06/07/2012 05:32 pm ET Updated Aug 07, 2012

Publishers Clearing House, The Weird Saga of a Successful Business that was Hoisted on Someone Else's Petard

Publishers Clearing House was founded in 1953 by Harold, LuEsther and Joyce Mertz, during a time when magazines were sold individually by door to door salesman or via a publishers' own direct mail efforts. Harold Mertz thought offering consumers a choice of many magazines at the same time would increase the possibility of sales, especially if the subscriptions were offered at the lowest possible introductory prices via the U.S. Postal Service, rather than commissioned salespeople.

PCH started in the Mertz's Port Washington basement and within a few years it was successful enough to move into a real office and start hiring staff. Mertz's principals were based on meticulous attention to detail, complete reporting on everything, a strong belief in testing and research, full and open discussion of the pros and cons of each decision, the ability to be open to new ideas and generosity of spirit for the environment, the community, employees and those less fortunate. From 1960 on, 40 percent of Publishers Clearing House profits were distributed to philanthropic causes for a total of one billion bucks.

In 1966, Harold noticed the success of the Readers Digest sweepstakes promotions and tested that idea for PCH, where the odds of actually winning were 1 in 10. (Today they are 2.1 billion to 1) The lowest prize was 25 cents and the grand prize was $10,000. Still Mertz had qualms about attaining so many new customers in this fashion, afraid it would jeopardize his cash cow, but he listened to the pros and went ahead. By 1970 the PCH prizes were delivered by the Prize Patrol surprising winners at home, filming their reactions and showing them on TV on Oprah, the Nightly News, the Rosie O'Donnell Show and David Letterman. PCH also gained recognition in the top TV comic monologues by Jay Leno, Jon Stewart, Jerry Seinfeld, SNL and Conan, et al.

Darrell Lester, author of The Naked Truth about Publishers Clearing House, joined the company in 1973 at the age of 21 as an entry level Marketing Analyst, when the company was going through a period of significant growth. He worked long hours, brought work home every weekend and loved every minute of it. Another plus, the employees had fun and loved each other. And the customers loved PCH. Lester believes PCH was the most beloved company in America.

So far, very terrific. So what could go wrong?

PCH Management treated magazine publishers arrogantly because they were sure that PCH would always completely dominate the field. In 1977 Time, Inc. the largest magazine publisher in the world then, became unhappy about commission discussions with PCH, and joined with the Pritzkers -- both with unlimited resources -- to start the competitive American Family Publishers. By 1982, AFP was aggressively using Ed McMahon and Dick Clark as spokesmen, increasing their prizes and flooding the market with TV ads.

Did it work? You betcha, as they say in Alaska.

For the first time, PCH profits declined.

Then In 1992 Arnold Diaz, a future 36 Emmy Award Winner at WCBS-TV, reported that PCH's sweepstakes return envelopes -- 95 percent non-orders and 5 percent orders -- had been dumped by the roadside. Investigations proved they had been dumped by a disgruntled employee of a company that helped PCH process their mail, but the news outlets kept reporting that PCH threw out its sweepstakes entries. PCH made some more dumb decisions like trying to counter McMahon and Clark with Eva Gabor in bubblebath. Needless to say, that didn't help.

Eventually, business shot up to 1 billion dollars in sales which necessitated lots, but not enough new hiring. Lester, who had become senior VP by that time, found a solution -- mandatory overtime, but other voices prevailed. By 1999 other direct marketers had sliced into subscription market and PCH sales dropped by 50 percent and the company was in the red for the first time.

Still there was more trouble ahead.

AFP sent out some misguided advertising which convinced several elderly consumers to fly to Tampa to collect sweepstakes prizes they thought they had but hadn't won. The result? It rained lawsuits on direct marketers. Followed by Senate hearings and class action suits. PCH unjustly received more negative publicity as a result of an ill-conceived ploy by their competitors. Legal fees cost them more than 100 million.

The @#$% hit the fan in 1997 and Lester lived through the legal hell until 2002 -- laying off employees, fighting off lawyers, squeezing suppliers. He retired at the age of 51 and now does consulting using techniques he acquired at PCH.

And he still remembers the fun days.