Sound Decision

Warner Steps Up

I had planned to run another interview this week, but there's a lot happening in the music world, so let's get right to the details:

A few hours ago, the Wall Street Journal's Ethan Smith broke the news that Warner will abandon the way it distributes local music in Korea, opting instead for a new joint venture with SK Telecom (the same company that launched Helio last week in America).

The unprecedented deal gives Korea's biggest mobile carrier (and biggest music retailer!) a 40% stake in WS Entertainment, a new company that will take local talent like Baek Jiyoung from recording all the way through distribution under one banner. This is important to Korea because it gets all the players on the same page, eliminating any chance of something like the battle with Apple that was settled last week in the US and UK, or Sony's continued standoff with iTunes in Japan.

So why should you care? Think of it as a glimpse into the future:

The market in South Korea for CDs has been decimated by factors including digital and physical piracy, declining by over 75% between 2001 and 2005 to less than $80 million. Mobile phones, music executives say, represent essentially the only retail channel that hasn't been undercut by piracy. Sales to mobile phones of songs, ring tones and the like grew to more than $530 million last year. -WSJ

With that in mind, let's look at Japan's music industry through the RIAJ's 2005 annual report (which, conveniently, came out just a few days ago), and then we'll double back around. These are the key points from the RIAJ report:

-The amount of music produced in 2005 was on par with 2004 on the tail of a decade-long plunge. Singles fell from 82 million units to 65 million, but albums rose from 220 million to 237 million, their first increase since 1998.

-In its first full year of tracking, digital music sales more than doubled expectations, moving 26.7 million copies and bringing in 34.3 billion yen. This kept industry growth positive over 2004, rising from 431.3 billion to 456.5 billion yen. Also worth noting: more than 96% of digital sales were mobile downloads like ringtones.

-The number of million-selling albums like BoA's Best of Soul and Orange Range's Natural also stayed steady: 11 this year and 10 last year. This is after million-sellers fell steeply from 30 in 1999 to 9 in 2003.

-Artist debuts like Yuna Itō and High and Mighty Color fell off slightly from 340 to 307 but were still healthy compared to earlier in the decade, when debuts dropped from 412 in 1994 to 132 in 2001.

If you want to take this further, compare it with the RIAA's year-end chart. But back to Japan and Korea. While Japan has not quite matched Korea's 75% plunge, a fall from 607.5 million yen in 2001 CD sales to 367.2 million (about 40%) in 2005 is still considerable. Likewise, Japan's digital music market is only in its early stages; even though it kept the industry growing this year, it only made up about 7.5% of music sales. In Korea, mobile sales beat CDs 6 to 1.

The bottom line is three-fold. First, Japanese labels are fooling themselves if they think they have won the piracy battle. CD sales will continue to plummet, and they will face a situation as dire as Korea's if they do not act quickly. You could call their unexpected digital music revenue in 2005 a nice surprise, or you could see it as a warning sign that the Japanese music industry is still woefully underestimating digital music's power to save them or crush them.

Second, those same Japanese labels now have one path to prosperity laid out clearly in front of them. Setting aside Sony and its obsession with owning the entire pipeline by itself, the labels have taken a few Baby Steps in signing with iTunes, but mobile phones are clearly where the big action is. Now they have a model to follow in Warner. (How ironic is it that the US entertainment arm of Warner's old parent company also announced a game-changing deal today? If WB can distribute films and TV shows on BitTorrent, anything is possible.)

Finally, we should root for more of these "technology-content hybrids," as the Journal article calls them. Of course it doesn't directly matter to us whether Warner Japan hooks up with DoCoMo, but it does matter that a Japanese equivalent of WS Entertainment sees J-Pop from a fresh angle, one with fewer barriers between local music and foreign markets. In the meantime, it should not surprise us to see Korean artists take a good shot at America long before the Japanese ones get their acts together.