Internet Onslaught Forces Veteran Record Clubs to Regroup

“Twelve CDs for a penny!” one magazine ad screams.

“Twelve CDs for the price of one--nothing more to buy, ever!” the other counters.

The fervor of those familiar record club pitches has remained constant through the years, but the two venerable mail-order giants behind them, Columbia House and BMG Direct, are now scrambling to reinvent themselves in the face of sliding business and new Internet challengers.

How bad has it been? The combined market share of the clubs (now 11%) sagged 20% between 1994 and 1997, according to the most recent industry numbers available, and by some insider accounts that trend has worsened.

The reason: The clubs have lost many of the music buyers who turned to them earlier this decade to quickly convert their collections from vinyl and tape to compact disc. The market is also a different landscape these days, with on-line merchants and retail giants such as Wal-Mart selling more music than ever.

“It’s a very interesting and challenging time for both clubs,” said George McMillan, president and chief executive officer of BMG Direct. “There are more options for music buyers than ever before, and we’re trying very hard to make sure that we’re in the hunt for their business.”

For BMG Direct, which is owned by Bertelsmann AG, that means launching a completely paper-free ordering process in upcoming months, an option that would allow members to buy their music via the Internet and phone.

Meanwhile, Columbia House, a joint venture of Sony Corp. and Time Warner Inc., this week announced a new partnership with America Online and has made an even more fundamental change: The club has scrapped the automatic monthly shipments and return cards that have been their trademark for more than four decades.

Play From Columbia House, the new name for the new-look club, was launched last year and heavily advertised during the holiday season. At the heart of the new club is the abandonment of the “negative option”--the sales model created by the Book of the Month Club that ships a new selection to customers every month unless they cancel the order with a return card.

Historically, the negative option (which BMG still employs) was a way to make customers open and read the monthly mailings. If they didn’t, they knew an unwanted album may be on the way. The tactic also frustrated many members.

“People just didn’t like the whole experience of dealing with the return cards; they were a hassle,” says Sharon Kuroki, Columbia House’s executive vice president of music marketing. “So we took a lot of the hassle out.”

The new-look clubs may win back some old customers, but not everyone is applauding. Retailers and many music artists, for instance, still say they suffer every time one of the clubs ships off a batch of free CDs.

“They may be a good deal for somebody, but they’re not a good deal for the artist,” said Peter Mensch, a manager who urges his clients, such as Metallica, Def Leppard and Hole, to keep their music out of the club catalogs. “It’s all about fair market value.”

Mensch’s frustration lies in the mathematics of the music clubs, the same arithmetic that allows the mail-order businesses to offer a dozen albums for seemingly impossible prices.

Instead of buying albums from labels, as stores do, the clubs purchase rights to the master recordings and album cover artwork, and then they lease time at industry manufacturing plants to produce their own CDs and tapes for a few dollars each. The clubs make their big money on the albums they sell at “regular” price, the $16-$17 level that stores charge.

The labels also benefit from the relationship. Unlike retail stores, the clubs do not call on the labels to spend money on marketing or store displays, nor do they return unsold albums, according to Marshall Wilcoxen, vice president of artists and repertoire at Columbia House.

“We’re the silent, mail-order partner to the label,” Wilcoxen said. “If we overstock, we don’t return anything. It reduces the risk for the labels.”

It also reduces the money going to artists, who get “radically less” money per album when their music is sold through the clubs, according to Donald Passman, a Los Angeles attorney who has represented Janet Jackson, Mariah Carey and R.E.M. And if an artist’s album is tucked in among those free CDs given away to new members, that artist makes no money at all on the transaction, Passman said.

But are the clubs a good deal for the consumer? The answer is yes--but with some fine print.

Those enticing introductory offers don’t go out of their way to mention shipping and handling charges, which puts the actual price per “free” CD closer to $4-$5, still far below retail prices.

The good news for consumers is the clubs, in their escalating competition with each other this decade, have added numerous sales and special offers beyond those introductory offers. Those offers, such as 50% discounts on selected titles, can keep the average price to $8-$10 an album. But exploiting the sale prices may require members to buy more music than they planned.

The downsides?

If you want to buy the latest releases you’ll have to wait weeks or months to see an album you want. Also, if you don’t take advantage of a sale, the list prices for the most popular albums will actually be higher than large retailers.

While the clubs make similar sounding pitches to prospective members, the deals they offer are actually markedly different.

To join BMG, you pick seven free CDs, then buy one at regular price ($15-$17) to get four more free--although, again, “free” does not include the shipping and handling costs.

For Columbia House, the new member generally gets 11 discs for one penny (not including those shipping and handling charges, which are about $2.40 for a single disc) and then must buy six CDs at full price during the next three years.