CD Clubs and the Battle for Your Music-Buying Soul

If you've ever read a consumer magazine or Sunday newspaper supplement, you've spotted those too-good-to-be-true offers from compact disc clubs. "Twelve CDs for the Price of One!" they promise "Nothing More to Buy -- Ever!" To join, you pay only the price of shipping and handling for a dozen CDs, about two bucks each. You then agree to purchase one additional CD, or six additional, or one additional at half price. It sounds confusing. And you think, there has to be a catch. But if you play your response-cards right, you'll never pay more than $4 for a CD again.I'm forever joining and rejoining CD clubs. The two major players in the mail order music business are Columbia House (and its subsidiary, CDHQ) and BMG Music Service. Operating from Indiana, these companies use a variety of strategies to earn hearty profits despite apparent deep discounting on the products they sell. It's a game, really, that pits consumers against marketers. If you learn a few simple rules, you can play again and again and again....BMG and Columbia House have all sorts of come-ons to entice you to buy more than the minimum requirement during your membership, the most effective of which are the "negative option" cards you must return when you receive a new catalog from the club every three weeks or so. If you neglect to check off a box on the card that reads, "Please do not send the featured selection" and mail it back to the club promptly, you'll automatically receive the specified CD and an invoice. BMG and Columbia House also allow members to respond by e-mail.Mail order clubs love negative option because "human behavior is based on inertia," as one marketer has observed. The clubs count on people to be lazy or forgetful and not return the cards, just as they've done since the Book of the Month Club introduced negative option in 1926. When you forget to send the card back on time and a CD arrives unexpectedly in the mail, you kick yourself but usually just pay up rather than return it. That's exactly what the clubs hope will happen.BMG and Columbia House also bank on the fact that many people, once they've purchased the required CDs, will order more. They'll make some money even if you don't take that route, but not nearly as much. How? They tack $2.20 to $2.40 in shipping and handling to each disc (even the "free" ones). That alone pays most if not all of their costs, especially since they pay no royalties on the discs they give away and only half the industry standard on those they sell at full price. The clubs also have minimal production costs, since they manufacture their own CDs from masters provided by the labels. That's why you often see the disclaimer "Manufactured Under License by BMG" where the UPC bar code is located.Finally, the mail order clubs make money selling your name, address and buying habits to other marketers. The average club member is 32 years old and makes $32,000 a year--a pretty hot demographic. The companies even tailor specific lists, such as a recent BMG offering of "The Alternative Music Select," with 300,000 names of people who have purchased recordings by artists such as Soundgarden, the Cranberries or Depeche Mode. You are what you buy. You can tell the clubs not to sell your name, but most people don't bother.All this adds up to healthy profits. The clubs' share of the compact disc market jumped from 9 percent in 1990 to 15 percent in 1994, for a total of $1.5 billion in revenues. During the past two years, however, the clubs have seen their share slip as consumers finish upgrading their oldies (faced with declining sales, Columbia House closed one of its three warehouses last year and laid off 160 workers). By now, everyone who's going to replace their LP of "Thriller" (Columbia House's top-selling album) with the CD version has done so.Discs that are at least three years old remain the heart of the clubs' market--the Eagles "Greatest Hits" has sold 7 million of its 22 million total copies since 1994, largely through the clubs. But sales of catalog records have slumped 5 percent in the past year, SoundScan reports--after jumping at an annual rate of 30 to 40 percent since the introduction of CD players a decade ago. Clearly, consumers are looking for new music, and the clubs don't offer current releases until months after they've hit stores. There are also plenty of other places to find the latest hits, including Internet storefronts, appliance stores and other mail-order sources.Some retailers shrug off the influence of CD clubs, saying they're geared toward selling the hits, and no record store can survive doing just that anyway. The name of the game, they say, is service and specialties. You'll also find that some larger retail stores offer "listening stations" where you can sample a CD before you buy. "If you open a CD you get from a club and don't like it, forget about returning it," notes Chris Vanderhoof, a manager at Hear Music in Chicago. "You will pay a little more for it than if you can get it through a club, but you also won't be wasting your money."Don MacKinnon, president of the Boston-based Hear Music, doesn't see the clubs as a problem. Instead, he wonders about the labels. "Most stores are playing the traditional music business game," he says. "They're stocking the hits, selling to kids. The record companies put all their money behind 40 records and do everything they can to sell those. The job of retailers, as the companies see it, is to provide slots for those top 40 artists, then alphabetize them.""If they're going to survive, retailers have to help customers expand their tastes," he adds. "Most retailers aren't being hurt so much by the clubs but by the many other ways of selling the commodity. It's cutthroat. The larger problem facing the retail business than selling established artists is how to promote new ones."George Daniels of George's Music Room in Chicago, twice named Retailer of the Year by the National Association of Recording Merchandisers, says the clubs shouldn't concern the savvy merchant. "The competition has changed, but when they started making big shops they didn't stop making small boats," he says. "Longevity has its assets and we circumvent the clubs and discounters with service. There's just a lot of shenanigans going on in the music industry in general."Music retailers have lost 17 percent of their market share during the nineties. They blame Columbia House and BMG for creating the impression that paying $15 for a compact disc in a store is a rip-off. Retailers say their hands are tied, since the major labels charge them $10 to $12 wholesale even though the cost of producing CDs has dropped to less than $1. But does all this righteous indignation mean the industry would like to see every CD sold for $15, or for $4?Because of the traditional royalty deals that allow for zero or half royalties on albums distributed through the clubs, a growing number of artists and labels are refusing to license their products. For that reason, the clubs no longer offer new releases from labels like Geffen, MCA, Virgin and Disney and few if any albums from artists such as the Beatles, Bob Dylan, the Rolling Stones, the Smashing Pumpkins, the Who or Pink Floyd. Nearly three million of the 13 million copies of Hootie & the Blowfish's "Cracked Rear View" were distributed through the clubs, which meant half or no royalties on nearly a quarter of their sales. Hootie's second album is being withheld from the clubs for a year. Meat Loaf is involved in a lawsuit over royalties on a million copies of "Bat Out of Hell" distributed by the clubs, and Pearl Jam lost royalties on a million "promotional" copies of Vs.Other conflicts arise because of the clubs' corporate ownership. Columbia House doesn't sell music on the RCA label since RCA is owned by BMG. Because Sony owns Columbia House, the BMG catalog doesn't include Sony artists such as Bruce Springsteen, Soul Asylum, Mary Chapin Carpenter, Luther Vandross, Billy Joel, Barbra Steisand or Mariah Carey.The clubs say the retailers' criticism of them is unfair. They spend hundreds of millions of dollars promoting artists and albums each year, and club sales also count toward gold and platinum certification from the Recording Industry Association of America. They move product and advance careers. But to ease tensions, BMG launched a "new-artist development program" designed to entice its members into stores to sample artists and albums that aren't offered yet by the clubs. For a modest fee, they provide sampler discs with two cuts from each of five bands. Included with the discs are $2 Blockbuster Music coupons.All the carping back and forth may be over nothing. Two surveys suggest that clubs help retail sales. The first, conducted among 2,000 adults for BMG, concluded that clubs encourage people to buy more music in general. A later survey of 1113 adults by the National Association of Recording Merchandisers (which counts both retailers and the clubs among its members), found essentially the same thing. NARM also reported, however, that Columbia House and BMG members buy fewer CDs from retailers after they leave the clubs.Let's assume you're like many music buyers. You restock your oldies from the clubs, and you buy new releases from the stores. You don't want to pay more than you have to, but you also don't like to wait. Join the clubs, but join carefully. The best current deal is eleven for the price of 1/2 or twelve for one, about $3 to $4 for each CD when you include shipping and handling charges. Don't take the clubs up on any offers that are less generous (the best places to find deals are music magazines such as Rolling Stone or Stereo Review, and the best time is around the Christmas holidays).When joining a club, don't feel obligated to choose from the CDs listed in the advertisements. Each club carries upwards of 8,000 titles. There are two ways to get the CDs you'd like. For Columbia House, phone customer service (800-457-0500) and ask the operator to provide the numbers, or check the online catalog at www.columbiahouse.com, where you can search by title, artist or song. BMG also has a customer service number (317-692-9200), although it's not toll-free. Its online Web catalog is at www.bmgmusicservice.com. For the inside dirt on both clubs, visit the unofficial CD Club Server at www.hirschhorn.com/cdclubs.Once you've fulfilled your membership requirements, you can quit by writing "Please Cancel My Membership" on your negative-option card. When you feel the need for more inexpensive music, join again. In the meantime, the lovesick clubs will try to woo you with offers that are never as good as those you can find on your own. Don't feel bad about throwing these promotions to the wind -- to the clubs, you are simply a name, address and checking account.HOW IT ALL BEGAN The music-by-mail business was born on August 1, 1955, when the Columbia Record Club sent out 6,000 packets to retailers announcing an innovation to increase LP sales in rural areas. There were other mail-order clubs around, notably the Book of the Month Club, but it was only now that Americans were starting to bring home phonographs for the family room.In its mailing, Columbia explained that each retailer would receive a 20 percent commission on all sales to club members that he recruited. To reassure store owners that the club wouldn't steal their over-the-counter business, the club promised that no record would be offered in its catalog for six months after its release. (A similar policy is followed today to appease retailers, although the grace period has dropped to three months.) For its part, Columbia would fund an ad campaign to emphasize the joy of listening to music at home. The initial offer to consumers, offered through newspaper ads, was buy four LPs, get one free.Columbia House Terre Haute, Indiana, as its distribution hub. Parent company CBS was already making LPs there, and Terre Haute's Midwestern location and train lines made it an ideal spot for mass shipping. As membership grew--during its first year, the club signed up 128,000 people--Columbia House added warehouses on each coast. In 1988, Sony Corp. bought the CBS Records Division, including the lucrative Columbia House (which was grossing $500 million annually) and the accounts of its 6 million members. Of these, most were video- or record-club members; only about 100,000 were buying newfangled compact discs. That would soon change. Because Sony already owned the Digital Audio Disc Corporation plant in Terre Haute, it saw the purchase of Columbia House as a natural marriage. DADC today manufactures 90 percent of the CDs Columbia House sells.In 1991, media giant Time Warner partnered with Sony in Columbia House. Today the club has about eight million members (12 million if you count its video club and other divisions) and controls 60 percent of the club market. Its Indiana distribution operation employs 3,200 people and the last time someone counted was receiving six tons of mail weekly (it even has its own post office). The club also sends out about 350 million solitications and 70 million parcels annually, and has a $210 million postage bill. There are also clubs in Canada and Mexico.Headquartered in nearby Indianapolis, rival BMG Music Service has grown rapidly during the past four years. The company was known as the RCA Music Service until 1986. That's when the German media conglomerate Bertelsmann AG bought RCA Records from General Electric and made it part of its New York-based Bertelsmann Music Group (hence the BMG). Headquartered in Munich, Bertelsmann is the third largest media company in the world behind Time Warner and Disney. Its music division, which includes the CD club, BMG Distribution, BMG Classics, RCA Records, Arista Records and Zoo Entertainment, earns upwards of $3 billion annually.Between 1991 and 1995, BMG Music Service doubled the size of its membership to where it now rivals Columbia House at close to eight million, with annual sales estimated at $400 million. The company receives 800,000 pieces of mail and ships 900,000 packages and letters each day. Much of this growth was due to the efforts of marketing whiz Joan Stamler, formerly of Doubleday Book Club and Columbia House, who took BMG to the masses by placing advertisements in dozens of magazines and by flooding the mails with tens of millions of direct solicitations. She also had the BMG catalog re- vamped to include color and commentary.BMG made its name with what are often seen as unbelievable offers: Choose eight or ten or twelve CDs free and then buy one at full or even half price and you're done. The best Columbia House could offer involved a commitment to buy six CDs at full price over three years. More recently Columbia House has responded to the competition with sporadic twelve for one offers. The company has also launched CDHQ, which goes head- to-head with BMG's introductory offers but has less selection than Columbia House.Obviously, CD clubs make a lot more money off your membership if you stick around long enough to buy their overpriced CDs. According to one industry survey, the average club member receives 17 selections. People who join the club, take their introductory freebies, buy one disc and then quit are known disparagely in the business as "in and outters." (Columbia House faces less risk than BMG since its standard offer requires you to buy six CDs at full price.) When Joan Stamler joined BMG, one of her goals was to cut back on "in and outters"; she boasted recently in a trade publication that she had trimmed the freeloaders to about 25 percent of all enrollments. Insult me if you must, but give me my cheap music. Since the clubs set their own rules, they can't complain if consumers work the system to get the best possible deal possible.TRICKS OF THE TRADE1. Don't buy any more than the minimum, no matter how enticing the "buy one, get one half price" offers become. If you have the patience, hold out on buying your full-price selection until they offer a 3-for-1 catalog special.2. Don't get yourself on the shit list by not paying what you owe. This isn't about fraud. Many people have joined under different names, however, or by using their home and work address. The clubs don't seem to mind as long as the bills are paid.3. If you join as "buy one at half price" option, consider purchasing a double album or box set that might not be available as a freebie. While Columbia House does not allow you to order multi-disk sets in your free introductory offer, BMG does. The order numbers for double-disc sets begin with the letter N. Put that number on one line and leave the next blank.4. Never buy from the advertisements or the meager catalogs they send you; use online resources or customer service lines to get exactly what you want.5. Never join under an offer that requires you to buy more than one CD.6. When you join, phone or write asking that your name not be sold to other marketers. If you don't, expect a lot of junk mail.7. If you remain a member of the clubs after fulfilling your requirements (i.e. you buy a CD), phone and ask to be placed on the "Order-Only" option. If the operator refuses, wait a day or two and try again. In the biz, this is known as changing from "negative option" to "positive option," and you'll only receive the discs you ask for.

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