Japan Hits a Sour Note on Music Sales; Changing Consumer Habits Mean Fewer Ringtones, CDs-Dragging Down Global Result

Japan Hits a Sour Note on Music Sales
Changing Consumer Habits Mean Fewer Ringtones, CDs—Dragging Down Global Result
HANNAH KARP And MIHO INADA
March 18, 2014 2:35 p.m. ET
Even with the recorded-music business stabilizing in many countries, global music revenue shrank last year. The biggest reason: Japan’s music market, the world’s second largest after the U.S., is in free fall.

Revenue from digital-music sales in Japan sank 23% last year, while physical music sales slid 13%. Overall, Japan’s entire music market shrank nearly 17% to 312.1 billion yen ($3.07 billion), according to the International Federation of the Phonographic Industry.
By contrast, global recorded-music sales shrank 3.9% last year, the IFPI said Tuesday. And excluding Japan’s results, global sales edged down just 0.1%.
Though digital sales account for only 20% of Japan’s total music revenue—far less than in the U.S. or other major markets—the plunge highlights Japan’s extreme vulnerability in a world where physical music sales are in steady decline.
If there is a bright spot in the results, it is the enormous growth potential that remains for subscription-streaming services, which are only just beginning to arrive in Japan. Proposed streaming services from companies including Spotify AB, Google Inc.,GOOG +1.61% Microsoft Corp. MSFT +3.94% , Japan’s messaging service Line Corp., and others, have yet to launch, because they are still hammering out licensing agreements, a challenge in Japan’s highly splintered recording industry.
The latest numbers highlight several quirks in the Japanese music business. Among them: Digital revenue declined mostly because of a sharp drop in demand for outmoded mobile products as ringtones, which had accounted for more of the digital market than in the U.S., the U.K. or Europe. In Japan, music shoppers would buy ringtones to sample a song before buying the whole track or album, but that pattern has faded with the rise of smartphones, which allow fans to enjoy their music through YouTube and other websites.
In the U.S., digital downloads are the biggest way that music is sold. But the basic download market is in its relative infancy in Japan. Many Japanese music companies have been reluctant to expedite deals with new digital services, attempting to protect a music-pricing system that allows record labels, instead of retailers, to set retail prices for physical music products.
That helps make physical sales far more profitable than downloads or streaming. Avex Group Holdings Inc., 7860.TO -1.08% for instance, one of Japan’s biggest music companies, said it sells albums for a minimum of 3,000 yen, or about $30, and singles for a minimum 1,000 yen, or about $10, increasing those prices whenever possible by bundling in merchandise or opportunities to meet members of the label’s pop groups.
Such bundling with merchandise and perks is another unusual hallmark of music sales in Japan. Some Japanese fans are willing to purchase several copies of the same album to get such freebies. Just 200,000 fans could easily snap up 1 million physical copies of a given album or single—a rarity outside Japan, said one record company executive.
Shigeru Kimura, 22, last month bought 15 copies of pop group AKB48’s most recent CD single, giving him the opportunity to meet 15 of the band’s dozens of members—one handshake for every copy he purchased. He said he spends about 50,000 yen a year on music, about 30% it on CDs, with the rest purchased through digital download.
Avex—which reaps two-thirds of its revenue from its artist-management and video-streaming divisions—said its revenue from physical music increased slightly last year, while digital music revenue fell.
“Our margins are much higher on physical sales so that is what we try to focus on,” said Avex spokesman Kaoru Yanagihara. “Our goal is to add more value to the CD.”
Even so, sales of CDs at Tower Records Japan, the country’s largest music chain, with 84 outlets, have been in decline. “People increasingly listen to music through free access sites like YouTube,” said company spokesman Tatsuro Yagawa.
Tatsuyoshi Kimura, a 22-year-old college student, used to spend 3,000 to 4,000 yen a month on CDs. But he rarely spends money on music any more, he says. “There are many sites like YouTube where I can listen to music free,” he said. “That was not possible five years ago.”
Reiko Masamoto, 48 years old, a serious fan of a pop band called Exile, still spends money on the group’s CDs—to support them and to get freebies like a photo book. But other than that, she has stopped buying CDs. “I check out trendy music on YouTube,” she said. “If some of them hit my heart, I’d then rent out CDs or borrow them from my friends who share the music taste with me.”
Apple Inc. AAPL +0.88% launched its iTunes music store in Japan in 2005. But SonyCorp.’s 6758.TO +0.35% Sony Music Entertainment Japan—which operates separately from Sony’s global music unit based in New York, Sony Music Entertainment—made its catalog available to Japanese iTunes users only two years ago.
Sony Music Japan said the delay was due to the time it took to make a deal with Apple. The iTunes store’s sales in Japan grew 20% last year, and for the first time it is generating more revenue for some big labels than Recochoku, a Japanese digital-music store.
Adding to digital services’ challenge in Japan: The country’s music industry isn’t dominated by a few major labels, as it is in much of the world. In the U.S., major labels distribute more than 85% of the recorded music. Japan, by contrast, has 65-plus record labels, and major labels control only 36% of the market.
Big record labels typically have been more receptive than their independent rivals to music-streaming services, in part because their vast music catalogs are able to generate relatively large royalty payments, even if the average new album or song doesn’t necessarily produce much in the way of royalties yet.
Streaming services generated more than $1 billion globally last year, with 28 million people world-wide paying for a music subscription, up from 20 million in 2012 and eight million in 2010, according to the IFPI. The few existing subscription music services in Japan generated 3.1 billion yen in 2013, up more than sixfold over the previous year.
As more labels sign on to streaming-service license agreements in Japan, that number will rise. Sony’s subscription music-streaming service, Music Unlimited—one of the few such services available in Japan—said it has the highest conversion rate from trial to paid subscriptions of all 19 markets where the service operates.
A spokeswoman for Music Unlimited declined to disclose how many of Japan’s indie labels had withheld their catalogs from the service but said the Japanese library has doubled since Music Unlimited’s Japan launch in July 2012 and the Japanese version of the service offers more than 20 million tracks.