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Is BurnLounge a pyramid scheme?

By Hector Meza

Every so often, a new product or service comes along that claims it will revolutionize the entertainment business. So far, only Apple with its iPods and iTunes store has been able to successfully create a new distribution model for music (and now, with its portable video-capable device, it seems it might do so as well for movies and visual media.) However, one must remember that other similar ventures, including the reformed Napster and Yahoo! Music, have failed to capture a considerable market share.
A recent article in the trade paper Billboard profiled a startup company, BurnLounge, that “wants to democratize the music retail business.” “The web-based service,” continues the article, “provides the music library, e-commerce tools and business management software for virtually anyone to own and operate their own digital download store.” In other words, the website allows one to curate one’s own little iTunes music store using the catalog of five major record labels for an initial setup fee of $29.95. Billboard describes the model utilized by the company as multilevel marketing (MLM), similar to that of consumer products companies like Amway or Mary Kay Cosmetics, but unlike these there is no purchase of inventory necessary. However, there are different tiers of membership to the service: The highest is called the Mogul level—for which the company charges an extra $100 annually plus $14.95 a month—followed by the Affiliate Program ($6.95 a month) and finally the lowest level, the Fan Program (just the initial setup fee). A “mogul” receives a commission from the sales of the music files from his own store plus those of any affiliates and fans signed up under him, while affiliates receive commissions from their own sales and those of fans. Fans do not receive any monetary compensation; instead, they get points that can be exchanged for free downloads, merchandise, and “exclusive” discounts. To me, it already sounds like a recipe for disaster.
Last week, a friend invited me to a meet-and-greet hosted by the company in the basement of the trendy and odious Coffee Shop in Union Square. A spokesperson for the BurnLounge, a heavyset white man with a thick Texan accent and a self-described “successful Business Man that loves music” (especially R&B/hip-hop) whose favorite game is football, delivered a presentation that described the services offered by the company to a roomful of desperate-looking musicians (mostly of the hip-hop variety). This man never failed to use bombastic words and catchy phrases (“give to the musicians the means of distribution,” “Stop hypocrisy and start the profiting”) and drop terms—such as “VIP events,” “EXCLUSIVE,” “red-carpet,” and “A-list”—and names like Carson Daly and “celebrity DJ” Rick Dees when telling the starry-eyed, would-be entrepreneurs how John Doe in Iowa was already making three grand a week by signing-up for this life-changing opportunity. I guess this is the music biz equivalent of a Tupperware party.
There are many problems that plague marketing schemes such as this one. The management at BurnLounge must know this as they have come up with terms such as “concentric retail model” or “community marketing” to describe their approach. An article in MLMwatch.org, a website that has among other missions to make people aware of “the risks in becoming a multilevel distributor,” points out that:
“MLM is not exempt from the normal rules of the market and the way goods and services are sold. MLM is intrinsically unstable, guaranteed by design to oversaturate the market with no one noticing. MLM’s can never equalize into profitability the way companies in the real world can. The only money to be made is not from the product or service, but from the losses of people lower down in the organization.”
A case-study of Mary Kay by Anne Coughlan at Northwestern’s Kellogg School of Management provides an example of the dubious profitability of one particular multilevel marketing organization (referred to in the article as Network Marketing Organization or NMO):
“NuSkin, a Utah-based NMO selling personal care products indicated that the average commission income of its lowest-level distributors (comprising 69.9 percent of the its network) was $311 per year in 1994, while 2 percent of its distributors earned over $40,000 per year from NuSkin.”
Although with BurnLounge there is practically no cost for the inventory, the market that becomes saturated is that of people willing to sign up for the service. The company must then derive most of its profits from the membership and maintenance fees plus from the sale (for a mere $300) of their “motivational”, oops, I mean “educational” DVDs, named “BurnLounge University.” If a lot of people buy into BurnLounge, what is to distinguish one music store from another one that has a very similar catalog? And why not just buy the music from iTunes? Does one really want a free t-shirt and to attend the latest party with the Olsen twins and Jay-Z at the Marquee? The only way a lowly affiliate can turn a profit is by conning others into the website while there are unsigned people out there. In other words, get in there early, dear New York Press reader! Only you can be the next Tommy Mottola.
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