If you came of age in the pre-streaming era of the '90s, you remember having to buy your CDs from stores. Or, maybe you took advantage of the Columbia House music club and its eight-CDs-for-a-penny deal, a discount that was too good to be true. How could they sell products for next to nothing and still make a profit?
With a business model that’s downright Kafka-esque, music clubs managed to make money hand over fist by maintaining a low overhead, a high markup, and an ever-changing set of confusing rules. The following slice of music industry history lets you in on how music clubs made money, what customers were paying for, and how exactly they were being screwed.
The BMG and Columbia House record clubs used a method called "negative option billing." This means a customer signs up for a service, and a company mails them something - and bills them for it - once a week, month, or year, unless the customer objects.
A former Columbia House employee told The AV Club:
The whole business was premised on this concept called negative option. Which just sounds so creepy and draconian and weird, but the idea that if you don’t say no, we’re going to send you sh*t. It’s going to fill your mailbox, and we’re going to keep sending it unless you panic and beat us back. That was how the money was getting generated.
Negative option billing was outlawed in Ontario, Canada, in 2005. The Federal Trade Commission keeps a close eye on companies that use negative option billing, and insists that contract terms must be clearly stated.
You'd think record companies would be excited about BMG and Columbia House selling tons of CDs to people across the company. Not so. BMG and Columbia House sold albums based on an "implied license." This is where a distributor pays a lesser fee for a product, and if the payment is accepted, it's assumed that a license to sell the product has been granted.
It wasn't until 2006 that record companies got actually written licenses from music clubs. Until then, BMG and Columbia House were buying products at low cost and then selling them at a huge markup. When record companies complained about the implied licenses, music clubs threatened to stop carrying their products.
It wasn't technically extortion, but it was definitely sketchy.
The most important aspect of the music club business was keeping costs low, especially when it came to their products. In many cases, record clubs acquired the master tapes of the albums they sold and pressed their own copies, meaning the record companies and artists didn't see any profits from the sales of these albums.
In the documentary The Target Shoots First, director Chris Wilcha takes a trip to the Columbia House production center in Terre Haute, IN. He finds a full-fledged CD pressing and printing facility, along with a group of local college students who spend their summer mailing out "free" CDs.
Cleaning out old stuff, getting ready to move. Do y'all remember the BMG music club? pic.twitter.com/74P8r7rLuz— Ken Webster Jr (@ProducerKen) December 17, 2015
One way music clubs made more money was by changing their user agreements without saying anything - or putting the changes in very small print. The basic user agreement said they would send you a CD, and if you didn't mail them within 10 days to let them know you didn't want the CD, you had to pay for it. The agreement changed at the apparent whim of the music clubs.