‘Pay Radio’ Tunes In Charities, Turns Off Some Consumer Groups

The California Museum of Science and Industry has found a way to get something for nothing.

Well, almost.

The museum’s foundation receives about $1,000 per day in donations from a Los Angeles entrepreneur in return for letting him use the museum’s name to promote a “976-” telephone number. The 4,000 or so children calling each day hear a recorded science trivia message.

To the museum, the cash cost of raising this bonanza is almost nothing. The museum just authorizes use of its name. (Museum employees get paid extra by the entrepreneur for the trivia; the museum only checks for accuracy.)

To parents, the Museum Storyline is a much more costly enterprise. Calls cost $2 each, so parents get billed $8,000 per day.

And to the entrepreneur, the Museum Storyline appears to be a profitable enterprise, one that he says encourages him to find other charities interested in a similar deal.

Welcome to the emerging world of charity-business co-ventures via “pay radio.”

Pay radio is what Bob Lorsch, a veteran products promoter, calls 976- telephone prefixes like his Museum Storyline. The telephone companies describe pay radio with the more prosaic term “information access services.”

Pay radio is attracting growing interest among charities across the country seeking new ways to generate money to cope with rising demands for services and cuts in government support. Fund-raising experts caution that without careful planning, pay radio’s seeming something-for-nothing advantages can be costly to a charity’s good will. These experts emphasize that nonprofit groups should thoroughly investigate offers before signing contracts and apply sound business judgments.

Pay radio also is controversial, under fire from consumer groups that say it offers little value at high cost. They also question the ethics of TV commercials aimed at enticing children to make calls that cost a dollar a minute.

The phone companies are reprehensible, said attorney Robert Gnaizda of Public Advocates, a San Francisco public-interest law

firm that is suing Pacific Bell and General Telephone of California over their pay-radio practices.

“We are providing a network service,” an indignant General Telephone of California spokesman said.

In addition to consumer protests, a variety of conservative religious groups object fiercely to sexually explicit pay-radio services, which Pacific Bell refers to as “emotional messages.”

The telephone companies believe 976- prefixes present one of their most promising opportunities to make more money. Pay radio is extraordinarily profitable for a public utility service.

Pacific Bell keeps 60 cents of the $2 charge for a two-minute 976- call, according to Bill Dunkle, the company’s information access services general manager. Pacific Bell’s costs are 12.5 cents for a one-minute call and less than 15 cents for a two-minute call, Dunkle said, which means that each $2 call adds nearly half a dollar to Pacific Bell’s pre-tax profits.

Solicits Calls

The problem faced by entrepreneurs who want to profit from pay radio is coming up with messages the public believes are worth as much as a dollar a minute.

That’s where children enter the picture, er . . . switchboard.

Lorsch solicits calls for his Museum Storyline with commercials on Southern California children’s TV shows.

The commercials feature K.I.T.T., the talking computer car of the recently canceled NBC television series “Knight Rider.” The car K.I.T.T., its voice supplied by veteran actor William Daniels, urges children to call 976-2233 in area codes 213, 818 and 619 to hear a recorded science trivia message.

The ads tell children that 25 cents of the $2 charge for the call will be donated to the museum. Both the TV ads and the opening of the message when they call the Museum Storyline remind youngsters to get parental permission before calling.

The California Special Olympics has a similar deal with Lorsch, giving the charity 25 cents for each child’s $2 call to Lorsch’s Santa Claus and Easter Bunny lines.

The American Red Cross has also tried pay radio, but under a different agreement that brought it about 90% of the gross revenues, instead of the 12.5% that the California Museum of Science and Industry Foundation and the California Special Olympics get from Lorsch.

Sold Cigarette Filters

Lorsch said what he has done--and believes other entrepreneurs will do--is “create merchandising programs with enough of a revenue stream that a charity can share in that revenue stream.”

Lorsch, 36, got into sales promotions at age 17 when, he said, he netted several hundred dollars a day selling cigarette filters out of the trunk of his car to liquor stores and convenience markets. “I decided then I would never make less than $100 per day,” he recalled.

Of the average $8,000 per day Lorsch grosses on his Museum Storyline, the telephone companies get $2,400 plus another $400 in taxes and service charges and he makes a tax-deductible donation of $1,000 to the museum. That leaves Lorsch $4,200 per day to cover his costs and make a profit.

Lorsch maintains that his 976- numbers for the science museum illustrate a major new opportunity in charity fund raising, a rich amalgam of business and charity that fulfills President Reagan’s call for private-sector initiatives to reduce reliance on government.

“In view of the new tax initiative in Congress (which would lower tax rates and thus lessen the value of charitable deductions), this kind of private-sector fund raising is the only way for charities to go,” Lorsch contends. (A variety of studies have indicated that as tax rates fall, donations from upper-income taxpayers decline because a larger share of the gift comes out of the giver’s pocket and a smaller share out of Uncle Sam’s.)

“Begging people to write a check just won’t do it anymore,” Lorsch said.

A Tycoon’s Challenge

The Museum Storyline grew out of a challenge from title insurance tycoon Ernest J. Loebbecke, the retired TI Corp. chairman. Last winter, Loebbecke, as chairman of the science museum foundation, asked each of the 79 other trustees, including Lorsch, to pledge thousands of dollars that he would match.

When his turn came to make a pledge, Lorsch said he suggested a business venture--in which he would provide all the risk capital--that could make hundreds of thousands of dollars for the museum foundation. The proposal was quickly approved.

Lorsch declined to reveal how much profit he makes from the Museum Storyline. His contract with the California Museum of Science and Industry Foundation does not give the foundation access to his books, according to Lorsch and Don Muchmore, the museum executive director.

Lorsch noted that since he sends a copy of his Pacific Bell bill to the museum foundation there is no question that he turns over every penny of the promised 25 cents per $2 call.

The economics of pay radio, according to Lorsch and Pacific Bell, resemble those for a theatrical play. Both pay radio and a theatrical play involve high-risk investments up front. When a play or a pay-radio message is a hit, then the original investment is quickly recouped. After that the recurring charges are relatively modest, making for handsome returns.

$100,000 Check Presented

Muchmore said that while no written agreement exists to adjust the amount Lorsch donates to the museum once he has recovered his initial capital costs, there is a verbal understanding.

Lorsch gave the museum foundation trustees a check for $100,000 earlier this month, indicating billings of $800,000. He told the trustees that he spent $300,000 on the program in its first three months, but did not provide a detailed breakdown.

If the Museum Storyline or a similar pay-radio service can be made to work in a dozen or so major markets, Lorsch could spread his fixed costs over greater revenues, thus increasing his return.

Lorsch said his principal up-front costs were first and last month’s minimum telephone charges and the preparation of the TV ads. He said his major continuing cost is television advertising.

Projected Revenues

In its first year, Lorsch said he projects Museum Storyline billings to parents and grandparents of $2 million to $3.2 million. If Lorsch makes his upper projection this breaks down as:

--Pacific and General Telephone charges of $960,000, of which $720,000 will be pre-tax profit for the telephone companies.

--Donations of $400,000 to the science museum foundation.

--Revenues to Lorsch’s firm of $1.84 million for his company to cover costs and make a profit. If he keeps just 5% of the total revenue as profit, he will make $160,000 or a 64% return on his initial investment in just one year.

Lorsch can benefit from the Museum Storyline in at least three ways.

First, Lorsch owns Teleline, the firm that provides the Museum Storyline (and the Santa Claus and Easter Bunny lines benefiting the California Special Olympics). If the line turns a profit, it goes to him and what he said were a few friends who invested in Teleline.

Second, Lorsch said, Teleline’s Museum Storyline buys services from Lorsch’s advertising-promotion-public-relations firm, Lorsch Creative Network.

Third, children who mail Teleline copies of their parents’ telephone bills get a premium in the mail: a cute-faced fuzzball called a wuppee, for each $2 call. Lorsch said he is also in the wuppee business, and that one of his wuppee customers is Teleline, the Museum Storyline company.

Scrutinize Bills

Lorsch said that his clerks scrutinize these phone bills for excessive calls by youngsters.

“If we find 40 calls on there we write a letter to the parents telling them their child is making excessive use of the number,” Lorsch said. “We also tell them that they are entitled, under a California Public Utilities Commission ruling, to a one-time forgiveness of all 976- charges and that even if they do file for a forgiveness they can keep the wuppees.”

Refunds, Lorsch said, run less than 1% of calls billed. “What other business do you know with less than 1% bad accounts?” he asked.

(About one in five pay-radio calls statewide goes through without billing because proper switching equipment is not in place, Pacific Bell’s Dunkle said. Lorsch has billing in both Pacific and General Telephone areas, but many pay-radio vendors bill only in Pacific Telephone areas.)

Many pay-radio vendors in California provide computer-generated horoscopes and up-to-the-minute sports scores and stock market quotations. These services require costly and sophisticated machinery, which interacts with callers, who specify their interests by pushing the buttons on their telephones. Lorsch’s services require only telephone answering machines, which he said he rents from a vendor.

Many of these more sophisticated pay-radio services make a profit while charging 55 cents or 95 cents per call, compared to Lorsch’s $2 charge for the science trivia message.

Whatever the charge, the telephone companies make a substantial profit every time a pay-radio number is called.

An internal Pacific Bell memorandum, filed with the state Public Utility Commission, predicts 976- revenues in the hundreds of millions of dollars in California alone. And that’s while pay radio is in its infancy, the technological equivalent of broadcast radio’s crystal receiver set.

So far, revenues have been a fraction of what the memorandum predicted. Pacific Bell’s 976- revenues were $31 million in 1985, Dunkle said, about 20% of what the memo predicted. But a variety of experts said there is no doubt that pay radio’s future nationwide consists of a dollar sign followed by at least nine digits.

Ma Bell no longer provides local telephone services, but has figured out a way to get a piece of the pay-radio action. American Telephone & Telegraph owns the long-distance analogue of 976- prefixes, the area-less area code number 900, which can provide rudimentary information services for a fee. Ma Bell also owns--without competition--pay radio’s ultimate six digits: 900-976-.

The American Red Cross tried 976- as a fund-raising device after the Mexico City earthquake. Ralph Wright, a Red Cross spokesman in Los Angeles, called the experiment a resounding success.

The terms under which the Red Cross got into pay radio differ significantly from those agreed to by the California Museum of Science and Industry Foundation and Lorsch.

The Red Cross arranged with Dial Info in San Francisco, another pay-radio vendor, to donate its services. Then the Red Cross arranged free TV promotion in the form of public service announcements, some aired in prime time.

In addition, the Red Cross and Dial Info President Ken Jones persuaded Pacific Bell to cut its usual 60-cent share of a $2 pay-radio call to its actual cost, which is less than 15 cents. (The reduced tariff required approval from the state Public Utilities Commission.)

Wright said the Red Cross ended up with about 90% of the $80,000 billed customers in San Francisco and $30,000 in Los Angeles. Wright said Jones also set up lines in Florida, where the limit on pay-radio charges is $10 per call, and those lines grossed $110,000.

Had the Red Cross operated under the same agreement Lorsch has with the California Museum of Science and Industry Foundation it would have received $27,500 instead of the nearly $200,000 it actually got.

Lorsch believes the Red Cross arrangement with Dial Info and his deal with the California Museum of Science and Industry Foundation are not comparable.

The Red Cross, he noted, ran a straight fund-raising appeal and people who called its numbers were entitled to deduct the cost of the calls on their income taxes.

“It’s not that my clients get 12.5% of the gross,” Lorsch said. “My clients get 100% of the promised donation at zero fund-raising cost.”

Lorsch said his 976- numbers for the California Museum of Science and Industry and the California Special Olympics, sell a service, either the trivia message or a talk from a mythical creature such as Santa Claus. Thus Lorsch’s firm, not the caller, is entitled to an income-tax deduction for the gifts to the science museum foundation and the Special Olympics.

Carol Lee Thorpe, chief fund-raiser for the California Special Olympics, said that charity was meticulous about the wording in Lorsch’s TV ads aimed at children.

“The product is hearing from Santa or the Easter Bunny and a donation is then made to California Special Olympics by the vendor. Never did we imply that this number is to donate to the California Special Olympics,” Thorpe emphasized.

The Santa line raised $13,000 for California Special Olympics, Lorsch said, indicating gross revenues of $104,000. The Easter Bunny line raised $48,700, Thorpe said, indicating $398,600 in billings to parents and grandparents.

Dial Info, the largest pay-radio entrepreneur in California not offering sexually explicit messages, does not direct 976- programs at children as a matter of principle, Jones said.

Lorsch said the state Public Utilities Commission, press and public are scrutinizing pay radio primarily because it is new.

Sees No Difference

“I think if they are going to legislate commercial advertising aimed at children they need to legislate all commercial advertising aimed at children. I don’t see any difference trying to entice a child to get his parents to go out and buy a $79 toy and enticing a child to make a $2 call to get a little science lesson on my 976 number,” he said.

“Our marketing to children is no more dangerous than a toy company’s or a fast-food restaurant’s,” Lorsch added. “What’s more dangerous? Listening to a $2 science message or eating French fries covered with salt every day after school? I don’t see the fast-food industry or the candy bar business publishing warnings about nutrition and good food, but in my ads we caution children to get permission from their parents before they call.”

Trip in Time Machine

Typical of the science trivia messages children hear for $2 is one by the Wizard of Change, who invites youngsters into an imaginary time machine for a quick fantasy trip to the year 1714 and the laboratory of German scientist Gabriel Daniel Fahrenheit.

“Look at all those bubbling fluids and gases vaporizing!” the Wizard’s rapid-fire voice proclaims excitedly. “He has a laboratory similar to mine in the Wheels of Change exhibit at the museum. He’s playing with a silver-and-white-colored liquid. That’s mercury! . . . Mercury, of course, is the only metal that is a liquid at ordinary temperatures,” the Wizard exclaims.

“I’m selling a service,” Lorsch said, “a science trivia message that in two minutes gives kids more information than they get from a month of watching cable television. . . . It’s becoming the ‘in’ trivia line for kids in Southern California.”

Muchmore, the science museum executive director, said he thinks Lorsch’s program is worth much more than the $1,000 per day it generates in financial support.

“I got totally enthused because in addition to fund raising we get a lot of marketing,” Muchmore said. “What we get cash wise is magnified two times over by the amount of television promotion we get.”

The TV ads began May 5, according to Lorsch. Muchmore said attendance rose by 55,000 people, or 15%, in May. But in June, with the TV ads still running and calls coming in at a steady rate of 4,000 per day, attendance fell slightly from the same month a year earlier.

Several fund-raising consultants and charity regulators told The Times that charities should be cautious about any financial arrangement, no matter how good it looks, in which their name is used.

“Good will is an asset,” said Gerald Plessner, an Arcadia fund-raiser and author of a three-volume fund-raising guide, “and you can’t squander good will any more than you can squander real tangible assets. . . . Even something that’s free costs you something, and you need to weigh it and measure your involvement based on sound business judgments.”

Five charity experts said that by cautioning children to get permission to call and by advising parents that they can get a one-time refund for excessive calls by their youngsters, the Museum Storyline program addresses concerns that could damage the museum’s good will.

The California Public Utilities Commission is currently engaged in a major examination of pay radio.

Lawsuits Filed

Public Advocates, a San Francisco public interest law firm that specializes in consumer advocacy litigation, has filed lawsuits seeking to reform pay radio. The firm is suing Pacific Bell for $50 million and General Telephone of California for $33 million. Public Advocates is also a party in the Public Utilities Commission study.

Robert Gnaizda, one of the public interest law firm’s founders, said, “We contend it is unfair to make children make financial judgments at a young age.

“It is possible that many small children understand consequences of $2. But will they understand the consequences of $50 because they call 25 times?” Gnaizda asked.

In its lawsuit against General Telephone, Public Advocates argued that the tariffs involved amount to fraud and that under Civil Code Section 35 the utility was not entitled to collect on charges made by children.

“The law is very clear here,” Gnaizda argues. “Except in medical emergencies, a merchant deals at his or her peril with minors, and a minor may disaffirm, up to age 18, any contract. . . . We argue that the telephone companies can’t get around that with a tariff.”

General Telephone lawyer Richard Potter said: “Their lawsuit was written less like a legal document and more like a magazine article.” Potter said General Telephone wanted the case dismissed, believing the issue belongs only before the Public Utilities Commission.

On April 19, Superior Court Judge Allan Steele of Ventura County ruled against General Telephone and ordered the case to trial.

‘Unconscionable’ Prices

The Public Utilities Commission, pending completion of its study, has ordered Pacific Bell and General Telephone to give any customer who complains a one-time “forgiveness” of any disputed 976- charges.

Gnaizda said that does not go far enough. “We believe 976- should be an optional service, like call waiting, and only people who want it should get it. We also think that the prices are unconscionable. No parent would pay that amount of money ($2) for the modest amount of information, that their child gets. Just an hour’s worth of calls costs $60 and that’s more than most parents probably spend on books for their child in a year.”

Gnaizda calls 976- a “scandal in which a service with modest social utility combined with very deceitful advertising practices. . . . I don’t think Pacific Bell’s top people are immoral. I think what happened is that they got into the new world of deregulation and were looking for new ways to generate revenues and someone said, ‘Look at all the money we can make here,’ and no one discussed any of the possible problems, such as calls by children, porno and so forth.”

Dunkle, Pacific Telephone’s pay-radio chief, agrees that many problems with the service were not anticipated by utility executives.

“We are on the threshold of the Information Age and 976- is an embryonic product on this frontier, and on a frontier things get kind of wild and wooly,” Dunkle said. “This has, very much, been a learning experience for all involved.”

Gnaizda said one area in need of more thought is allowing telephone companies to terminate service for non-payment of pay-radio charges. “Anyone else has to go to court to collect a bill, so why should porno vendors get special treatment because Pacific Bell is their billing and collection agent?” he asked.