RECORD CLUBS FACE THE MUSIC
By ANNE B. FISHER

(FORTUNE Magazine) – What do Hootie and the Blowfish have in common with Wal-Mart? Neither is a big fan of mail-order record clubs. The National Association of Recording Merchandisers (NARM), whose 1,100 members include retailers from Tower Records to the big discount chains, is about to mount a frontal assault on the two big mail-order outfits, Columbia House (jointly owned by Sony and Time Warner, FORTUNE's parent) and BMG, owned by Bertelsmann, the German megamedia company. Ready to sign up for one of those ten-CDs-for-a-penny introductory record club deals? Better do it soon. If the retailers--and many big-name recording artists--have their way, those offers will be going the way of eight-track tapes and vinyl LPs.

The ten-for-a-penny bonanzas are feasible, the retailers claim, only because record companies give the clubs millions of CDs free, in the name of promotional copies. Performers often get no royalties on the freebies, a fact that has prompted acts like U2, Metallica, and The Smashing Pumpkins to insist on no-club-sales clauses in their contracts. Of the 12 million copies of Hootie and Blowfish's debut album, "Cracked Rear View," three million were sold through record clubs, on which Hootie earned next to nothing. Industry buzz is that the band's leader, Darius Rucker, made Atlantic Records (another Time Warner unit) agree to a no-club clause for Hootie's eagerly awaited and soon-to-be-released encore album.

Record clubs have been around for years enjoying these subsidies, so why the fuss now? Because CD sales are sluggish and the clubs' market share of albums sold has risen from about 9% in 1990 to nearly 15%. So now struggling retailers are taking the clubs as a serious threat. "All we are asking for," says Pam Horovitz, president of NARM, "is a level playing field." The clubs say the field is already more level than the retailers let on.

"When the business is down, we're an easy target," says Barry Reiss, a vice president at Columbia House. He adds that record stores, unlike clubs, get substantial advertising and promotional money from record companies--all those big posters in the windows, etc.--while the record clubs spend millions on advertising that helps the whole industry. Furthermore, retailers can sell new releases right away, while the clubs have to wait three months: "About 80% of our catalogue sales are product that is over a year old. We're really in a totally different business from the record stores." (Well, not exactly.)

Expect the internecine sniping to escalate into all-out war. In late April the top brass of about 20 major music retailers will meet in Chicago to decide whether to sue the clubs for unfair business practices, file an FTC complaint alleging the same, or twist the record companies' arms to give them the same discounts and freebies the clubs get. It may turn out to be a multifront battle. The last time record retailers tried to band together to fight the clubs, back in 1991, nothing much happened. The stores, divided between discounters and full-price merchants, ended up merely squabbling among themselves.

What would truly solve everybody's problems: a bunch more smash hits like Hootie.

--Anne B. Fisher