Digital Music in Japan: A Threat to the Lucrative Physical Format

During last month’s Music Matters in Singapore, Universal Music Group International chairman-CEO Max Hole highlighted in his keynote speech on how Japan, the largest music market in Asia, is “unique and remarkable in many ways”, including innovations of the 360-model, and its ability to maintain high fixed prices on CDs.

Indeed, Japan is reportedly catching up with the US and possibly even surpassing it as the world’s most valuable music market, with strong growth in the physical format; yet, it faces its own set of challenges when it comes to fully embracing the digital revolution, including music streaming.

To understand more, MBIA spoke to Mikiro Enomoto, lead writer of “Music of Our Times”, published in WIRED Japan and author of “Music Takes Us to The Future”, a special series on musicman-net.

Mikiro Enomoto

He explains, “Downloads have never worked, and there are no ad-revenue models in Japan. The market leaders in Japan are Sony Music and Avex. Those two companies dislike ‘free music’.” This means that third party apps that are not owned by the leaders will probably continue to struggle to find attractive content on their platforms.

“KDDI, the second biggest career bought KKBox 2 years ago, and KKBox launched in Japan, too. But it lacked the freemium model because of the denial by Sony Music and Avex. Also, it lacks brand-new J-pop songs. How can you win without weapons?”

Enomoto, who is also the strategy consultant for music service for the Avex Group and Sony Computer Entertainment, also shared on the history of music streaming in Japan, its various business models, and his take on the trends of music streaming in the near future.

Could you provide a brief history of music streaming and their respective business models in Japan? Which models have worked, and which have failed?

The first music streaming business was in 1998 by Motoharu Sano, the pioneer of J-Rock, who held a live-streaming event. In 2000, Spaceshower TV (the top music TV station in Japan) launched Beatrip.com, which held a special live program of major artists on a weekly-basis. The goal of Beatrip was to offer a VEVO-like service, but the advertising model couldn't support the music web service.

Sony's Music Unlimited made the second wave of music streaming services in 2010, a paid-subscription service like Rhapsody. 

Then, the mobile carriers entered the music subscription business. Their idea was, when you subscribe to the cell phone line, if you subscribed to their music service at the same time, you could buy a brand-new cell phone at a discount. That was how D-hits, the music streaming service of NTT DoCoMo (the top carrier in Japan) got more than a million paid-subscribers in less than a year.

What kind of challenges did app developers face in bringing content onto their platforms? How did they convince Japanese record labels who are well-known to be very protective of their content to place their catalogs with them?

The digital music revenues have continued to decrease since 2008, the year of iPhone 3G. Before the coming of iPhone 3G, Japan's music industry saw considerable success in Chaku-Uta, the music download service available only on cell-phones. The success was huge enough that iTunes failed in Japan, and that made Jobs consider if Apple should launch its cell phone business, i.e. the iPhone.

Later, however, the combination of iPhone and the YouTube app destroyed the Chaku-Uta business, and so the industry in Japan desperately needed an alternative plan. They chose the paid-subscription model. The revenue of paid-subscription model rose quickly. The growth-rate in 2013 was over 500%.

But I must say paid-subscription service is still niche here, especially since most of younger generation don't even know of their existence, because they are mad about free music streaming on YouTube and Nico-Nico, which is even more popular than YouTube.

Another reason is that you can't find brand-new J-pop songs on paid-subscription services, because major labels are afraid of the possibility that people won't buy CDs if they supply new J-pop songs via streaming. The market share of CDs in Japan is over 80 percent, and the average price of the CD is over JPY2,200 (USD22). The average revenue per capita is over JPY3,000 (USD30), which is #1 in the world. So they feel that subscription fees (JPY980 monthly) can't compensate it. The bad thing is, this calculation is true.

What is your take on why peer to peer sharing of music has never really taken off in Japan? After all, it was the revolution of Napster that forced the music industry to change itself outside of Japan. 

There are issues of illegal P2P usage in Japan too. But it has made less impact in comparison with the rest of the world. In 2002 when Napster and Kazaar boomed, only 6.4 percent of people used P2P in Japan. 

It is mostly because the post-pc era had already occurred in Japan since 1998. i-Mode is 9 years earlier than iPhone. If you asked the young why they didn't use PC at that time, they must have said, "PC is not cool, it is for business use." 

The young became huge fans of the cell phone in late 90's. They started to enjoy downloading music via cell phone since when Chaku-Uta service launched in 2002. Then P2P started in Japan. As it were, the solution came first and the problem came next.

Amongst the different apps, which of them has a focus more on indie artists and smaller labels?

The structure of music industries in Japan is very unique. There are over 30 "major" labels in Japan, most of them are in fact indie labels on the global basis. So every service is full of indie labels' music in Japan, compared with the global market.

Name top 3 trends on the future of music streaming in Japan that you'd expect to see over the next five years.

The first one is Life's Radio. It is the Pandora equivalent in Japan. Like the Music Genome Project of Pandora, Life's Radio gathered over 50 musicians to build up its music recommendation engine for years. The quality of the engine is as excellent as Pandora, but it lacks the ad-model for same reason I explained above. When the time comes, it is planned to expand other Asia markets with the engine, which works best with J-pop & K-pop.

The second is the possibility of the combination of hi-resolution downloads with on-demand streaming. Recently Hi resolution Walkman has been a hit in Japan. They topped instead of iPod and the like for months. It resulted a great growth of Mora, Sony's music download service, whereas the global sales of iTunes music have decreased. And as I said, the huge growth of subscription services includes Sony's Music Unlimited. Guess you can buy hi-resolution music at a discount if you are the subscriber of Music Unlimited.

The third point is Spotify's coming into Japan. It means the acceptance of freemium model, which I believe the most critical point for the popularization of music streaming service. But JPY980 (USD10) monthly won't work here, because it will mean another crash of the highest revenue per capita. So Spotify will need some big change of its pricing model if they get the permission from Sony Music etc. It is very difficult for Daniel Ek, I guess.