Whatever happened to Colombia House's 8 CD's for a penny?

Do you remember Colombia House’s offer of eight compact discs (or 12 records or tapes) for a penny? Perforated sign up cards seemed to adorn the middle of every magazine for a couple of decades, and most of us probably signed up for the offer...at least once.  

 However, Colombia House actually wasn’t just a phenomenon of the 1970’s and 80’s when new music technology like tapes and CD’s boosted the popularity of personal music players. The origins of the mail order megalith go back all the way to the 1950s. Created in 1955, the Colombia Record Club was a vanguard experiment in music by direct mail, created to appease a rural population who couldn’t easily walk into record stores. To keep those urban record stores from getting up in arms about a potential loss of sales, Columbia didn’t release brand new selections but lagged about 6 months behind current music. Retailers also were given a 20% commission if they recruited new members. The result was that by the end of the year, the new record club had signed up 125,175 members and sold 700,000 records via mail order.

By 1963, The Colombia Record Company accounted for an incredible 10% of all record sales on the retail market. In the 1970’s, the company was rebranded as Colombia House, and grew to 3 million members. At their high point around 1991, bolstered by the release of music CD’s, they had reached 10 million members, or just shy of 4% of the U.S. population!

Looking to cash in on Colombia House’s ultra-successful business model, BMG, or the BMG Music Group, emerged as an alternative. They actually merged around 2005 when the Blackstone Group, who owned the majority stake in Colombia House at the time, sold to the German media conglomerate Bertelsmann, who owned BMG. As recently as 2000, both companies grossed about $1.5 billion a year in sales!

But as of June 20, 2009, both BMG and Colombia House stopped selling music, though the do still distribute DVDs and Blue Ray discs. Colombia House now operates under the umbrella of Direct Brands, Inc., which offers the Book-of-the-Month club in a similar direct mail model.

So how the heck did they make money by practically giving away music? The original offer was just to hook new members of course, and once in, they were subject to a practice called “negative option billing.” Your original 8 CD’s were mailed to you as promised, but from there you were on the hook for monthly shipments of new music (at full price) unless you expressly told the club you didn’t want them. Of course, not one paid attention to this part, and soon the confusing bills started piling up as fast as your collection of unwanted music.

The practice of negative option billing is deemed unethical at best, and more commonly illegal. In Ontario and other parts of Canada, negative option billing was actually outlawed, and in the U.S. the practice is supposed to be heavily regulated by the Federal Trade Commission.

“The Federal Trade Commission requires that any club or service offering a negative option plan must clearly and conspicuously indicate minimum purchase obligations, cancellation procedures, the frequency with which members must reject shipments, and how to eventually cancel a membership when they enroll new members.”

Both Colombia House and BMG had their share of run-ins with the FTC and the courts. In 2008, BMG sold a huge number of fraudulent debt claims to a collection agency. However, it was found that a significant number of the consumers who allegedly hadn’t paid their bills actually hadn’t been notified of their debt obligation, nor bought any music in the past 5 years. In 2011, Colombia House was slapped with a similar class action suit for systematic unauthorized credit card charges, discouraging or making it impossible for consumers to cancel, and barraging members with unwanted products.

Colombia House basically cut every corner possible – not securing licenses for distribution of records, just relying on implied licensing; pressing their own versions of the records, tapes, or CD’s instead of buying them from the record companies; not paying royalties for all of those bonus records they sent members, and other “bullying” tactics. If a record company or artist made too much of a stink about it, Colombia House simply cut them from their catalog, a chance no one wanted to take when they were moving so many copies.

An expose on the music clubs revealed that they were probably paying an average of $1.50 for each record, tape, or CD, while they sold it for $3.20 to $5.50. However, one in three discs were sold at the $16 full retail price, so Colombia House made about a $7.20 margin on each unit. Compare that to the high end, optimistic margin of $6.50 record retailers hoped to get, and the direct mail music model was killing it.

The amazing thing was that the offer of 8 cd's for a penny was so enticing, the majority of members felt they were somehow getting over on the record company. People used multiple names and addresses or signed up every time they moved. Some extreme cases, like that of Joseph Parvin from Lawrenceville, New Jersey, brought it to a new level. In 2000, Parvin pleaded guilty to using 16 different PO Boxes to scam Colombia House and BMG out of 26,554 cd’s over a five-year span. He was convicted of one count of mail fraud. Others did the same thing and sold the CD’s at flea markets.

While most of us didn’t go nearly that far, we never really understood what we were signing up for, and were faced with high bills, debt collectors, or blemishes on our credit for years to come after dancing with Colombia House and missing a step.