- [Reporter] Ever get a whole bunch of CDs
for a penny, or even free?
♪ Columbia House, big enough ♪
♪ to bring you all the best in entertainment ♪
- [Reporter] 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?
- Remember, it's our secret,
so watch your mail for this package from Columbia.
- 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.
- [Reporter] That's Larry Miller.
He's an NYU professor and music industry vet
with a podcast about the industry, Musonomics.
- 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.
- [Reporter] 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.
- 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 come 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.
- [Reporter] 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.
- 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.
- [Reporter] 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.
- 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.
- [Reporter] However, that 1.5 billion
wasn't really going to everybody.
- 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.
- [Reporter] Most of the artists and writers
didn't get paid anything on any of the free albums.
- However, the sale of the records did count
in the calculation of gold and platinum and chart position.
- [Reporter] 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?
- 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.