BurnLounge Abandons MLM

I just got another message from Len Clements letting me in on the latest developments he had on the whole Burnlounge mess. Once again Len has let me post the entire alert. Thanks Len! I have tons of traffic from some of the forums, especially a couple tied to SC Football.

I know lots of you think this is becoming the Burnlounge blog, but is more interesting Amway changing there name back to Amway.

Affiliate Sales Opportunity Will Remain

June 21st, 2007As predicted in Alert #81, BurnLounge has not only dropped the payment of bonuses on the enrollment packages, they have removed the multilevel aspect of their commission system completely. BurnLounge, a reseller of downloadable music, will retain an affiliate-type compensation system where the direct seller of the download will receive a significantly larger commission, and no compensation will be paid to anyone "upline" from the seller. Essentially, there will no longer be an upline, nor any formal hierarchy of affiliates.

There was to be a hearing in front of a circuit court judge last Tuesday (June 18th) to decide whether the FTC's attempt to shut the company down would be successful. Apparently the decision to adopt a non-MLM commission structure was sufficient to avoid such an injunction (although, as of this writing, no formal decision has been announced by either party).

A company announcement is forthcoming and will appear on their web site soon. In the mean time, here is a preview of the key points to be addressed:

BURNLOUNGE SIMPLIFIES BUSINESS MODEL

New Model Will Drive Community Expansion and Greater Rewards Per Sale, Benefiting Retailers, Artists, and Partners

New York, NY, June 21, 2007 - BurnLounge, the world's first fan driven digital download community, today announced a simplification of its business model that will eliminate the network marketing element of its business while providing greater business benefit for entrepreneurial members of the BurnLounge community.

The company intends to focus on its free service and will deliver increased rewards per sale. BurnLounge will continue to build strong partnerships and high-margin product lines providing a viable business for its members and artists. The free service is comprised of BL2, the software that enables anyone to open up their own download store and become a digital retailer; and BurnPages, a personal web page with customizable widgets.

"Despite our strong disagreement with the Federal Trade Commission's complaint against the network marketing portion of the business, BurnLounge has voluntarily decided to make this bold move to show our commitment to our artists, partners, and independent retailers who have supported us from the beginning," said Grant D. Johnson, chairman and chief executive officer, BurnLounge.

Johnson added, "Network marketing was a unique channel to promote our products, but not integral to the future success of the company and its retailers. We took this strategic action to benefit the greater BurnLounge community."

With the new model, BurnLounge retailers will earn even greater compensation per sale in a more traditional affiliate marketing structure. The new model will be simpler, and retailers will soon be able to expand their businesses beyond music into high-margin entertainment products such as movies, videos, portable devices, and accessories.

"Our retailers are BurnLounge's top priority, and we will make this transition together," said Ryan Dadd, co-founder, president and chief operating officer, BurnLounge. "They have played a vital role in the growth of our company and we remain committed to their success. BurnLounge will continue to give its retailers strong revenue-generating products."

Stephen Murray, co-founder, president of entertainment and chief creative officer, BurnLounge, added, "The new model is a win-win situation for our members, the company, and for the industry. It is a revolutionary concept and a revolutionary product. Making this change to our business model to focus on our core products of BL2 and BurnPages makes it much easier to grow this community."

Commentary: This restructuring was spun in the best possible way, under the circumstances. Although, had I written it I might have left off the last comment about this change being a "win-win" for everyone, and it making it "much easier to grow this community." This invokes the obvious question: If true, why did the FTC have to demand that you make such a change?

A network marketing compensation system surely would have caused BurnLounge to grow faster (as it apparently was doing) and need not have been completely abandoned to satisfy the legal issues described in the FTC's complaint. Only the bonuses paid on the initial and annual payments for online store "packages" were problematic in that they created a direct financial reward for recruitment (since only new recruits would ever purchase them). The paying of commissions down six levels on the actual sales of music downloads, which clearly could be, and were being, purchased by non-distributors, surely was not an issue of legality to the FTC on it's face.

However, the aspect of requiring a certain number of download sales to qualify for bonuses on the reseller packages absolutely could have been legally problematic. As one industry expert I spoke to said, "BurnLounge probably had more sales to family pets than any other company in the industry." That is, the affiliate made token sales essentially to themselves, but under the name of friends or family members (and yes, even Fluffy and Fido occasionally appear in MLM sales lists, although I have no evidence this occurred in BurnLounge). It is not uncommon for MLM programs with a sales quota related to low cost products (in this case as low as 99¢) to be artificially met out of the distributor's own pocket. But this issue would have also disappeared along with the bonuses on store packages.

I might have tried adding a separate catalogue of generic MLM audio/video products and then maintaining a simple matrix or unilevel pay plan (although, under any circumstances, it should never have been six levels deep - four maybe, five at the most). This catalogue could have included non-MLM specific motivational and sales training materials as well (think Nightingale-Conant). As I said in Alert #81, the relatively low cost and profit margin on the products would not have left enough income to maintain a stand-alone, full time income opportunity. But with the addition of a generic tools library BurnLounge could have been a successful supplemental, or side-program, that networkers could have offered to their existing downlines.

But then, we also don't know what went on during those discussions with the FTC the last few days. As can be seem from cases such as Equinox and Five Star Auto Club (see this FTC letter), to satisfy the FTC their target often times must stretch well beyond what ever point they would have had to be at to have avoided their wrath in the first place. This could very well have been what happened here. BurnLounge may not have been given the option of revising their MLM aspect, but only to remove it altogether. But this is all academic. BurnLounge is not a multilevel marketing company anymore. Thus, is no longer relevant to an MLM Alert eLetter. Now it's only a matter of how much they remain relevant to the music industry.

Len ClementsMarketWave, Inc.