In the Matter of the Petition by LOTUS PUBLISHING CORPORATION, P. O. Box 9123, Cambridge, MA 02139-9123, Denial of Application for Second-Class Mail Privileges for Lotus Magazine P.S. Docket No. 24/68 April 7, 1987 Edwin S. Bernstein Administrative Law Judge APPEARANCES FOR PETITIONER: John E. McKeever, Esq. Arden J. Olson, Esq. Schnader, Harrison, Segal & Lewis 1111 19th Street, N.W. Washington, DC 20036-3693 APPEARANCE FOR RESPONDENT: Jeffrey H. Zelkowitz, Esq. Law Department United States Postal Service Washington, DC 20260-1143 BEFORE: Judge Edwin S. Bernstein
This is an appeal by Petitioner from a decision of the Director, Office of Classification and Rates Administration denying Petitioner second-class mail privileges for its publication, Lotus . The Director decided that Lotus magazine was ineligible for second- class mail privileges pursuant to Domestic Mail Manual (DMM) 422.6(c) based upon his determination that Lotus was controlled by the owners of Lotus Development Corporation (LDC) and conducted as an auxiliary to and essentially for the advancement of LDC's main business.
A hearing was held in Washington, DC. The parties filed pro- posed findings of fact, proposed conclusions of law, and memoranda. All of these have been considered. To the extent indicated, they have been adopted. Otherwise, they have been rejected as irrelevant or not supported by the evidence.
The parties stipulated and I find:
1. Lotus magazine is currently owned and published by Lotus Publishing Corporation.
2. Lotus Publishing Corporation is a wholly owned subsidiary of Lotus Development Corporation.
3. The main business of Lotus Development Corporation is the production and sale of computer software, including but not limited to programs entitled "1-2-3", "Symphony" and "Jazz".
4. On April 23, l985, Lotus magazine applied for second-class privileges as a requester publication.
5. On April 23, l986, the Office of Classification and Rates Administration of the United States Postal Service denied Lotus magazine's application in a letter from Donald D. Dillman to Daniel A. McMillan.
6. Petitioner filed a timely appeal to this ruling (Tr. 11-12).
Lotus Development Corporation's largest product is "1-2-3". Its second largest product is "Symphony". LDC has sold more than two million copies of its computer software programs. "1-2-3" is the most commonly used programming language in American business today. It is the industry standard. It is estimated that there are between six and eight million users of LDC software or equivalent products (Tr. 17).
LDC also has entered the information business. Lotus Publishing Corporation is part of that business. In June 1984, LDC hired Daniel A. McMillan to research the possibility of starting a publishing business. Mr. McMillan had substantial publishing experience with McGraw-Hill Publishing Company and other publishers. He had been responsible for publishing Aviation Week , Byte and other important magazines. (Tr. 15-16). After consider- able research, Mr. McMillan recommended the publication of Lotus magazine. That recommendation was approved by LDC's Board of Directors (Tr. 57) and Lotus' first issue was published in May 1985 (Tr. 19).
Mr. McMillan concluded that the nature and extent of LDC's software use provided LDC with an opportunity to make money by publishing a magazine that would focus on the information needs of the users of LDC's software programs as well as other spreadsheet programs (Tr. 19, 21, 56-57).
When Mr. McMillan was performing his research, there already were in the market publications of other independent firms that dealt exclusively with one or more LDC products. These included approximately 120 to 125 books and various periodicals (Tr. 26-28). In addition, many of the more general computer magazines were highlighting LDC's products (Tr. 28-29).
Another reason for establishing Lotus magazine, in addition to the desire to make a profit, was that it was consistent with LDC's policy of providing informational support for its customers. Thus, LDC's annual statement dated February 11, l985, stated, "To develop a direct communications link with its customers, Lotus will intro- duce its own monthly magazine beginning in May l985. Lotus magazine will help managers and professionals use personal computer systems, Lotus software and other software more creatively and produc- tively." This conformed with support goals of LDC stated in that report to "Follow the product and the customer out of the store. Offer customers practical information about basic additional product benefits and new uses. Warn them about potential problems. Support dealers and end users with good products, good training and good information." (RX-3 at 20, 15).
LDC also distributes other publications and newsletters which are specifically designed to promote the sale of its software products. These include Prompt Newsletter (LX-4a), Lotus Update (LX-4b), @ Campus (LX-5), and Lotus User Forum (LX-6), all of which are distributed at no charge (Tr. 23-26).
Like these publications, Lotus magazine is targeted at an audience who are already using LDC software. However, unlike these other publications, Lotus is designed to be sold. Lotus costs $3 per issue or $18 for an one year subscription of 12 monthly issues. This is comparable to the rates for other leading computer magazines such as PC World which costs $17.97 per year and PC magazine which costs $21.97 for 24 issues (Tr. 52-53).
Purchasers of LDC software are offered a free six-month trial subscription of Lotus . The offering of free trial subscriptions is a common method of soliciting paid subscriptions in the publishing business (Tr. 53, 126). To obtain a free trial subscription to Lotus , a potential subscriber must state that he uses LDC software (Tr. 53-54). Once one has received a trial subscription to Lotus , he is not entitled to receive a second free subscription but must pay for further copies of the magazine at regular rates (Tr. 55-56, 188-189).
In developing Lotus , Lotus Publishing performed substantial in-house market research and also commissioned independent research to determine which of the magazine's features would most interest computer software users. The various sections and features of the magazine were developed as a result of that market research (Tr. 47- 52).
LDC does not exercise any editorial control over Lotus (Tr. 35- 36, 44, 91). Sometimes Lotus contains articles that point out defects, limitations, or shortcomings in LDC's products or criti- cize LDC (Tr. 36-41; LX-9a, 9b, 9c, 9d and 9e). The magazine also contains articles that argue against the need for LDC upgrades (Tr. 36, 38). Thus, two subscriber witnesses testified that they have read articles in Lotus that criticized LDC, including one article which suggested that software users might consider boycotting upgrades of software produced by companies such as LDC (Tr. 162-163, 171).
Many articles in Lotus convey generic information concerning spreadsheet software products generally rather than specifically deal with LDC products. The magazine also contains articles, sections, and features that do not deal at all with LDC products (Tr. 45-46, 94, 190-193, 196-198).
The majority of the articles in Lotus are written by people who are independent of LDC (Tr. 94, 163-164, 172). LDC does not submit articles to Lotus Publishing for publication in Lotus (Tr. 58). On those occasions when an employee of LDC publishes an article in Lotus , the article is written by the author on his own, and he - not LDC - is compensated by Lotus Publishing, as is the case with any other author (Tr. 58-59, 93).
The Lotus Magazine Writers Guide distributed by Lotus Publishing to prospective authors states, "Sales hype has no place in Lotus . Most articles assume that the reader already owns the product and is primarily interested in learning how to use it more effectively" (Tr. 91-92; LX-17 at 2)
Dr. Frank W. Connolly, Mr. Gerald Wenham, and Mr. Edwin R. Iwata testified as subscriber witnesses for Petitioner. Dr. Connolly, who teaches computer systems applications at The American University, uses Lotus magazine in his classroom and has on a number of occasions placed articles from the magazine on reserve in The American University's library for his students' use (Tr. 185, 187, 189-194; LX-24 and 25).
Gerald Wenham, an economist with the U. S. Department of Agriculture and a heavy computer user, obtained a trial subscrip- tion to Lotus , subsequently purchased a subscription for $18 a year, and has renewed that subscription. He concluded that Lotus is an objective, useful source of information about spreadsheets and spreadsheet software programs, as well as a source of insights into other more general computer topics (Tr. 155-158). Mr. Wenham also evaluated Compaq magazine because he owns a Compaq computer. However, he did not purchase a subscription to Compaq because, he concluded that it dealt almost exclusively with Compaq products in contrast to Lotus which he felt "deals with much more wider issues in the computer industry" (Tr. 160-161). Mr. Wenham stated that he reads each issue of Lotus from cover to cover and he has never noticed any bias in Lotus that suggests editorial control by LDC. In his opinion, Lotus is not advertising for Lotus Development Corporation "in any way, shape, or form" (Tr. 160-164).
Edwin Iwata is Director for Supervisory Research at The Controller of the Currency and a heavy computer user. Based upon Mr. Iwata's evaluation and recommendation, The Controller of the Currency purchased a subscription to Lotus . Mr. Iwata stated that he regularly reads other computing magazines including PC Week , PC World and PC . He testified that he would not have been interested in reading Lotus if he had not already been a user of LDC software programs; that he does not consider Lotus to be advertising; that he has never had the impression that LDC exercises editorial control over the contents of Lotus ; and that the features and sections of Lotus are comparable to the features and sections in other personal computer magazines (Tr. 169-172). Lotus has enjoyed substantial success in attracting subscribers. It now has approximately 200,000 to 220,000 paid subscribers (Tr. 65, 66; LX-11, 12 and 13). This is almost 60 percent of Lotus ' total circulation. Lotus ' paid subscriptions have steadily increased (LX-13). The magazine is experiencing a renewal rate of 75 percent and a rate of conversion from trial subscriptions to paid subscriptions of 30 percent. Both of these percentages are remarkably high in the publishing industry (Tr. 70-71, 132-134). Lotus ' renewal rate is particularly impressive in view of the fact that the trend in renewal percentages for magazines generally has been down (Tr. 133-136).
Douglas Cobb, who publishes the Symphony Users Journal and the 1-2-3 Users Journal , magazines that compete with Lotus , also testified. He stated that in his view Lotus is not a "house organ" and is not designed essentially to advertise or promote the sale of Lotus Development products (Tr. 151).
Russell Berg, who has 35 years of experience in the publishing industry, has evaluated approximately 100 publications, and been associated both with "house organs" and with "commercial" publications such as Scientific American magazine, testified that, based upon his examination of many issues of Lotus , the magazine's paid circulation statistics, its renewal rate, its record of conversions from trial to paid subscriptions, Lotus is perceived by its readers as being objective and is not perceived as advertising or "puffery" for LDC products (Tr. 117-119, 122, 127, 130-135). In Mr. Berg's opinion, Lotus is a "commercial" magazine and not a "house organ" designed to promote the sale of LDC products and is not published essentially for the advancement of the main business of LDC (Tr. 135-137).
The Postal Service, in its denial letter, sets forth the "Q & A", "Good Ideas", " @ Lotus" and "Books" sections, which are regular features of Lotus , as examples of articles which further interest in LDC software products (LX-3 at 3). However, these are features that Lotus ' readers find valuable and want to be retained. In a survey of Lotus ' readers covering 16 issues of the magazine from May 1985 through September 1986, these sections were rated either "excellent" or "good" by 90.97 percent of those surveyed for "Q & A", 92.86 percent for "Good Ideas", 82.91 percent for " @ Lotus" and 87.26 percent for "Books" (LX-19; Tr. 95-97, 52). Lotus ' subscription revenues to date are approximately four million dollars (Tr. 71). Its advertising revenues to date are approximately fourteen million dollars (Tr. 90). The magazine has attracted wide acceptance from advertisers (Tr. 73). Most adver- tisements in Lotus are placed by independent advertising agencies (Tr. 90). Lotus ' advertisers include IBM, Hewlett-Packard, Xerox, Digital Equipment, AT&T and other well known companies (Tr. 88-89; LX-16).
In Lotus ' initial issues most advertisements were for products compatible with LDC's software programs and therefore mentioned LDC products (Tr. 83). However, there has been a steady increase in the percentage of advertisements that do not relate to or mention LDC products and since the October 1985 issue, a majority of the advertisements in Lotus do not mention LDC products or products compatible with LDC products. Beginning with the April 1986 issue, over 70 percent of the advertisements in Lotus did not mention LDC or its products, except perhaps incidentally as one of a number of software companies (Tr. 85-86; LX-15).
The use of LDC's software programs has become so widespread that many independent personal computer publications contain a substan- tial number of advertisements for products that are compatible with LDC software programs or that refer to LDC's software programs as well as a substantial amount of editorial matter that highlights LDC products (Tr. 129-130). In fact, the percentage of advertisements in Lotus magazine that mention LDC products or that are for products that are compatible with LDC products is typical of publications that deal with personal computers. For example, a recent issue of PC World , which is not affiliated with LDC or Lotus Publishing, contained 47 advertisements or 20 percent of the issue's advertise- ments that mentioned LDC products (Tr. 89-90).
Lotus Publishing does not exercise any control over the content of advertisements in Lotus . Many advertisements in Lotus that refer to LDC or its products are identical to these that appear in other magazines (Tr. 12-13, 73-74, 90).
LDC must pay for advertising space in Lotus . Lotus Publishing receives the same revenue from the advertisements for LDC products as it does for advertisements placed by others. In addition, LDC's advertisements do not receive any preferential placement in Lotus (Tr. 80-81). Lotus also accepts and contains advertisements for products that compete with LDC's software programs (Tr. 74, 161- 162). Approximately 40-50 percent of the advertisements in Lotus do not even deal with software programs (Tr. 88). Lotus is now generating a profit (Tr. 62, 90). Although the original business plan projected that the magazine would generate a profit within three years with full recovery of LDC's initial investment and all costs within five years, Lotus began to generate a profit approximately 18 months ahead of schedule, which is unusual for a new magazine (Tr. 34-35, 62, 90-91, 113). The magazine became profitable in September 1986. A $250,000 profit was projected for October 1986 and it is anticipated that Lotus will continue to operate at a profit with a profit of approximately $1.5 million projected for l987 (Tr. 108, 109).
Just as the actions of individuals often are based upon multiple motives, frequently commercial ventures are undertaken for more than one reason. Such was the case with respect to Lotus . The directors of LDC had two principal objectives in creating Lotus -to make money by selling magazines to the many computer users who use Lotus Development's software programs and to offer follow-up support for their customers, providing them with useful information about their software products.
Respondent argues that because of DMM 422.6(c), Petitioner is not entitled to second-class mail privileges for Lotus . DMM 422.6(c) reads:
The publication must not be owned or controlled by one or more individuals or business concerns and conducted as an auxiliary to and essentially for the advancement of the main business or calling of those who own or control it.
Although Lotus is owned by LDC, and it appears to be conducted as an auxiliary to the main business of LDC, it is not conducted essentially for the advancement of the main business of LDC.
"Essentially" in DMM 422.6(c) means "primarily" (DMM 422.231). These terms have been defined to also mean "principally", "funda- mentally" or "first in importance or precedence". SmokEnders, Inc. , P.S. No. 4/192 (I.D. 1977 at 15)
Respondent argues that the issue hinges on LDC's intent as ascertained from LDC's statements such as those that the publication was intended to be "the official source for accurate, up-to-date information about Lotus software in business" (RX-8M); that Lotus was designed to "develop a direct communications link with its customers...", and "help managers and professionals use personal computer systems, Lotus software and other software more creatively and productively"; and that LDC's support goals were to "Follow the product and customer out of the store. Offer customers practical information about basic and additional product benefits and new uses. Warn them about potential problems. Support dealers and end users with good products, good training and good information" (RX-3, at 20, 15).
Although these statements indicate LDC's emphasis on customer support as a reason for publishing Lotus , they are not inconsistent with the conclusion that Lotus was designed primarily to make money for LDC, in part by taking advantage of a built-in market based upon the magazine's association with the software manufacturer. The conclusion that Lotus was not designed to be a house organ which would primarily advance LDC's main business but was developed to be an outstanding computer magazine designed to make money for LDC and be operated with editorial independence is based in part upon the creditable testimony of its first publisher, Daniel McMillan (Tr. 19, 21, 56-57).
More important than what people say is what they do. An examination of the operation of Lotus shows that despite Lotus Publishing's ownership by LDC, Lotus Publishing has managed Lotus without giving any preference to LDC, LDC's products or LDC's employees. LDC does not exercise any editorial control over Lotus and Lotus at times contains articles that criticize LDC or its products (Tr. 36-41; LX-9a, 9b, 9c, 9d and 9e). LDC does not submit articles to Lotus Publishing. When an LDC employee writes an article for Lotus , he is treated and compensated as any other author (Tr. 58-59, 93).
The use of LDC programs is so widespread and important to computer users that it is understandable that articles and advertisements that refer to "1-2-3" and other LDC programs would occupy significant space in a computer magazine. However, since its early issues, there has been a steady increase in advertisements in Lotus that do not mention LDC products or products compatible with LDC products. Since the April 1986 issue, over 70 percent of the advertisements do not mention LDC or its products except incident- ally as one of a number of software companies (Tr. 84-86); LX-15). This percentage is similar to percentages in other leading computer magazines such as PC World (Tr. 89-90).
LDC must pay for advertising space in Lotus . Lotus Publishing receives the same revenue from advertisements for LDC products as it does for advertisements placed by others and LDC advertisements do not receive any preferential placement in Lotus (Tr. 80-81). Lotus also contains advertisements that compete with LDC's products (Tr. 74, 161-162).
With respect to features that Respondent listed as promoting LDC products, the fact that these features are so well-liked by readers would justify their inclusion in any computer publication, whether or not the publication was connected with LDC. Thus, in a survey, either "good" or "excellent" ratings were given by 90.97 percent of those surveyed for "Q & A", by 92.86 percent for "Good Ideas", by 82.91 percent for " @ Lotus", and 87.26 percent for "Books" (LX-19; Tr. 95-97, 52). Lotus has in a relatively short time achieved impressive reader approval. The magazine has achieved a renewal rate of subscriptions of 75 percent and a rate of conversion from trial to paid subscriptions of 30 percent, both of which are remarkably high in the publishing industry (Tr. 70-71, 132-134). Dr. Connolly, Mr. Wenham and Mr. Iwata, computer users with impressive employment credentials, all purchased subscriptions because they found Lotus to be an useful and objective publication and not a house organ. Mr. Cobb, a publisher of competing Lotus software oriented publications and Mr. Berg, a publisher with extensive experience, also reached the same conclusion. All of these witnesses testified credibly and persuasively.
Since its inception less than two years ago, Lotus has achieved impressive success in the publishing business. It now has over 200,000 paid subscribers (Tr. 65, 66). It has advertising revenue to date of approximately fourteen million dollars (Tr. 90), sub- scription revenues of approximately four million dollars (Tr. 71), and instead of becoming profitable after 36 months as projected, Lotus has become profitable in about half that time (Tr. 34-35) with an $1.5 million profit projected for 1987. It is difficult to believe that the publication would be so well accepted by both readers and advertisers if it was conducted essentially to advance LDC's products.
The conclusion that Lotus is primarily designed and published to make a profit while capitalizing on LDC's following of software users rather than primarily a promotional vehicle for LDC and its products is consistent with other cases in point.
In Holmes Management Company , P.S. 4/71 (1976), TV Guam , a guide to cable television offerings on the island of Guam was published by the owners of Guam's only cable television system. In reversing the Director, Office of Mail Classification's denial of the petitioner's application for a second-class permit, the judge emphasized such factors as the profitability of the publication, the independent operations of the two businesses, and the fact that subscribers to TV Guam already were cable TV subscribers.
Again, in SmokEnders, Inc. , P.S. 4/192 (1977), the admini- strative law judge evaluated whether SmokEnder World , a publication offered to graduates of seminars of SmokEnders, Inc., was primarily designed to promote the seminars. The president of SmokEnders, Inc., testified that the publication was intended as a "channel of communication" to provide seminar graduates with "reinforcement and reassurance in order not to resume smoking" (ID at 11). It was held that, although SmokEnder World served to advance the seminar business, the primary purpose of the magazine was "to strengthen the resolve of participants not to resume smoking" rather than gain new seminar participants (ID at 14, 15). Thus, although SmokEnder World operated as a "auxiliary" to the seminar program and was published to obtain the same result (converting smokers to non-smokers), it was found not to be "conducted for the advancement of" the seminar business, that is, "to find continually new customers willing to pay the seminar fee and thus to keep the enterprise of petitioner viable and prosperous" (ID at 16).
In Exxon Travel Club, Inc. , P.S. 2/85, (1974) it was held that since the publication "reaches primarily subscribers who are already credit card holders and members of Petitioners" that is "sufficient proof that the publication is not being used as means of promoting either membership in petitioner or the wider use of credit cards" (ID at 28).
A good analysis of criteria to be considered is found in The Diners' Club, Inc. , P.O.D. 1/225 (1961). In overturning the denial of second-class privileges, the Judicial Officer relied upon the following, all of which are present with resp[ct to Lotus :
1. The magazine was published to make a profit.
2. The credit card business helped to promote the magazine.
3. The credit card business was operated separately.
4. Advertising was open to non-members businesses and member businesses alike.
5. The vast majority of advertising was placed by independent agencies.
6. The content of advertising was prepared by advertisers and the magazine exercised no control over the content of advertisements.
7. The policy of the magazine was to permit advertisers to mention competitive credit card systems (P.O.D. at 10).
Although it was found that there was some benefit to the credit card business from the magazine, the benefit was found to be incidental to the magazine's main purpose which was to make money.
In contrast, in Commodore Business Machines, Inc. , P.S. 14/95 (1983), the publication was found to be a "company publication" whose purpose was to inform "current potential customers of product developments" (ID at 4). Nearly all editorial matter was "solely devoted to Commodore's computers and other products" and "describe Commodore products in favorable terms" so as to constitute "touting" of these products. Also, Commodore was not financially separate from the computer business, had no editorial independence, and was conceived as a "source of information on [on Commodore's] new products" rather than as a profit-making enterprise (ID at 7, 13).
Thus based upon the evidence and the applicable case law, I conclude that Lotus magazine is not a publication conducted essentially for the advancement of the main business or calling of Lotus Development Corporation, the firm that owns Lotus . The evidence is sufficiently persuasive to rebut any presumption to the contrary.
Accordingly, the decision of Director, Office of Mail Classification denying Petitioner's application for second-class privileges is in error, Petitioner's appeal is sustained and the Director's decision is reversed.