Music Clubs' Newfound Clout

By mining customer data and putting the Web to good use, the discount sellers can make stars and reap the rewards of boosting labels' sales

The biggest breakout artist in 2001 was R&B crooner Alicia Keys. Her album, Songs in A Minor, sold more than 5 million copies, and the 20-year-old artist took home five Grammys, including ones for song of the year and best new artist.

Her success came as no surprise to industry veterans. After all, Keys is the protégée of J Records' Clive J. Davis, who launched such stars as Aretha Franklin, Janis Joplin, and Whitney Houston. But Davis doesn't deserve all the credit. Keys had another big booster: The Columbia House Music Club. That's right, that King of UnCool, the 12 CDs-for-nothing (as long as you agree to buy five more at full price) music club, played a part in launching one of the year's hottest new acts.


  Usually, Columbia House doesn't advertise new stars, let alone unknowns like Keys. Disadvantageous licensing deals prohibit the music clubs from marketing the latest-hit performers for as long as six months. Global stars such as Madonna hold out for up to a year to keep their albums from being sold at a discount. But in a revolutionary co-marketing deal, Columbia House promoted Keys's album, sending out 2 million e-mails and 6 million flyers to customers it knows are R&B fans. Columbia House sales have accounted for between 3% and 6% of Keys's sales.

Since then, Columbia House has cut deals with at least 10 other labels, including Universal (which boasts No. 1 rapper Nelly), Arista, Columbia, and Epic. "We were key to broadening awareness," says Columbia House CEO Scott Flanders -- no pun intended. "We've entered a new era of cooperation [with the labels]."

Such innovative programs are just one way that Columbia House and rival BMG Music Service are reinventing themselves in the Digital Age. The two clubs are sitting on mountains of untapped customer data, which could be crucial to labels that are struggling to introduce new acts, not to mention stem falling sales and battle online piracy. Columbia House alone has 25 full-time statisticians poring over customer data to craft promotions.

Historically, the labels have had little interest in understanding their customers. Their raison d'etre was nurturing and developing new acts. But as the Internet has started to undermine traditional business models, the clubs have begun to leverage their direct-marketing expertise to help support the labels, the nascent business of selling music over the Web -- and themselves.


  That the record clubs are in need of revival is beyond question. Both Columbia House and BMG peaked in the mid-1990s, when their members accounted for 15% of album sales in the U.S. Though both clubs claim they are profitable (BMG is owned by private media conglomerate Bertelsmann, and Columbia House was purchased in June by private investment bank The Blackstone Group), club sales now account for less than 10% of industry sales.

To boost revenues -- and attract the right kind of customer -- BMG is experimenting with streamlined versions of the club that appeal to younger, hipper music fans. One example is the Preferred Buyers Club at Bertelsmann's online music retailer CDNOW. Customers who register and buy one of several selected club titles receive $5 off any future purchase, regardless of whether it's a club selection.

The program, launched Mar. 19, is already a success, BMG says. CDNOW shoppers who are Preferred Buyers Club members spend 15% more on retail products than before they joined. That's a boon for the labels, since they reap higher fees on retail titles than on club titles. "The traditional club has a lot of smoke and mirrors," says Stuart Goldfarb, CEO of Bertelsmann's direct-sales music division, BeMusic. "This is very simple. It has a low commitment. The result is that people are spending more money on music."


  Moreover, 15% of BeMusic's revenue comes from Internet ventures including CDNOW and MyPlay, a so-called Web locker service that lets surfers store, organize, and listen to their music online. Though Goldfarb has been careful not to bet the farm on the Internet -- doing so cost former Berteslmann CEO Thomas Middelhoff his job -- he clearly believes the clubs can be a bridge between the physical and digital worlds.

"The labels are notoriously unsophisticated about using [customer] data," he says. "We can sell a certain artist to someone we know has already bought their music. We can tailor music to their taste or craft offers based on their buying habits."

To that end, in October BMG will launch a new program that expose Club members to new artists. Based on members' past purchases, the Club will bundle a free CD with the regular monthly selection. By successfully targeting customers' tastes, BMG hopes build the club's reputation as a trustworthy source of music recommendations, not to mention selling more music. BMG Music can introduce customers to new artists they might like.

Columbia House, meanwhile, is eying digital music. Though it won't build its own service, it plans to integrate one of the new digital music services such as MusicNet, pressplay, or Rhapsody into its offerings -- as soon as those services have a compelling offer for consumers, says Flanders. "There's no question retailers and [the clubs] have clout they haven't used," says Aram Sinnreich, an independent music analyst. "They could turn digital music into a multimillion dollar market overnight if they worked aggressively."


  Such moves are a giant leap in securing a new role for music clubs. Yet there's still some doubt as to whether the clubs will succeed in transforming themselves into trendsetters at a time when the music industry is under siege. According to Nielsen SoundScan, for instance, CD sales through Aug. 3 were down 12.8% so far this year -- on top of a 10% decline in 2001.

The hard times have stirred rumors that instead of evolving, the two clubs will merge and continue doing business as usual. "Two record clubs simply cannot be profitable in the same country. Commercial logic dictates that they are brought together or that one will exit the business," says Columbia House's Flanders. In fact, the two held long-running though fruitless merger negotiations before the Blackstone Group purchased Columbia House in June. A Bertelsmann spokesman denies that any serious merger discussions continue.

Bertelsmann's new CEO, Gunther Thielen, will undoubtedly be careful about jumping head-first into more Internet ventures. But the company is equally as unlikely to divest itself of its club interests. The $20 billion media behemoth was built on the book- and music-club business, which now count 40 million subscribers worldwide.


  Together or apart, the clubs now have a prime opportunity to prove that they can shine again. They can use their mountains of data to help promote new artists, boost slack CD sales, or help to sell digital subscription services that are run by the music companies.

"People say the Digital Age is going to change the industry. But the use of data and recommendations really sends it back to its roots," says BMG's Goldfarb. "It's the club business all over again." And that's a game BMG and Columbia House know how to play.

By Jane Black in New York

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