why retailers hate the clubs Although music store owners control 85 percent of the market, they've begun to fight back against mail-order clubs. For example, many used music stores refuse to buy or trade club CDs. The retailers have support from some artists and labels who refuse to license their products to clubs, mostly because of the lower royalties they earn. This includes releases from labels like Geffen, MCA, Virgin and Disney and just about any album by the Beatles, Bob Dylan, the Rolling Stones, the Who or Pink Floyd. Hootie & the Blowfish have also joined the ranks, after nearly three million of 13 million copies of Cracked Rear View were sold through clubs. That meant half or no royalties on nearly a third of their sales. The group was smarter the second time around: Fairweather Johnson was withheld from the clubs for a year. Meat Loaf sued over royalties on a million copies of Bat Out of Hell, and Pearl Jam lost royalties on a million "free" copies of Vs.
Retailers are unhappy because some feel the clubs have an unfair advantage in the marketplace. A record store must purchase CDs that include full royalties, which leaves room for $2 to $5 profit on each sale. The clubs, on the other hand, with their zero or half royalties and in-house production, have brought their costs down to about $4 per disc, so they can make more than $12 in profit. Noting that, one Pasadena music chain offered $6 for any of 50 popular CDs purchased from record clubs because it was cheaper than buying them from a distributor.
In 1992 the National Association of Recording Merchandisers (which counts retailers and the clubs among its members), filed suit to force clubs to stop their freebie offers. The clubs say the retailers' criticism is unfair. They spend hundreds of millions of dollars promoting artists and albums each year, they say, and club sales count toward gold and platinum certification from the Recording Industry Association of America. In an effort to ease tensions, BMG launched a "new-artist development program" designed to entice its members into stores to sample artists who aren't offered yet by the clubs. For the price of shipping and handling, BMG offered sampler discs of two cuts from each of five bands. Included with the disc are $2 Blockbuster Music coupons. This didn't appease the retailers, and they make noises every once in a while about more suits over the clubs' "unfair trade practices."
All the carping back and forth may be over nothing. Two surveys suggest that clubs help retail sales. The first, conducted among 2000 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 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.
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."
During the past few years, retailers have found some breathing room as consumers finish upgrading their oldies. That has always been a major part of the clubs' sales — the Eagles' Greatest Hits has sold seven million of 22 million copies since 1994, largely through mail-order. But today, everyone who's going to replace their LP of Thriller with the CD version has done so. Sales of catalog records slumped 5 percent in 1996 after jumping 30 percent to 40 percent each year since the introduction of CD players.