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Can Spotify crack CD-loving Japan?

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Barron's Asia

Spotify is finally entering the music market that time, modernity and logic forgot: Japan.

As music-streaming services conquer the world — Sweden’s Spotify alone has 60 million users — Japan’s masses tend to buy their tunes old school. CDs and increasingly vinyl are the mediums of choice in the world’s second-biggest music market. Sales total about $3 billion, which explains why digital music giants from Apple to Japan’s own Line messaging service are investing big here.

Playing Japan makes perfect sense for Spotify, as it plans an initial public offering later this year and tries to eke out a profit. That goes too for Asia more broadly. Spotify entered Indonesia, the fourth-most populous nation, in March and operates in Hong Kong, Malaysia, the Philippines and Singapore. There’s speculation about hitting India, next. But Japan’s idiosyncrasies won’t make things easy for the music streaming giants.

The compact disc is still king for Japan’s 127 million people. Tower Records locations still thrive in cities around the nation, presenting quite a paradox. Japanese consumers proudly count themselves among the perennial early adopters of new technologies like robots, and yet cling to mediums going the way of the eight-track tape and mini disc (even fax machines are still wildly popular). As the CD goes virtually extinct and digital downloads thrive everywhere else, they account for about 80 percent of Japanese sales.

This uniqueness is a microcosm of challenges facing the economy. Like many outside disrupters — including Uber and Airbnb — Japan’s protectionist business climate is an incredibly tough nut to crack. Such advancements are greeted with great suspicion in a market prone to the “Galapagos syndrome.” The advent of Netflix and Hulu, for example, barely dented the video-rental market as chains like Tsutaya thrive. Japan has barely been touched by budget airlines, never mind the apps economy shaking up the West. Spotify can provide an earful on that after years of painstaking licensing negotiations.

Artists may have few qualms, of course. Taylor Swift and her ilk can give you earfuls about streaming slashing royalties. Japan’s homegrown pop idols, which massively outsell Western acts, in theory are pulling in comparatively more cash. David Bowie saw this coming as far back at the mid-1990s, warning that the internet would impede artists’ ability to monetize the music and recalibrated accordingly.

In that sense, Japan is fighting the last media content war. Its devotion to CDs also tells a story of how Japan Inc. sells its recording artists. CDs aren’t just a key revenue source for labels, but the promotional tool of choice.

Japanese pop music offerings are deeper and more diverse than meets the eye. But inane pop idol groups are the real cash cows. These formulaic and sterilely manufactured boy bands and girl band offer little appeal outside Japan’s borders — Galapagos, remember — but then the size of Japan’s market deadens incentives to go global. The biggest, AKB48, is as unlistenable as it is creepy — young women chosen for cuteness over singing chops dressed like pubescent schoolgirls. Each member gets her own CD cover and fans — an uncomfortable number of which are 50-something male techie geeks — call in and vote for who’s hottest.

It’s fascinating, really, that the pop industry in South Korea, whose population is two-and-a-half times smaller, succeeded globally where Japan hasn’t. Japan Inc. hasn’t come close to replicating Psy’s 2012 global hit “Gangnam Style.” K-pop’s lure is pulling tourists Seoul’s way, but few outside Japan could name a single J-pop act.

Another way Japan is different: scale matters for little. Sony Music, for example, has long had the biggest streaming service in Japan, but lacks access to Japan’s most popular acts and hits. CDs are the preferred marketing gimmick, and a successful one. Consumers gorge on collectable goods — greatest hits albums, unique packaging designs and CDs containing concert tickets (which gets some fans to buy multiple CDs). The prevalence of in-store artist appearances explains why Tower still has 85 Japanese outlets as it closes an even bigger number in the U.S.

Japan’s overly cautious music industry is emblematic of why Prime Minister Shinzo Abe’s revival plan has gotten so little traction. The Bank of Japan’s massive stimulus means little if risk adverse executives and bankers merely mind the store and won’t grow business. All too many senior executives think their job is to avoid problems and scandals on their watch, not raise Japan Inc.’s game. It really is akin to a game of musical chairs.

Spotify may indeed squeeze beautiful music out of Japan’s masses. But it’ll have to work hard to avoid hitting some sour notes.

William Pesek is executive editor of Barron’s Asia. www.barronsasia.com