Cell Phones Morph into Music Players
Cell Phones Morph into Music Players

Cell Phones Morph into Music Players

Cell Phones Morph into Music Players

Watch out, iPod! The hottest mobile news on planet Earth this week is KDDI’s announcement of a full-song mobile download service for 3G. If the service launches as planned, the profits could be enormous for carriers and labels alike. But all is not well in Japan’s mobile music land and those pesky FTC raids are just part of the worry.Part 1 of a Series.

Part I

Without a doubt, this week’s news of lasting significance was KDDI’s Thursday announcement that the company would launch a full-song download service on 3G late in November.

According to a report in the Financial Times, users will be able to choose from 10,000 songs on six websites and download them to 3G mobile phones for several hundred yen each. The company said it has signed up 20 record labels and will open the service to all interested content providers.

KDDI President Onodera was quoted as saying that the service was “ground-breaking,” and that the company wanted to make the music download system a “defining service” for its mobile arm.

If they launch as planned, KDDI will score a significant coups in the Japan market, beating larger rival NTT DoCoMo and No. 3 market player Vodafone to the punch with a mobile service that many in the industry have long sought.

The provision of full-song, near-CD-quality downloads to mobile phones via a packet network (with flat-rate billing) is seen by many as the ultimate evolution of the mobile Internet first launched, ironically, by NTT DoCoMo back in February 1999.

The transformation of the mobile Internet experience from 4-voice polyphonic ring tones, simple GIF and bitmap images, and black and white displays to real, actual music downloading a la the Walkman will be complete.

But it would be premature to declare that history is over.

In fact, there are questions on how (and how soon) 3G music download services such as KDDI’s can become as widespread a success as earlier, 2G digital content.

The service will likely force the industry into an even bigger restructuring than the start of real-tone download services (Chaku Uta) back in December 2002 did.

Before, all a content provider had to do was pay a 5-yen-per-download fee to JASRAC, Japan’s artists’ rights body, and then was free to create as many ring tones as desired. A provider was, in effect, paying for sheet music rights; production of the actual chords was then up to a bunch of guys sitting at PCs.

2G ring-tone production was technically difficult (and therefore expensive) since each carrier (and each handset) implemented different standards and different chips, meaning that a single ring tone might have to be produced in dozens of versions.

But many, many providers got into the business (the existing karaoke service providers had huge existing libraries and have subsequently gained an unassailable lead in the ring-tone market) and many, many customers downloaded ring tones, typically paying 300 yen per month to access 4 or 5 downloads. Revenues and profits were strong across the board (more or less); JASRAC reported 105,280,000,000 JPY in royalty revenues in 2001. A sizeable chunk, some 3.8 billion yen according to Music Media Watch editor Steve Myers, coming from ring tone downloads. Wow!

As a result, the 2G mobile market was wide and deep, and the strong revenues were shared widely across many companies. Also, it was difficult for an individual subscriber to run up a huge fee; even if Taka-kun or Kumi-chan subscribed to a dozen ring tone services, the monthly fee was still less than, say, 2,000-3,000 yen (more or less what a typical commuter might spend at Starbucks in a month).

The 30-second, near-CD-quality real tones, however, are the actual audio track encoded in MP3, AAC, or similar, format. Since the content provider is therefore providing the actual music as the artist recorded it, in addition to JASRAC’s fee, the provider must pay a significantly larger rights fee to the “master rights holder,” which in Japan is generally the record labels.

Compared to 2G, 3G real-tone production is quite simple and cheap (since the format is standard and most handsets implement the playback in the same way). Real-tone files in Japan have so far run at 200 KB inching up to 300 KB and the service was launched on KDDI’s CDMA 1X 3G network (December 2002), later being joined by NTT DoCoMo with their W-CDMA 3G system.

In Japan, the master rights for several major Japanese pop artists are controlled by Label Mobile, which began as a joint venture between five record labels and has now expanded to include 11 labels as shareholders. Label Mobile, for example, charges 100 yen per download, of which 75 yen goes to the master rights owner and the rest is split between the carrier and the provider.

In general, real tones sell for 50 to 200 yen each, depending on individual providers’ subscription pricing. Also, unlike with 2G, it is possible to run up a multi-thousand-yen bill; the tunes sound great, are heavily promoted, and the Shibuya teens seem to enjoy all they can get caring not a whit for dad’s monthly bill.

For these reasons, few providers have gotten into the 3G real-tone business and the industry has morphed into a deep but narrow shape. Nonetheless, in July 2004, KDDI announced 100 million Chaku Uta downloads on their network; clearly, revenues and profits with 3G real tones are still huge. Label Mobile’s President Mike Ueda is predicting that Chaku Uta will be a 20 billion yen business in 2004 and a staggering 100 billion yen in 2006.But the competition is tight, margins are tighter, and the labels now have an iron lock on royalty fees they couldn’t get under 2G.

And while the existing 2G ring-tone business won’t dry up anytime soon, the writing is on the wall; according to Steve Myers many have slowed the development of new content for their ring-tone sites and there has been a general if unspoken agreement to wait and see how real tones (and the long-expected full-song) download services would play out.

Well, the future is here, and 2G ring tones services — like some digital version of a large Titanic just as Leonardo and Kate leap off the fantail into the frigid North Atlantic — are headed irreversibly down.

But all is not well with 3G music services.

— End of Part I —

Next week: Network challenges at DoCoMo and KDDI, the FTC raids Label Mobile, and the indies strike back!

— Daniel Scuka