Japan Lags In Digital Music Race

Japan may be one of the world's most advanced markets for mobile music applications, but it lags behind when it comes to online music services.

This situation might change soon, with the expected launch of several new services, such as MSN Music Service and Apple Computer's iTunes, in the world's second-largest music market.

At first glance, selling music online to technology-savvy Japanese music fans seems like a no-brainer. Some 52% of Japanese households are connected to the Internet, according to the International Federation of the Phonographic Industry; 28% have broadband connections.

But the local industry here anticipates that iTunes and MSN Music will face major hurdles in Japan.

One is pricing. Japan's homegrown online music services charge significantly more than their counterparts in other major music markets because of the higher wholesale prices set by record companies here.

For example, the country's main legitimate download service, Mora, offers Japanese repertoire for 270 yen ($2.50) per track and 2,400 yen ($22) per album; international material goes for 240 yen ($2.20) per track or 2,025 yen ($19) per album.

That compares with iTunes' 99 cent tracks in the United States.

The other big hurdle overseas download services face is Japanese labels' stance on copy protection.

Unlike their American counterparts, Japanese record companies have enthusiastically embraced copy protection. Generally speaking, tracks from domestically pressed, copy-protected CDs can be digitally copied onto MiniDiscs but not onto CD-Rs or computer hard drives.

Similarly, usage rules for download services are tougher than in other markets. The Mora service, for example, allows users to copy tracks to compatible players only up to three times.

Online download services must also anticipate competition from mobile-phone-based downloads, which many observers see as having greater potential. Mobile-phone downloads will get a big boost as new-generation 3G mobile phones become more popular.

Some think the digital music delivery business in Japan will skip the personal computer stage and move directly to mobile-based services, with master ringtone providers evolving into the full-length song download business.

"In Japan's music and telecommunications world, it seems many people see downloads and mastertones as competing for customers, and that blurring will become heavier when full-song mastertones become available, which some say will be within this year," a source says.

Still, the MSN and Apple services are on their way to Japan; both companies are actively negotiating for repertoire with Japanese labels.

"MSN Music Service will launch in Japan later this year," says an MSN representative, who would not provide additional details.

The Japanese version of iTunes should also be up and running by the end of the year, a source tells Billboard. "They're going to do Australia and New Zealand, and then they're going to do Japan," one well-informed source says.

Apple is tight-lipped on the subject. "We're not in a position to disclose any information to the public [about iTunes in Japan]," Apple Japan senior public relations manager Takashi Takebayashi says. He says the iTunes team at Apple's headquarters in Cupertino, Calif., is working with Japanese labels ahead of the service's launch in that country.

Labels confirm there are discussions with the new services. "Warner Music is in negotiations with MSN Japan and anticipates closing an agreement in time for the service launch," a Warner Music Japan representative says.

As for Apple, the Warner representative says, "we look forward to working with them when they enter the Japanese market."

Other labels are less committal.

"We have been approached by some companies, including Microsoft and Apple, which are going to start legitimate music-download business[es] in Japan," says a representative for Avex, Japan's biggest independent label. "Avex is willing to expand opportunities to provide its repertoire to listeners, so we will give positive consideration" to Microsoft and Apple.

Sony Music Entertainment (Japan) offers a similar line. "SMEJ is always open to discussing online music service with any company," says a Sony representative, who could not comment about specific negotiations.

The direction of the negotiations may not entirely be in the hands of the local executives.

"I assume the [local affiliates of the major international labels] will be forced by their head offices to license their repertoire to MSN and iTunes," a source says.

Apple's iPod digital music player already is selling strongly in Japan—despite the lack of a complementary iTunes service in the territory. Exact iPod sales figures for Japan are not available.

Industry analysts say Japanese iPod buyers are copying their CD collections onto the players as well as copying tracks from rented CDs. Japan is unique among major music markets in having a thriving CD-rental business, and rented CD singles cost just 100 yen (91 cents).

LABELS OFFER DOWNLOADS

Also slowing the growth of the legal download business in Japan is Japanese labels' reluctance to allow third-party sales of their product.

For example, SMEJ, the territory's biggest record company, created the template for Japan's legal download business when it launched its "bit music" online music store in December 1999 with songs priced at 350 yen ($3.18).

Other Japanese labels, such as Avex and Toshiba-EMI, soon launched their own download services. But with relatively high prices and a limited range of repertoire, the services did not catch on.

This lead to the formation of Tokyo-based Label Gate, which is owned by 17 Japanese labels. Label Gate began offering downloads last October; in March, it was rebranded as Mora when Toshiba-EMI was added to the list of participating labels.

Many of the Label Gate owners are shareholders in Label Mobile, a Tokyo-based company that supplies master ringtones for mobile phones.

The offices of Label Mobile and several Japanese labels were recently raided by the government's Fair Trade Commission on suspicion of violating Japan's Anti-Monopoly Law by refusing to allow other companies to license their repertoire for use as master ringtones.

There is no indication whether the FTC also plans to investigate the Japanese labels' download pricing policies. (Japan's saihan system, which gives labels the right to set retail prices on physical CDs, does not apply to music downloads.)

Download sales are still minimal. In August, the Mora site sold about 150,000 downloads, according to the service. It currently offers 70,000 songs for download and plans to expand that number to 150,000 by March 2005.

One industry source says Sony has a vested interest in maintaining Mora as Japan's leading download portal, noting that the service uses Sony's So-net technology. This can explain, the source says, why Sony is not so keen to embrace the arrival of potential Mora competitors.

Besides Mora, other legal music download services in Japan include Excite Music Store, launched in May on the Excite portal site; OCN Music Store, introduced in June by Internet service provider NTT Communications; Listen Music Store, launched by Listen Japan in June; NTT Communications' Love Music Store, which also began operations in June; and cable-radio operator Usen's Ongen service, which debuted in August.

THE FILE-SHARING SCENE

Even though Japan has lagged behind other major music markets in developing a legitimate download business, unauthorized file sharing appears to have had less of an impact on its market compared with other territories.

Computer software manufacturers' trade group the Assn. of Copyright for Computer Software estimates that as of April there were some 986,000 users of file-sharing software in Japan, or about 3.5% of the country's Internet users.

London-based analyst Mark Mulligan at Jupiter Research says the comparable rates for the United States and Europe are 12% and 20%, respectively.

One reason, says Hiroshi Yamazaki, associate GM of Toshiba-EMI's New Media Group, is the language barrier. "There aren't many Japanese-language file-sharing services," he says.

Local labels body the Recording Industry Assn. of Japan has taken a tough stance on file sharing, and this too has reduced the piracy threat.

In January 2003, the RIAJ won a landmark legal victory against Tokyo-based company MMO Japan, which had been distributing a Japanese-language version of the File Rogue file-sharing program. That has largely deterred others from offering similar services.

Private think tank Nomura Research Institute estimates Japan's online music-download market will grow from 1.5 billion yen ($13.6 million) in fiscal 2003 to 88.3 billion yen ($802.2 million) in fiscal 2008. It should then account for some 20% of Japan's recorded-music sales.