*BMG Music Service's Online Membership Up in Tough Market

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German media and entertainment giant Bertelsmann AG is claiming more than 1 million new online members during its last fiscal year to its BMG Music Service -- an indication that the paper-based music club model can work on the Internet.

Enrollments via www.bmgmusicservice.com were up 114 percent year-on-year, accounting for more than 10 percent of BMG Music Service's overall membership from Internet- and catalog-based efforts.

"Rather than separating it and trying to make it go alone, we took the e-commerce function and spread it across the core functions of our business," said George McMillan, president/CEO of BMG Direct, New York.

BMG Music Service, which is part of BMG Direct, offers more than 12,000 titles in several music genres to more than 10 million members.

The milestone comes on the heels of a July 20 decision by Bertelsmann to acquire, by the fall, struggling music e-tailer CDNow.com for $117 million in cash. The new acquisition will become part of the Bertelsmann e-Commerce Group.

Unlike CDNow, which had a loyal customer base but little cash, BMGMusicService.com has been operationally profitable for a year. McMillan refused to disclose financials, but said the music division doubled its Internet enrollment goal for fiscal year 2000, which ended in June.

The customer acquisition strategy called for a combination of e-mail marketing and mentions of the Web address on the estimated 300 million to 400 million pieces of mail that go out each year to BMG Music Service customers and prospects.

Banners, affiliation with other sites, increased traffic from search engines and reciprocal relationships also helped drive traffic online.

Such marketing made BMGMusicService.com the most visited music e-commerce site in June, ahead of rival CDNow, according to data from Media Metrix, New York. The site also ranked seventh among retailers online, attracting 4.1 million visitors in June.

McMillan said BMGMusicService.com's growth was because of support from other channels of distribution -- an advantage over online music retailers that were challenged by high customer acquisition costs and by figuring out the lifetime value of the customer.

"In the free-standing e-commerce model, the Web has been low-margin intrinsically," he said. "But also with those kind of low margins, it is very difficult to get enough of a relationship with the customer from a sales point of view to justify the cost of acquiring them."

But while online enrollments ramp up, BMG Direct won't neglect customers who prefer to shop for music by catalog.

"Of our 10 million customers, 10 percent of those customers probably will never end up being online," McMillan said. "Ten percent will end up being only online, and the others are going to be some combination of paper and e-commerce. Our biggest job in the next two years is to optimize that balance, so that we listen to the customer to figure out what works for each of those different categories."

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