// BMG Buys Columbia House //

[System.S]

yup,
The combined company will have about $1.5 billion in annual revenue and 16 million members in North America.

Bertelsmann AG (BMG) announced that it has purchased Columbia House, the large membership club music and movie seller, for around $400 million. Columbia House was BMG Direct's largest competitor with 8 million members in North America. Both music clubs have battled with increased competition from new media ventures, digital downloads, subscription services and dwindling industry sales over the last couple of years.

BMG Direct was a neglected unit of BMG when former CEO Thomas Middelhoff was placing all the company's chips on digital music ventures. When those fizzled and he was ousted, Gunter Thielen, the new CEO, made resuscitating BMG Direct a top priority. He brought in Stuart Goldfarb in 2001 to put BMG on a severe diet to trim the fat. Goldfarb streamlined the division by restructuring the non-profitable sectors and cleaning the list to dump lackluster members. The Slim-Fast milkshakes worked and BMG Direct reported a profit last year in the eight-figure range.

With BMG's recommitment to its old-school publishing roots and its recent restructuring knowledge, it was time to take aim at the competition. Rumor had it that Columbia House wanted out, and BMG pounced. Another attractive facet was that Columbia House had made a big advance into DVD club sales in the past few years that rewarded them handsomely. The combined company will have about $1.5 billion in annual revenue and 16 million members in North America.

What's fascinating about the membership-based, music club business is that it's still viable. Many would think that the old-school negative sell model would have withered on the vine in the digital age, but it hasn't. Negative selling requires the members to physically return the CDs to the music club that they automatically receive every month, or else get charged. Because this scenario is way down on the to-do list of members in our time-challenged world, most don't even bother, and that's where the services cash in. So why are 16 million people enrolled?

The clubs provided a better-than-average filtering mechanism that's based on a members buying habits. Many time-strapped members like the selections proposed to them and don't have the minutes to wade through the severe multitude of music choices every month. In addition, with CDs going for $15-20 dollars a pop, the clubs are a pretty good deal.