Japan

Any sign of hope for the still-struggling Japanese music market is big news nowadays.

Case in point: The Nihon Keizai Shimbun (or Nikkei, for short)—the Japanese equivalent of The Wall Street Journal—ran a story in early June saying that Apple Computer would launch its popular iTunes Music Store in Japan in August.

At press time, the story—which did not quote any sources—was unconfirmed. But as with other media reports from the past year breathlessly announcing iTunes' imminent launch in the world's second-biggest music market, the story was widely picked up by other media for the obvious reason that iTunes is a hot brand.

The story also reignited industry speculation as to whether iTunes can kick-start Japan's music sales, which have been heading south since 1998.

Japan continues to develop promising new acts like Orange Range, Base Ball Bear, Kagrra and Ayaka Hirahara. Yet according to the Recording Industry Assn. of Japan, 2004 audio-product retail sales (i.e., net of returns) in Japan totaled 282.4 million units, down 4% from 2003, for a value of 507.8 billion yen ($4.8 billion), down 2%.

As a result, mechanical royalties from CD sales now account for less than 25% of Japanese authors' society JASRAC's annual collections. In the year ending March 31, CD mechanicals were worth 26.8 billion yen ($244.7 million), according to the society. In comparison, CD mechanicals in the year ending March 31, 2001, totaled 37.7 billion yen (equal to $307.7 million at that time), or 35.5% of JASRAC's collections for the year.

Meanwhile, JASRAC reports a 10.2% increase in "compound use" income from online karaoke service operators and downloadable ringtones to 5.2 billion yen ($141.5 million), or 8.4% of the society's collections, for the year ending March 31. Four years ago, such royalties accounted for slightly more than 1% of JASRAC's collections.

As in other major music markets, Apple's iPod has been a huge hit in Japan—which is ironic, given that Japan is the home turf of Sony, which a generation ago developed the Walkman, the first mega-popular portable music player.

Since the July 2004 launch of the iPod mini in Japan, Apple has staked what it claims is a 50% share of the country's portable digital music player market, and the company says it is aiming for an 80% share following the introduction of the iPod shuffle. Japanese electronics companies are fighting back by launching a new generation of portable digital music players.

While it remains to be seen how much of a boost iTunes can give to music sales in Japan, telecom operator KDDI has helped revive the country's singles market through its Chaku-Uta Full mobile phone-based music download service, introduced last November.

Online and mobile-based distribution will obviously help the Japanese music business. "All new distribution channels are welcome to us," Toshiba-EMI president Shoji Doyama says. "Online and mobile are the two distribution channels we expect to grow fastest over the next couple of years."

Universal Music K.K. president/CEO Kei Ishizaka welcomes these distribution channels but adds a word of caution.

"New means of distribution are already contributing to profits as an actual business model," Ishizaka says. "The most pressing management issue at the moment is ensuring that expanding our online distribution business will remain compatible with strengthening our packaged sales business."

But leading industry figures are aware that their top priority is to find and market artists and music that appeal to the public. With the rapid "graying" of Japanese society, that is more of a challenge than ever.

"Opening up and fortifying the middle-aged music market" is a crucial task for the industry, Ishizaka says. "In 2007, a lot of baby boomers will retire, leaving them with a lot of time on their hands—this will be a good market."

Universal Music International executive VP of marketing and A&R Max Hole sees a need for more local acts that middle-aged Japanese can listen to without feeling guilty.

"We need something like a Japanese Coldplay," Hole says.

"The only thing you can do is go back to the basics," Sony Music Entertainment (Japan) executive VP Mamoru Sakuma says. "Of course, the methods of selling are changing, and the users are changing, but these have to be accepted as a matter of course; changes have always taken place."

Sakuma's rhetoric is matched by Sony's impressive results for the year ending March 31. Despite the Japanese market's overall decline, revenue for SMEJ and its 30subsidiaries totaled 54.2 billion yen ($1.5 billion), up 6.6% from the previous year. Of that amount, 85.1 billion yen ($804 million) came from sales and distribution of recorded music (including product from other record companies), marking an 8.1% increase.

Crucial to Sony's success in 2004, Sakuma says, was its decision three years ago to break SMEJ into six largely autonomous labels in which younger A&R staffers were given free rein to sign promising new acts.

That strategy paid off with the extraordinary success of Okinawan band Orange Range, SMEJ's biggest hitmaker last year, which sold a total of 2.7 million albums and singles. Sakuma notes that sales of master ringtones accounted for 5%-10% of Orange Range's total sales for the year.

One music executive describes Orange Range's success as "the Utada effect," referring to the way female vocalist Hikaru Utada's steady run of mega-hits has buoyed Toshiba-EMI's sales figures. "It fits into the overall pattern in Japan today, where there are fewer big sellers, but when they 'pop,' they can still be very big indeed," he says.

Another key trend in the Japanese market last year was the "Korea effect," as Korean music—and Korean pop culture in general—became more popular in Japan, to the point where "K-pop" is now a distinct musical genre.

By far the biggest Korean star in Japan is 18-year-old female vocalist BoA, whose four albums on Tokyo-based Avex have sold 4.7 million copies since 2001, according to the label. Other South Korean acts popular in Japan include male vocalist K (Sony Music Records) and Se7en (Columbia Music Entertainment).

But Japanese labels know that there is no substitute for domestic acts with hit potential. Such foreign-affiliated labels as Universal Music K.K. and BMG Japan, traditionally strong on international repertoire but weak when it came to local acts, have started having success with Japanese talent.

For example, female hip-hop artist Ai, signed to Universal imprint Def Jam Japan, saw her single "Story" climb the charts following its mid-May release.

"We must create new superstars; there aren't enough of them," UMKK's Ishizaka says. "There haven't been any big stars like Eminem, Michael Jackson, Madonna, the Beatles, Yosui Inoue or Hikaru Utada recently."

BMG Japan president Hidehiko Tashiro says his company "has totally revised its domestic roster with attractive, unique and appealing artists. This effort is already seeing results with the recent chart successes of artists such as Sukima Switch, THC!! and MCU."

Toshiba-EMI's Doyama puts it bluntly: "The biggest challenge is to generate more million-selling hits."

In 2004 the only single that sold 1 million copies in Japan was Orange Range's "Hana," while 10 albums hit that mark. In 2003, two singles and nine albums reached the 1 million total.

Doyama adds that the launch of iTunes in Japan could affect labels' pricing policies. According to the Nikkei story, iTunes Japan will charge 150 yen ($1.41) per song. In comparison, download service Mora, which is operated by a consortium of major Japanese labels, offers domestic repertoire at 210 yen ($1.97) and international repertoire for 240 yen ($2.25) per track; non-Japanese catalog product sells for as low as 158 yen ($1.48) per track.

"Pricing strategy will become more important after iTunes launches in Japan," Doyama says. ••••