How Columbia House sold 12 CDS for $1

Does 12 CDs for a penny sound too good to be true? Well, in the mid-90s that offer represented more than $1.5 billion of the music industry. NYU music business professor, Larry Miller, helps break down how music clubs like Columbia House and BMG Music Service didn't just make money, but were very profitable as well. Following is a transcript of the video.

Matt Stuart: Ever get a whole bunch of CDs for a penny, or even free?

Commercial: Columbia House, big enough to bring you all the best in entertainment

Matt: Columbia House and the BMG Music Service both offered amazing deals. About eight CDs at almost no cost to you, then just buy one more at full retail price and you get three more for free. Sounds too good to be true, right? How could something like this make money?

Commercial: Remember, it's our secret, so watch your mail for this package from Columbia.

Larry Miller: You could join these things for a penny, get a bunch of music for almost free as long as you promised to buy a certain amount of music over the next year or so at regular club prices.

Matt: That's Larry Miller. He's an NYU professor and music industry vet with a podcast about the industry, Musonomics.

Larry: The regular price of the CDs that you would buy was the suggested retail price, which was 17.98, 18.98, 19.98 plus shipping and handling for those CDs.

Matt: Those prices and the shipping costs were key to the club's success. Columbia House, BMG Music, and other clubs utilized a practice called negative option billing.

Larry: The way that the clubs offered music to consumers was through a catalog roughly every month. Actually it was a little bit more often and in some cases they were shipping 21 different catalogs every month. And that for every catalog, you would need to send back a postcard within ten days of your receipt of that catalog indicating that you didn't want the selection of the month. If you didn't do that in time, or if you just forgot, you would be shipped that record and of course you would be billed for it.

Matt: Forget to send the card back and you'd owe the club about $22 for a CD you may not even want. But you still only paid a few bucks shipping on 11 other albums. This still doesn't seem sustainable, especially when retail shops were selling CDs for $14 and up.

Larry: They would license the actual master tapes and the production files for the physical media from the major music companies. And they would be able to manufacture these records at a cost of about $1.50 or so each. In many cases, inferior pressings on vinyl and CD and you wouldn't get maybe the full lyrics and you wouldn't get the nice inserts and stuff and even the little booklets that were included in the CD were not quite as nice as the ones that you would get in the store very often.

Matt: By pressing their own albums, the clubs were able to make about $5 to $6 on each unit they actually sold. Even accounting for all the free albums they sent out.

Larry: As it turns out, that was plenty of margin to operate these businesses which together were generating about a billion and a half dollars of revenue, or about 15% of U.S. record industry volume at the peak, which was around 1996 or so for the record clubs.

Matt: However, that 1.5 billion wasn't really going to everybody.

Larry: The records that you would get for a penny counted as free goods and that there were no royalties on free goods. It's still unclear today exactly how many of those royalties were paid through to recording artists. They were only paid on the purchased goods, and even so it was at three-quarters of the regular rate that they would have been paid had you bought it in a regular record store.

Matt: Most of the artists and writers didn't get paid anything on any of the free albums.

Larry: However, the sale of the records did count in the calculation of gold and platinum and chart position.

Matt: So no money, but you might wind up with a pretty big trophy. Now the clubs are long gone and services like Spotify and Apple Music have taken their place with access to almost any song you could want for $10 a month. Are those bum deals for the artists, too?

Larry: I believe that as streaming takes hold and as smartphone penetration continues to grow the way that it has and as smart speakers and voice interactivity begins to take hold that music consumption is going to grow to a level that we just haven't experienced before. Even if the amount of money per listen is less than what we were used to getting back in the days of the CD or vinyl record.