The parent companies of Anderson Merchandisers and Alliance Entertainment -- the two largest music industry wholesalers -- are caught up in a high stakes and high profile spitting contest with the biggest U.S. magazine publishers.

In a move initiated by Knoxville, Tenn.-based Anderson News and followed up on by Alliance parent Source Interlink, the two magazine wholesalers – which comprise 50% of the magazine distribution business -- told magazine publishers that they planned to add a 7 cent surcharge for each magazine they distribute to retailers. Moreover, Anderson News threatened that if publishers did not sign off on the 7 cents fee, it would exit the magazine distribution business rather than continue in an unprofitable business.

In response big magazine publishers like Time Inc., and Blair Publishing are refusing to ship product to the two distributors, according to Mediaweek, a Billboard sister publication.

Source Interlink, itself a big magazine publisher after acquiring 80 consumer magazines and 100 Web sites from Primedia in 2007 (and since consolidated to 75 magazines and 90 websites), has since backed down from its demand for the seven cent surcharge, sources say.

In the latest move, Source Interlink has written a letter to its retail customers explaining why some of them may have experienced an interruption in magazine shipments from the company. The letter from Source Interlink chairman/CEO Greg Mays stated the company will file a major anti-trust lawsuit and will seek a restraining order so it can properly service stores.

It said any missed shipments to stores are due to "an unprecedented and unprovoked assault on this channel by certain publishers and a national distributor," according to the letter, which was obtained by Billboard. "They are trying to lock out competition [Source] in the magazine distribution chain to the retailer's detriment. To accomplish this scheme, this group has spread false rumors about Source and attempted to undermine us in the community."

Those rumors include claims that Source Interlink has liquidity problems and is unable to make payments to publishers, sources say. In a move to parry that rumor, Source Interlink has paid down its magazine's accounts payables by some $100 million in the past week. Moreover, the letter added, "Source has ample and readily available liquidity, in excess of $200 million, and is current in its obligations to all its customers...We have solid backing and support from our investment partner, The Yucaipa Companies. Most importantly we are enjoying solid support from the retail sector and many publishers who have the best interests of the industry at heart."

Source argues in the letter that while the magazine publishers characterize the brouhaha as a dispute over seven cents, the whole situation is actually a part of bigger picture negotiations to "secure necessary financial adjustments to outdated distribution agreements."

According to a story on businesstn.com, retailers like Wal-Mart are increasingly turning to scanned-based-trading (SBT), which means they pay for magazines when the products are scanned at the check out counter, rather than purchasing them in bulk from wholesalers like Anderson and Source Interlink on the front-end. This new business model impacts cashflow and squeezes liquidity for wholesalers and inflates inventory on their balance sheet.

Anderson racks magazines at more than 2,300 Wal-Mart stores while Source Interlink handles about 700 of the discounter's outlets. The wholesalers think that the publishers should share in the SBT burden and have been trying to negotiate on this point.

In the customer letter, the Source Interlink executive alleges that the move by the publishers to cut them off and deal solely with the other two major magazine wholesalers, the News Group and Hudson News "is an attempt to eliminate competition in the magazine distribution chain that is primarily directed at [retail]."

By locking up two distributors beholden to them, the publishers will be able to dictate retail price and cost structure; reduce service to stores by cutting staffing, forcing merchants to pay if they want their stores serviced; and eliminate important programs like scan-based-trading, the letter states.