – 31,000 copies out of a total of 75,000."
I did find it interesting that the inflated circulation number in Europe was only 75,000 in a market of (in 2010)  857 million people.

2.      A WSJ insider alerted the higher ups about the scheme and its illegitimacy.  The insider was fired.
Senior executives in New York, including Murdoch's right-hand man, Les Hinton, were alerted to the problems last year by an internal whistleblower and apparently chose to take no action. The whistleblower was then made redundant.

3.  When one of the main companies involved wanted to back out, the WSJ sweetened the deal.  Having circulation drop 16% wasn't going to look good.  They even found another company to cover the payments and told everyone to keep quiet.

In early 2010 the scheme began to run into trouble when the biggest single sponsor, a Dutch company called Executive Learning Partnership, ELP, threatened to back out. ELP alone were responsible for 16% of the Journal's European circulation, sponsoring 12,000 copies a day for which they were paying only 1¢ per copy. For the 259 publishing days in a year, they were sponsoring 3.1m copies at a cost to them of €31,080 (£27,200). They complained that the publicity they were receiving was not enough return on their investment.
On 9 April 2010, Andrew Langhoff emailed ELP to table a new deal, explaining that "our clear goal is to add a new component to our partnership" and offering to "provide a well-branded showcase for ELP's valuable services". On 30 April, ELP agreed to continue to sponsor 12,000 copies at the same rate. But that deal included a new eight-page addendum, which the Guardian has seen.
The addendum included a collection of side deals: the Journal would give ELP free advertising and, in exchange, the ELP would produce "leadership videos" for them; they would jointly organise more seminars and workshops on themes connected to ELP's work; but, crucially, Langhoff agreed that the Journal would publish "a minimum of three special reports" that would be based on surveys of the European market which ELP would run with the Journal's help. . .

By the autumn of 2010, ELP were complaining that the Journal was failing to deliver its end of the agreement. They threatened not to make a payment of €15,000 that was due at the end of December, for the copies of the Journal which they had sponsored since April 30. Without the payment, the Journal could not officially record the sales and their circulation figures would suddenly dive by 16%, undermining the confidence of advertisers and readers.

So Langhoff set up a complex scheme to channel money to ELP to pay for the papers it had agreed to buy – effectively buying the papers with the Journal's own cash. This involved the use of other companies although it is not suggested that they were aware they were taking part in a scam.

Of course when the WSJ was bought by Murdoch, who also owns Fox News, pundits immediately raised fears about the credibility of the WSJ.  From the Washington Post in August 2007:
The colorful and controversial tabloid king faced strong opposition during his four-month run at Dow Jones and whipped up worries that he would destroy the credibility of the august Journal.  [Emphasis added]
 If we look at the dates above, this scheme was put into action just six months after the WSJ was bought.

Consequences so far
The Guardian also writes that as word of their asking questions reached the WSJ's executives, Andrew Langhoff, the European managing director of the Journal's parent company, Dow Jones and Co, resigned. 

Personal note
I also have to add that the WSJ's history of selling copies to students didn't begin with Murdoch.  As a faculty member in a College of Business and Public Policy, I regularly got offers from the WSJ for a free subscription if I got students to buy the journal.  [See update below for example.] At least here the students were legitimately buying the journal (for a student rate as I recall) themselves.  But I always wondered how many faculty who made the offers to students also revealed that they would get a free subscriptions themselves.  (I never passed the offer on to my students.  Though I mentioned it a few times when we studied ethics.)

Some Contrast
There was also an Associated Press story I read in the Anchorage Daily News yesterday about boxer Dewey Bozella who is making his pro boxing debut at age 52 two years after his murder conviction was overturned and after serving 26 years in prison for a murder he didn't do.
. . . He was suspected in 1977 of killing Crapser. Bozella was fingered by a suspect in another crime and eventually charged for her death. But a grand jury found there wasn't enough evidence and refused to indict him. . .

Life unraveled in 1983 when false testimony from convicts that granted their freedom cost Bozella his. Bozella was arrested again for Crapser's death and in December 1983 was convicted of murder and sentenced to 20 years to life. He collapsed to the ground in tears, crying out that he didn't do it.

Murder is easy to understand and there is a demand for a conviction.  It doesn't matter if it's not the right guy as long as we can convince ourselves it is.  But fraud is dicier.

Apparently the folks at WSJ didn't see anything wrong when the whistleblower brought things to their attention a year ago.  Or they thought the risk was worth any possible consequences.  Langhof's resignation would seem to be the cost of doing business and mollifying anyone who is seriously concerned.  If it hadn't been for the leftover sensitivity from News Corps' recent phone hacking scandal, perhaps he wouldn't have had to resign.  And I'm sure Langhof's salary and other perks these last few years will carry him over for a while.

And Bozella gets a chance to get his body battered in a pro fight now that he's out of prison.

UPDATE October 14:  I just got an email offer for students of the type I mentioned above:

For a limited time, we are offering you a free 4-week trial to The Journal.  You'll receive the print Journal every weekday, plus unlimited access to the Online Journal.

The Wall Street Journal now provides more politics coverage than ever, making it an ideal complement to your Political Science textbook.  Plus, our Education program makes it easy for you to integrate our content into your curriculum.

With the Journal-in-Education program, you'll:
  • Save time with our faculty-developed tools and integration ideas.
  • Engage students and promote debate with The Journal's reliable coverage of U.S. and World events.
  • Keep courses fresh with a daily supply of new material and information.
When your students subscribe, they'll receive The Journal in print, online and via smartphone.  Plus, students pay the lowest rate - 75% off regular rates!
Try out The Journal for free for 4 weeks and see for yourself how The Journal will provide you and your students with relevant, real-world content for your classes.
The Wall Street Journal Education Department
200 Burnett Road
Chicopee, MA 01020

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