Friday, 13 July 2012

Why gossip magazines publish stories despite knowing they will get sued

Surely gossip magazines know even before printing certain stories that they'll get sued for it, yet they go ahead anyway.  You would think it's a suicidal business decision, one most people wouldn't take.  However, the publishing of these controversial stories based on half truths and "sources" are calculated business decisions like any other.

The revenue boost is too good to ignore

There are millions who will pay money to read about a celebrity's dirty laundry...priorities of contemporary society.  Tom Cruise's recent divorce from Katie Holmes presented a golden opportunity for certain publications to speculate,  insinuate, and sell millions of copies in the process.  While there's a good chance of being sued for publishing defaming rumors and outright lies, a story headlined by a prominent name presents a boost to revenue that make the risk worth it.

They're ready to get sued

Based on history and their own internal probability models, gossip publications (or in most cases their conglomerate parent companies) have a good idea of how often they will be sued in a given financial year.  They weigh up the difference between the money they may have to pay out to a plaintiff (complainant) and the revenue their story will generate.  If the cash flow is estimated to be positive then the chief editor/rabble-rouser will give the go-ahead.

Furthermore, besides keeping a separate fund to settle court disputes, these publications create contingencies in their financial statements for the monies they expect to pay out to plaintiffs.  (A contingency is an asset or liability whose timing and/or amount is uncertain in nature).  So accounting standards would require them to actually estimate the amount of money they are likely to be sued for, and show it as a liability in their financial statements.

This points to how much such businesses like National Enquirer and People Magazine consider court cases to be a normal part of doing business.

They get a tax deduction for their legal fees

In most parts of the world there's a fundamental rule the tax authorities apply to ascertain whether an expense is tax deductible or not.  Notwithstanding any specific legislation, a business is allowed to deduct an expense if it is an inevitable concomitant of doing business.  In other words, if the expense is normal and recurring for a company, then the taxman will allow it to be deducted from their taxable income, thereby reducing their tax liability.

Getting sued is regular and all part of the game for guys like OK! Magazine.  Legal fees for them will therefore be allowed as a tax deduction.  Other businesses that spend less time in the courtroom and more time actually doing business may not be allowed the deduction.  Strange, a bit unfair, but true.

If the court orders a payout to the plaintiff, the gossip publication still comes out in the black most of the time, financially speaking.  Reputation wise...well that doesn't matter too much to their readership.  It's usually win-win when these cases go to court.  The celebrity who sues gets their money, and the magazine still maintains a positive cash flow after the case is settled.  Ultimately the people who bankroll this whole fiasco are the ones who buy the magazines.

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