inside free CD clubs If you've ever read a consumer magazine or Sunday newspaper insert, you've spotted those offers from music clubs that sound too good to be true. "12 CDs for the price of 1!," they promise. "Nothing More to Buy — Ever!" To join, you pay the price of shipping and handling for 12 CDs, about two bucks each. You then agree to purchase one additional CD, or five additional, at full price. [Both BMG and Columbia House have closed their doors. This article is now archived for history's sake.]
Anyone who knows of my history with grocery coupons won't be surprised that I'm forever joining and rejoining CD clubs. The only remaining player in the mail-order music business is Columbia House. It uses a variety of marketing strategies to entice you to snatch up "free" CDs while committing to putting money down for more than you're required to buy as a member. This series of articles includes information about the history of the clubs, how they work, what retailers think of them, how close they may be to dead, and how you can get the best deal while they're still around.
Although mail-order CD clubs are a $1 billion industry, many people in the music industry believe their days are numbered, particularly now that digital music clubs such as eMusic, iTunes, Napster and Rhapsody have taken off. Only six or seven years ago, the future looked bright for CD clubs. Record clubs accounted for about 15 percent of album sales in the United States. But the clubs now must compete with discount online retailers, and most people have replaced their classic LPs with CDs, so the offers aren't as enticing. The clubs also have other disadvantages. The agreements they make with the record labels keep them from offering the latest albums until about three months after they're released. They must constantly battle fraud and, like all retailers, the spread of free music online.
As a result, the clubs' share of the album market is estimated since the mid-1990s to have dropped by half, to less than 7.9 percent of all sales. One insider says that Columbia House's music revenues have shrunk to less than $10 million, from $75 million in 1995. The clubs have begun to cut costs, dismissing employees and shutting down warehouses. In 2000, BMG closed its Canadian club, which had 800,000 members.
If profits continue to sink, the 12-for-1 deal may go the way of the 8-track tape. To survive, the clubs need more members who stick around longer. The "in and outters" (people who join, buy the minimum required, and quit) aren't nearly as profitable. (At one point in the mid-1990s, more than 25 percent of the people who enrolled at BMG bought only the one required CD at full price.) One problem is that CH can't lower the number of free CDs it offers up front as long as BMG pushes its standard 12-for-1 deal. "With a competitor, we cannot unilaterally disarm," Columbia House CEO Scott Flanders has said. CH had been giving away two CDs for every one it sold; it's working toward making that split 50-50. There's also the chance that Columbia House and BMG may merge. They discussed that option at length over the past few years, but couldn't work anything out. At one point, CH considered folding into CDNow, but that didn't work out either.
In April 2001, Flanders discussed the future of the business with Billboard magazine. He said that CH hopes to develop closer relationships with the labels, because he believes the clubs can't survive without them. He points out that the clubs generate huge royalties for musicians: in the year 2000, CH paid more than $80 million to songwriters. He hopes to work out royalty agreements with the labels that will allow the clubs to offer albums to members as soon as they're available in stores.
The clubs always have had to deal with less-than-honest people who will order CDs and not pay for them. As profits dwindle, the clubs are becoming more vigilant about screening new applicants and rejecting people with bad credit. "We cannot make a profit if we get ripped off by consumers who are looking for a physical Napster," Flanders told Billboard. By tightening down, Columbia House in 2000 reduced the number of free CDs it sent out by 25 million.
So, how do the clubs make money giving away so many free CDs? First, as noted earlier, they hope you'll stay around for a while and buy more music than you have to. Once you join either club, you'll be given all sorts of reasons to buy: more free CDs, two-for-one deals, sale prices. One of the most effective strategies until recently were the "negative option" cards you had to return when you received a catalog from the club every three weeks or so. If you neglected to check off a box on the card that read "Please do not send the featured selection" and mail it back promptly, you'd automatically receive the featured disc and an invoice. Mail-order clubs love negative option, which was introduced by the Book-of-the-Month Club in 1926, because "human behavior is based on inertia," as one marketer put it. But negative option also didn't make as much sense when the Internet came along. BMG now requires members to respond online.
The clubs also make money by tacking on "shipping and handling" charges to each CD. So while they're technically free, you should expect to pay about $2 each. While retailers might have to pay $11 or $12 wholesale per CD, the clubs work out special royalty arrangements with the labels, then press their own CDs. That's why you see the disclaimer "Manufactured Under License by BMG" notice where the UPC code usually is located. If there are slight differences in quality between these CDs and what you'd buy in a store, it seems doubtful a casual listener would notice.
Finally, the clubs make some money selling your name, address and buying habits to other marketers. The average club member is young and relatively well-off — a hot demographic. "I've been told there's enough direct access in the computer room to store the name of every individual who ever lived," a CH executive boasted about 10 years ago — so no telling what they have in their files now. Columbia House and BMG sell their membership rolls and even tailor specific lists such as a BMG offering of "The Alternative Music Select," with 298,000 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.