South Korea Split

The record industry in South Korea—the third-largest music market in Asia—has given a mixed welcome to the territory's first download subscription service.

South Korea's leading mobile-phone service operator, SK Telecom, launched online music service MelOn (short for Melody Online) Nov. 15.

Subscribers pay 5,000 won ($4.30) per month for unlimited access to a catalog of 570,000 local and international songs from more than 80 labels, including the local affiliates of Sony BMG, Warner Music and EMI.

The subscription allows users to download or stream tracks to their home computers or mobile phones. However, the digital-rights management system SKT uses means that all downloaded tracks stop playing one month after purchase.

MelOn is part of SKT's business strategy to combine online and mobile-phone music services. "Through the convergence between online and offline, SKT aims to gain a stronger leadership position among mobile operators in Korea," a company spokesman says.

SKT is a major player in the polyphonic and master ringtones business here. The company "gets much revenue from the phone music business, so we cannot ignore the importance of music," the spokesman says.

Still, many in the local industry have doubts about MelOn. Several of Korea's biggest domestic music companies—including SM Entertainment, Yedang Media and Doremi Media—have not signed on with the service, nor has the local arm of Universal Music.

Park Kyung-chun, chairman of labels body the Music Industry Assn. of Korea, says he "does not welcome" MelOn. He insists that the service's monthly rate is too low to compensate for the amount of music available and fears it will discourage people from buying CDs.

As broadband access and mobile-phone use in South Korea have increased in recent years, the retail value of record sales has steadily fallen. In 2001, sales totaled $287.9 million, while in 2003, the total was down to $162.4 million, according to the International Federation of the Phonographic Industry.

In comparison, the Korea Assn. of Phonogram Producers—which collects digital music revenue for labels here—estimates that Koreans spent up to $238 million on music services for their mobile phones in 2003.

SKT predicts that most of the current 3 million subscribers to its premium services will also subscribe to the MelOn music package.

SPLIT ON ROYALTIES

SKT has reached agreements with KAPP and some individual labels on a split of revenue from MelOn. The telecom also has a blanket royalties agreement with authors' body KOMCA.

Under those agreements, 25% of MelOn's revenue will go to KAPP for distribution to labels, and 10% will go to KOMCA.

MIAK's Park is also a director of KAPP. He says an agreement has not been reached within the body about how the revenue it gathers from SKT will be divided among the various labels, although discussions are continuing.

The issue is complicated by the fact that several of Korea's largest music companies are not members of KAPP and must negotiate individual deals with SKT.

James Whang is president of music publishing at Doremi Media, which is not a KAPP member. He says Doremi and other leading Korean companies plan to meet with MIAK "as soon as possible" to discuss the MelOn service.

"The service looks OK," Whang says, "but we're concerned about the rate they are offering and about their kind of monopoly position here."

SKT insists that its offer of inexpensively priced, "timed-out" subscriptions will lead to a "strong and vigorous" Korean music industry in the long term.

"Nowadays, most Koreans are downloading their favorite songs for free, not paying anything," the SKT spokesman says. "In this situation, offering a service for a low price will help the health of the Korean music business. We expect that agreements [with the remaining labels] will be made in the near future."

Nikki Han, director of international business at SM Entertainment, explains that labels are reluctant to embrace MelOn partly because they feel they were wronged in previous deals struck with telecoms regarding master ringtones revenue.

According to sources, the labels' and publishers' combined share of master ringtones revenue in Korea could be as low as 20%. The bigger labels here are keen to avoid a similar scenario with downloads.

"It is important to reach a deal that is fair to the labels," Han says. "But I think we'll be able to get something done."