CMU Trends Digital Labels & Publishers

Trends: Finally coming on stream – digital developments in Japan

By | Published on Tuesday 23 December 2014


While the Taylor Swift debacle may have instigated plenty of digital music debate in North America and Europe this last month, the discussion has been centred on what kind of digital, and specifically what kind of streaming services, have the most mileage. What will that digital spectrum outlined earlier in this report look like in five years time? Though, that much of that spectrum will be filled with third-party streaming services of the Pandora and Spotify kind is generally taken as read.

Though not everywhere, as yet. In Japan – the world’s second biggest recorded music market – there is almost no streaming sector to speak of, with none of the big global names in streaming music currently operating there. Of course, there can be a perception in the West that Japan is a land of milk and honey where CDs still sell by the boatload and consumers have never really taken to digital music at all. But the truth is far more complicated, shown in the significant drop in the Japanese record industry’s income in 2013, a significant slide that dragged down an otherwise flat performance for the global business.

During this year’s Tokyo International Music Market conference, CMU’s Andy Malt spoke to key players in the Japanese music market to work out what’s going on, both in the physical market, and in the download and, especially, the streaming domain.

The Japanese music industry has always been different in many ways to that of Europe or North America, though the differences have only increased as the European and American industries have gone digital. While various labels claim ‘major’ status in Japan, there are four key companies at the top level: the Japanese divisions of Warner Music and Universal Music, Sony Music Japan (a sister company to the US-headquartered Sony Music Entertainment) and Avex. And developments in the Japanese digital space have been led, or delayed, by these four companies. And of late by disagreements between them.

It is true to say that the physical market held up longer in Japan than in most Western countries.

Traditionally the big Japanese record companies have had a great deal of control over their market. Most notably, CD prices have a fixed minimum price. This has been key in the physical market holding up much longer; people often forget that, while overall units were falling too, the UK recorded music market, for example, also had to contend with falling profit margins on every record sold, thanks to loss-leading supermarkets and VAT-dodging online stores piling pressure onto high street retailers.

Other factors that have helped keep the physical market stronger for longer include music DVD sales, which have held up much better in Japan and taken up some of the slack as CD sales did start to slip. Meanwhile some pop acts have helped keep CD sales buoyant by putting tickets for meet and greet events, and other incentives, into the package.

Most successful in this area are the girl group AKB48. A somewhat unique pop franchise, AKB48 have over hundred members at any one time, with an A-team at the front. This makes organising meet and greets on a prolific scale more realistic, while fans are also encouraged to vote on which of the wider membership are elevated to the A-team, with voting slips only available with the band’s CDs. Which means fans buy disks in there tens, sometimes hundreds (it also means copies of the CD stripped of tickets and voting slips often go for 20p a time on the second hand market).

Where these tactics to keep physical sales both up and at a premium price have worked, the impetus to move over to digital is less; indeed downloads let alone streams may be actively avoided. Aya Yamauchi of AKB48’s label King Records openly admits that the company is “very conservative towards digital”, noting that the split between physical and digital revenue for the company is still around 80/20.

But, while Japan’s physical market may have held up better than most, it is still in decline. The Japanese music industry’s future in definitely digital; the question is, what will that digital market look like?

There are, of course, some digital services in Japan. And thanks to the rapid growth of iPhone usage in recent years, iTunes is now the biggest. Though the Apple service has had to cross a number of hurdles since launching in Japan in 2005, having met strong resistance from both labels and management companies. Indeed, in order to make its first label deal, Apple had to concede to set a fixed-price per-track rate way higher than everywhere else in the world (around US$2.50 per track).

“Apple doesn’t compromise easily”, former iTunes Japan director Keith Cahoon told CMU, noting how much resistance the company came up against. And even now, he explained, management company and record label Johnny & Associates – which represents most of Japan’s biggest boybands – will not allow any of its content onto the service.

And Sony was a particularly tough label to crack too, he admits. A standalone business separate from the worldwide Sony Music company, Sony Music Japan fiercely defends its turf. “They hate Apple for killing the Walkman” Cahoon said, “and they hate Universal from growing bigger than them”. Though ultimately, he reckons, “Japanese labels just want transparency and to know that they’re going to be paid properly”.

While iTunes and therefore the download model, having finally gained some pace, has now taken a lead, there are some streaming services operating in the Japanese market, including the Sony Entertainment Network and Taiwanese streaming set-up KKBOX. Though these are fundamentally different to the likes of Spotify, in that label restrictions mean there are no playlist functions and users are required to access full albums.

Of the various reasons given for Japan’s reticence in licensing streaming services in general, and especially those taking the more flexible Spotify approach, one given over and over again by those operating within the local digital market is ‘business culture’. Many people noted that labels in the country pride themselves on reaching a consensus before making a move into bold new territories, and it’s been hard to reach a consensus on this.

Or, perhaps, no one wants to be seen to be breaking from the pack first. A representative of one streaming service said that most of the labels he spoke to in Japan were actually now in favour of licensing their content, though most would then say that they would rather come in on the “second wave”, rather than be there at launch. Of course most streaming companies in Europe and America are of the opinion that all the big players need to be on board from launch for the all important early adopters to embrace their services.

There are a growing number of Japanese labels making their music available on streaming services outside Japan though. Shotaro Kaizuka of Nippon Columbia (the independent Japanese division of the otherwise Sony-owned Columbia label) explained that he was making his new girl group Chu-Z available on digital services globally “because I want people to be able to access their music”.

As for his home market, he added: “I think Japan should embrace the foreign streaming services, because we need the competition here. But most labels are very closed to that idea at the moment”.

Certainly none of the key streaming players elsewhere in the world – Spotify, Deezer, Rdio, Beats, Pandora or WiMP/Tidal – seem anywhere near close to arriving in the world’s second biggest recorded music market. Though when it comes to partnering with those companies within Japan, rumour has it that there is a fundamental split between the four above mentioned majors, two want the international services in, two are not so sure.

Last year saw the launch of Recochoku Best, a streaming service spin-off of mobile download store Recochoku. Although seen by some as Japan finally warming to the idea of streaming music, it is notable that Recochoku was set up some of the key record labels themselves – Sony, Avex, Universal, EMI and Victor – and was, and is, a service for pre-smartphone mobiles. That this key development was still happening under the Recochoku banner actually suggested that the labels were as keen as ever to control the market.

Though more recently Universal has pulled out Recochoku, selling its stake to mobile operator Docomo. Discussing that decision, General Manager of Digital Business Development at Universal Japan, Takayuki Suzuki, said that the company felt it was now better to focus on licensing smartphone-based services like Spotify and Rdio.

Warner Japan also seems more focussed on working with the global services. Suzuki reckons that that’s because, as divisions of worldwide record companies, Universal and Warner are able to see the bigger picture; and that the Warner and Universal labels in Japan feel closer now to their sister divisions around the world than ever before. But on the other side of the table, Sony and Avex have created their own domestic streaming service Line Music, in partnership with popular messaging platform Line.

That service does shift streaming over to smartphones, but once again the labels are in control. Albeit fewer labels. Opinion is divided on what impact Line Music will have. Norikazu Yamaguchi of artist management company Bug Corp says he believes the move is a bad one, which will ultimately fail and only hold up the launch of the global streaming services in Japan even further.

All of which means the Japanese market is in a challenging position. The physical market is now following the trend seen worldwide, but a late-to-the-party download market isn’t really positioned to take up the slack, even in the short term.

As with other markets where iTunes never quite reached the heights seen in the US and UK, streaming is key to near future growth, but – unless one of those domestic services really can fly – that whole domain will remain stunted until the global services can get fully established.