While Japan’s music market is second only to the US, with $3.5 bn in CD sales, it ranks first in mobile music in terms of market size, service penetration and sophistication. Japanese record labels have managed a powerful comeback from their failure in the wild, MIDI ring tone-based 2G music market to massive success in the master-rights-based “Chaku-uta” 3G universe. They already own a 20-percent share of Japan’s $1-billion-plus mobile music market. How did they pull off this stunning achievement? The labels identified their core assets in the mobile universe: trust and convenience.
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While many music labels are still debating how to get into digital music, Japan found the answer. And mobile music in this country is big business. In 2004, sales of music CDs were about US$3.5 bn while sales of mobile content (i.e. content fees paid to content providers, excluding the even larger data traffic fees pocketed by operators) were over US$2.0 bn; of this amount, 50 to 60 percent was music related.
Record companies have long been frustrated in Japan by the fact mobile music — essentially ring tones — were not earning them a single yen since they made use only of composer’s rights and involved cheaply paid students or musician wannabes trying to get the closest match to original songs with a 8-track MIDI files.
No going back
When introduced in December 2002, Chaku-uta changed the game: as the rights for extracts of original songs were under control of record labels, they finally had an opportunity to get into mobile. And for the customers, there was rarely any going back. After once trying a Chaku-uta as a ring tone, most refuse to buy any more lower-quality polyphonic ones.
Two years later, Chaku-uta represent 20 percent of mobile music sales, equivalent to US$200 million in sales. The other 80 percent (~US$800 million) corresponds to the estimated 2 billion MIDI-based ring tones that are still being sold. The difference is that with Chaku-uta, record companies are getting a revenue share even better than in the case of CDs (through the company Label Mobile, who sells most major labels’ content and over 60% of all Chaku-uta).
During these two years, only KDDI — the second largest operator with some 20 million subscribers (compared to NTT DoCoMo’s almost 50 million) — made Chaku-uta compatible on all its handsets. Chaku-uta proved to be an unexpected market driver and gave a terrific advantage in retaining or gaining new customers, leading KDDI to change its marketing focus from “video-download” and “GPS” to “Chaku-uta” within a few months of the service’s launch.
As a result, competitors NTT DoCoMo and Vodafone joined the movement, and the market for Chaku-uta is expected to grow to US$300 million in 2005, serving more than 30 million Chaku-uta-enabled phones (an approximately 30 percent technology penetration in the Japan market) from 2004′s 20 million.
In 2007, when most phones in Japan will have become Chaku-uta compatible thanks to handset replacement mechanics, the market will very likely represent over US$1 billion, equal to or more than one-third (!) of the CD market size.
What do users value?
For years, labels have controlled the master rights to artists’ music. However, mobile phones are changing the game of distribution, and independent labels and artists now have a means to reach their rabid fans directly. The Web, and especially mobile, in Japan has been redefining people’s relation to music. While consumers have been made to forget about the (very high) price of physical CDs for the last ten years, the dematerialized, digital form of music and the widespread penetration of music players (MP3 player or mobile phone) are radically changing consumers’ expectations. When all you get is a digital file stored and locked on a device, what is the right price?
I would like to draw a comparison here: when digital cameras first came out, pro and prosumer photographers looked down on them, claiming that the quality would never compare to “analog” ones.
Today, most people have realized they are not going to print out large prints of every picture they take; they would rather buy a digital camera, which makes up in versatility and general convenience what they may lack in quality (and most recent digicams don’t lack much in quality at all!).
When the Internet has made it possible to get practically any kind of information digitized on your computer, why pay for digital music? Particularly when it has to be downloaded via a pricey mobile network? My answer is that people pay for two things: (1) trust, and (2) convenience.
First of two key elements: Trust
In this case, “trust” is the trust consumers place in the service provider, or the brand name, to provide a superior-quality product. In the case of mobile music, how many of us have experienced downloading a promising ring tone and ended up with a sloppy, tinny tune typed in by a tired, part-time worker? For content providers, building trust in the quality of their products and — even better — in a brand name will be key to their survival when the market shifts from polyphonic ring tones to master-rights-based music. This has already started in Japan and will happen overseas within twelve to twenty-four months, time enough for people to upgrade their handsets enabling a better mobile experience, the network to evolve to high-speed, and services to evolve to sustainable models away from the pay-per-download, hit-and-run game.
Mobile phones are superior in that they have a direct connection to end users; no broadband connection nor PC is required, thank you very much.
… and convenience
Japanese who frequent the ubiquitous conbini convenience stores know what this is about. Sure, they are routinely charged 20 to 50 percent more for foods, drinks, snacks and other items than in a regular supermarket — but they can make the purchase from a trusted source at 4:00 AM or just a few steps from a subway station entrance. Regular supermarkets can’t compete on opening hours or location, so they don’t even try and the conbini business is booming.
For mobile music, iPodders and owners of other, less-talked-about MP3 players still need to own a PC and subscribe to a broadband connection. This corresponds to the regular supermarkets. Mobile phones — the “conbini” solution — are superior in that they have a direct connection to end users; no broadband connection nor PC is required, thank you very much.
This advantage was mentioned by KDDI’s CEO in November last year, and repeated this year by industry figures including Bill Gates, a guy who hasn’t gotten rich by being wrong. In addition to the price of the music itself, many users are quite willing to pay for convenience. And it isn’t just a Japan-specific, end-user culture thing; many people in multiple markets will be willing to pony up for similar convenience.
Just as Internet music stores saved you the time and money or the subway or bus ride to the CD shop, mobiles save you from needing a PC and a broadband connection — plus they save you time and provide instant fulfillment of your music desires. Mobile music is not only about the large crowd of casual users, but also about providing the shortest, fastest way for impulse buyers to exercise their impulses.
Usually, to remake an entire industry, a revolution in fundamental technology has to occur. Just as it won’t be until fuel cells arrive en masse that a real revolution in the car industry can occur, the music industry has had to wait for widespread broadband Internet before its unique assets have become obvious.
While the future of recorded CDs seems bleak, and in some countries CDs are now seen more as a way to promote an artist than a source of profit, music is already selling and will sell even more in the future, via the Internet. But this channel will surely be usurped by the mobile, because of, first, their direct connection to the network, and, second, because mobiles now greatly outnumber PCs.
In Japan, you can find roughly 90 million mobiles and less than 80 million PCs; in China, 350 million mobiles and not even 100 million PCs.
With the future of mobile music clearly bright, we can ask ourselves two questions: First, when buying music, what, exactly, are people buying? And second, when selling music, what, exactly, are record companies selling? Are these the same thing? These are questions for which no answer is obvious at this time, but that will strongly affect the industry as mobile music gains wide adoption in markets outside Japan and Asia.
Rethinking the value of people’s time — parallel with television?
I should probably end this long article here, but there is one last point worth making. About a year ago, the CEO of a major French TV channel was explaining what he saw as the essence of the TV business and he let those words slip: “There are many ways to talk about television, but in a business perspective, the essence of our job is to help Coca-Cola, for instance, sell their products.”
This would have gone rather unnoticed as being a down-to-Earth, materialistic view of the media business if the CEO hadn’t gone further to say: “But for an advertising message to be perceived, people’s brains have to be available. The role of our programs is to do this: entertain… and relax the brain to prepare it between two messages. What we are selling to Coca-Cola is ‘available brain’ time.”
While this may sound offensive, and these comments did create a stir in French print, broadcast and online media, it’s difficult not to make the same parallel in the case of mobile music. What if people’s time was actually valuable enough that they should be paid to listen to CDs in the hope they will attend concerts and buy other goods?
In China, where music fans can get CDs very cheaply (for about US$1) due to widespread piracy, and even “official CDs” are very cheap (US$2 to 4), this is practically the only way money can be made with music. Record company revenues flow primarily from concerts and product endorsements. And now new models suited to the digital age are also emerging, with portal sites where amateurs post their creations, helping them to be (occasionally) spotted by record companies looking for emerging talent.
Rather than a threat to the music business, both fixed and mobile Internet should be seen as tremendous opportunities for new business models.
– Benjamin Joffe
Author’s note: Thanks for taking some of your highly-valued time to read through this lengthy article. Its content is based on the report co-authored with Vectis International, which just might help your business improve and thrive in the next 2 to 3 years of mobile-music-induced intermediation (click here for more details). — BJ