Columbia House Company Business Information, Profile, and History

Company Perspectives:

Throughout the company's rich history, an enthusiastic embrace of emerging technology has become an enduring corporate trademark. From CDs to videos and DVDs, Columbia House has created a club that has consistently met the public's demand for the latest advancement in entertainment products.

History of Columbia House Company

Columbia House Company is the leading club-based, direct-to-consumer marketer of music and movies in North America, conducting its mail-order business in the United States, Canada, and Mexico. Columbia House boasts approximately 8.5 million members who can choose from approximately 9,000 music selections and 5,000 DVD titles. The company operates three clubs: The Music Club, The DVD Club, and Video Library. The company also distributes video games through its music and DVD clubs. The Blackstone Group L.P., a New York-based investment firm, owns 85 percent of Columbia House, with the balance split between Sony Corporation and Time Warner Inc.

Origins

Columbia House began as an experiment, a venture whose quick success and sustained growth throughout the 20th century most likely surprised its creator. In 1955, an executive at CBS Records formed a new division of Columbia Records, one of the record labels owned by CBS. The purpose of the new division, which was named the Columbia Record Club, was to test the idea of marketing music through the mail. To attract interest in the concept, Columbia Record Club offered one free monophonic record to those who joined the club, offering its new members a wide selection of jazz, easy-listening, and Broadway show titles from which to choose. The response from the public confirmed the legitimacy of club membership and direct-mail marketing as an effective means of selling music. By the end of 1955, the Columbia Record Club boasted 128,000 members who purchased 700,000 records.

The quick success of the marketing experiment forced management at CBS and Columbia Records to treat the division more seriously. Initially, when executives were testing the waters of selling to customers directly through the mail, the fulfillment operations of the division were housed in Manhattan in part of a building on Fifth Avenue. The public's embrace of the record club concept rendered the New York City facility obsolete by Columbia Record Club's second year in existence. To provide sufficient space for the warehouse and shipping functions of the division, a sprawling distribution center, staffed with more than 100 employees, was established in Terre Haute, Indiana, in 1956. The Terre Haute facility, the principal physical presence of an enterprise that lacked, in many consumers' minds, any physical dimension, served as the hub of operations throughout the 20th century. The city was chosen for its access to railways--of vital importance to a mail-order company at the time--and, equally important, because Columbia Records manufactured its vinyl discs in Terre Haute. The synergy achieved in Terre Haute established a pattern, later leading to the establishment of distribution centers near Columbia Records' other manufacturing facilities in Connecticut and California.

Within a decade of its formation, Columbia Record Club changed the profile of the retail music industry. A new dimension to the business of selling music emerged, a new way of placing music in the listener's hands that was created in large part by the advances made by Columbia Record Club. By 1957, two years after starting out, Columbia Record Club was using its Terre Haute facility to ship seven million records to its members, the ranks of which were swelling by the month. The club's success in signing new members was underpinned by its ability to tap into the growth of the industry it served. The music industry was expanding substantially during the latter half of the 1950s, its growth fueled by the emergence of a new genre, rock 'n' roll, and, to a lesser extent, by technological advances in the recording of music and the equipment used to listen to music. Columbia Record Club rode the wave of the popularity, introducing rock 'n' roll records, listed under the less controversial "Teen Hits" category, in 1958. The following year, the Columbia Records division began offering its members stereophonic records and it offered a small assortment of stereo equipment to help spark interest in the new format.

Columbia Record Club stood as a recognizable force in the U.S. music industry within a decade of its formation. By 1963, the division accounted for 10 percent of all the money spent on recorded music, achieving market share that forced traditional retailers to take notice. The club managed to capture a sizable portion of the market by offering a broad selection of music whose range would only be matched by the massive, national retail chains that emerged decades later. The division also tried to remain on the vanguard of technology that would improve the operation of its business, and it tried to anticipate the changing needs and tastes of its membership. The company, in a bid to attract audiophiles, introduced the Reel-To-Reel Club in 1960, offering recordings that could be played on reel-to-reel players. In 1962, Columbia Record Club became one of the national leaders in the use of data processing equipment after investing in computers, one of the first companies of any kind that embraced the new technology. To offer its membership the types of recording format that were being developed and proving popular, the company started the Columbia Cartridge Club, which targeted the 8-track market, in 1965, and four years later launched the Cassette Club, giving its members another recording format to stimulate their purchasing activity.

Columbia Record Club celebrated its 20th anniversary in 1975 having surpassed the three-million-member mark. The company, generating millions of dollars in sales from albums such as Simon and Garfunkel's Bridge Over Troubled Water and The Eagles' One of These Nights, was enjoying a decade of business that would be its last as a company exclusively devoted to marketing and distributing vinyl records. The 1980s and 1990s brought change, both welcomed and not welcomed, making the last years of the 20th century an era of defining significance for the music club.

Diversification in the 1980s

Columbia Record Club entered its new era of existence as an international enterprise. In 1979, the Canadian Music Club was formed, adding more than 100,000 new members by the end of the year. In 1981, the period of profound change began, touched off by the introduction of the CBS Video Library, which offered videos of old television shows and special interest programs to customers through the mail. The following year, the CBS Video Club was formed, moving Columbia Record Club into a business line that later would account for more than half of its sales. Another important addition to the club's selection of merchandise occurred in 1986, when the company began offering compact discs (CDs), embracing a format that soon rendered vinyl discs obsolete.

During the late 1980s, Columbia House's parent company became part of an industrywide trend. The U.S. recording industry was controlled in large part by foreign companies during the 1980s, with the Dutch owning Polygram, the Germans owning RCA, and the British owning Capitol. The Japanese joined the fray in 1987, when Sony Corporation acquired CBS Records and its various labels, including Columbia, for $2 billion. The transaction ranked as the largest-ever Japanese purchase of a U.S. company.

With a new parent company, Columbia House entered the 1990s and reached an impressive milestone. The company shipped its one billionth record in 1990. The following year control over the company was divided between Sony and Time Warner Inc., with Columbia House organized as a joint venture company. Each company owned half of Columbia House, with all of the assets of Sony Music Entertainment--formerly CBS Records--and the Time-Life Home Video Club combined to form the new version of Columbia House. As part of the deal that made Columbia House a joint venture between Sony and Time Warner, the CBS Video Club changed its name to the Columbia House Video Club and the CBS Video Library was renamed the Columbia House Video Library. Membership in Columbia House exceeded ten million by the end of 1991.

Columbia House continued to demonstrate its ability to adapt to change during the 1990s. The more mainstream appeal of Latin pop music, which gained widespread popularity from singers such as Gloria Estefan and Ricky Martin, prompted the company to introduce Club Musica Latina in 1992. In 1995, the company fleshed out its North American presence and increased its commitment to Latin artists and customers by establishing Columbia House Mexico. The following year, Columbia House launched its web site, giving its customers the opportunity to peruse music and video catalogs and to purchase their selections online. In 1997, after establishing its online presence, Columbia House formed its DVD club, which proved to be a vital contributor to the company's revenue volume, helping, along with other video sales, to account for approximately half of the company's revenues.

As Columbia House prepared to exit the 1990s, it was beginning to suffer from the advances made by other retailers. Nationwide, record club sales declined during much of the 1990s, reaching their peak in 1994 when clubs of Columbia House's ilk accounted for 15.1 percent of all CD sales. By 2001, record clubs accounted for less than 8 percent of all CD sales, as the success of Internet-based retailers such as Amazon.com coupled with the sharply discounted prices offered by massive retail chains such as Wal-Mart Stores, Inc. hobbled Columbia House's progress. To combat the causes of its flagging business, the company sought a partnership with one of the pioneers of online music sales, CDNow.com Inc., which maintained a base of 2.3 million online customers. The two companies agreed to merge in mid-1999, recruiting a new chief executive officer, Scott Flanders, to lead the new company. An initial public offering of Columbia House was included as part of the merger plan, but in March 2000 the deal collapsed. Columbia House,

In the wake of the scuttled merger agreement, Flanders, who had cofounded an e-commerce company, Telstreet.com, before being recruited by Sony and Time Warner, remained in charge of Columbia House. Sony and Time Warner executives wanted Flanders to resolve Columbia House's financial problems. Flanders responded by initiating a restructuring program in 2000 that produced positive cash flow by the end of 2000. In 2001, he closed the company's distribution center in Colorado City, Colorado, which was operating at 60 percent of the level of 1999.

Acquisition by Blackstone Group in 2002

Flanders succeeded in restoring some of Columbia House's luster. Despite the strides achieved, there was speculation that Sony and Time Warner were looking to sell Columbia House, a theory that became reality in 2002. In May, a New York-based private investment firm, Blackstone Group, acquired a majority stake in Columbia House, paying $410 million to take control of the company. After the deal was concluded, Sony and Time Warner each held a minority stake in Columbia House.

As Columbia House prepared for its 50th anniversary, another potential merger grabbed the headlines. In late 2003, rumors were circulating that Columbia House might merge with Blockbuster, Inc. The proposed merger promised to combine the largest video rental chain in the United States with the largest direct marketer of music and videos in the United States, joining Blockbuster's 48 million members with Columbia House's more than eight million members. Blockbuster dominated the movie rental business, controlling 40 percent of the U.S. market, but the massive retail chain lagged behind in the DVD retail market, controlling only 3 percent of the U.S. market. The company announced that it intended to increase its market share to 9 percent by 2006. Columbia House, with between 7 percent and 8 percent of the DVD retail sales market, offered Blockbuster an expedient way to surpass its goal. As Columbia House entered the mid-2000s, speculation about its union with Blockbuster dominated news about the company, offering, in some analysts' minds, a new way for the company to approach its business in the future.

Principal Subsidiaries: ColumbiaHouse.com, Inc.

Principal Competitors: Amazon.com, Inc.; Bertelsmann AG; The Musicland Group, Inc.

Chronology

• Key Dates:
• 1955: Columbia Record Club, a division of Columbia Records, is formed.
• 1963: The division accounts for 10 percent of the recorded music retail market.
• 1975: Membership in the club exceeds three million.
• 1979: The Canadian Music Club is formed.
• 1987: Sony Corporation acquires CBS Records, its various labels, and Columbia House.
• 1991: Time Warner Inc. and Sony organize Columbia House as a joint venture company.
• 1995: Columbia House Mexico is formed.
• 2000: A proposed merger with CDNow.com, Inc. collapses.
• 2002: Blackstone Group acquires a majority stake in Columbia House.