No matter how you look at it, Inphomation Communications Inc. was a victim of its own success.
Maybe that success drew in competitors like metal to a magnet.
Perhaps that success prompted burly long-distance companies to flex their muscles and grab for bigger shares of the dialing dollars that Inphomation's Psychic Friends Network seemed to so easily conjure up.
Possibly that success prompted Inphomation's flamboyant and controversial founder, Michael Warren Lasky, to grow complacent, prompting profligate spending and activities that a federal bankruptcy judge has said may have been dishonest or even illegal.
After a bitter two-day hearing last week -- and following a stern rebuke from the judge -- the now-insolvent Inphomation was placed into the hands of an outside trustee. At its height, earlier in the decade, Lasky said, the privately held Inphomation had annual revenues approaching $140 million. On Feb. 2, the Pikesville-based firm filed for Chapter 11 bankruptcy protection, listing assets of about $1.2 million and liabilities of $26 million.
Inphomation made its splash by using TV infomercials to generate demand for telephone chats with its psychics. Singer Dionne Warwick starred as a celebrity spokeswoman.
But the company that was innovative enough to create the telephone psychic business just wasn't nimble enough to find that next great thing, said Jeffrey L. Schwartz, chief executive officer of Quintel Entertainment Inc., a Pearl River, N.Y., company that gets part of its $200 million in annual sales from the 900-line psychic business.
"If you look at Quintel we have nine or 10 different business groups," Schwartz said. "Mike Warren [a Lasky pseudonym] and Inphomation have just one. We used our 900 business to grow our database and then use it to sell long-distance, voice-mail and call-following products. You can't exist any longer on just the TV-900 business."
But Inphomation did for a long time. The Psychic Friends Network infomercial made the weekly "Top 40" of infomercials 264 times -- and usually was among the top five, according to data by Jordan Whitney Inc., a tracking firm based in Tustin, Calif. That's more than any other infomercial to date.
Psychic Friends was the top infomercial in the country for 1994 and again for 1995. It ranked second in 1996. But it dropped to ninth last year when Inphomation's real slide began. Last August, Psychic Friends dropped to 13th -- its first time out of the Top 10 rankings. On Sept. 15, it appeared on Jordan Whitney's chart for the last time -- in 26th spot.
Many industry-watchers remain befuddled about what started its fall.
"I have no idea how a company making that much money" could have gotten into such deep trouble, said Dave Nagel, editor-in-chief of Response TV, a Santa Ana, Calif.-based trade-journal that covers the infomercial industry. "Where did all the money go? It makes no sense to me."
Competition did become fierce. When other firms saw how much Inphomation was reaping from Psychic Friends, they moved in for a piece of the business. Psychic Friends had created a strong brand name, but the new entrants chose monikers similar enough to benefit from the pioneer's cachet.
All that competition, company insiders say, helped spark Inphomation's second big problem: "charge-backs." In the telecommunications industry, long-distance providers reserve money to protect against telephone-bill disputes relating to 900-line telephone calls. For instance, suppose a consumer rings up $1,000 in phone bills thanks to calls on one of the Psychic Friends' 900-line long-distance lines. If the long-distance provider that collects the money pays Inphomation right away, and the consumer later comes back and either disavows part or all of the bill, the long-distance company would be on the hook for the disputed amount -- a "charge-back." To keep that from happening, the long-distance company puts aside, or "reserves," some of the money it takes in against those possible charge-backs.
Quintel Entertainment's Schwartz said the reserve rates -- the percentage of revenue held back for charge-backs -- have jumped in recent years, creating a huge problem for any company whose livelihood comes from 900 lines. "They've really crept up over the past four years -- from about 20 percent to 40 percent" of a 900-line company's revenues, he said. "If you're not changing your business model every month, you're out of business."