Commentary / Japan

The distribution revolution

by Takamitsu Sawa

The domestic market for internet shopping has been growing steadily at an annual rate of nearly 10 percent, according to a survey released last year by the Ministry of Economy, Trade and Industry. In fiscal 2017, Japan’s online shopping market reached ¥16.5 trillion, accounting for 5.79 percent of total household spending. Since the ratio has already passed 10 percent in such countries as Britain, China and the United States, the size of the Japanese market is likely to double over the next several years.

Online shopping is attractive to consumers since the prices are relatively low, the goods are quickly delivered to the designated places and there are no additional cost for credit card payments. In addition, there is a large variety of merchandise for customers to choose from, and a premium member of Amazon Japan can enjoy free delivery by paying annual dues of ¥3,900.

Sellers enjoy the following benefits: A sharp saving on rent and labor costs since they don’t need a physical store; they can attract customers to fast-selling commodities based on their past purchase histories; and inventory stocking becomes unnecessary for big e-commerce companies like Rakuten Inc., which have large numbers of virtual shops operating on their platforms.

There is no doubt that the e-commerce market will expand further with the exception of fresh foodstuffs. Following the abolition in 1998 of the law regulating large-scale retail stores, many small stores on shopping streets in urban areas have closed down, bringing about drastic changes in the retail market. Customers now go to supermarkets or drugstores to buy daily necessities, to volume sale outlets to purchase home appliances and to convenience stores to make smaller purchases.

But even more dramatic changes are taking place now as volume sale outlets, whose expansion had led to the closures of many small shops, have now become prey to online shopping and run the risk of becoming no more than product-display facilities.

In sum, internet shopping provides benefits to both sellers and consumers, and should be regarded as the main player in the third revolution in the distribution of goods. Since fiscal 2013, internet users have accounted for roughly 83 percent of the population. And today, a majority of e-commerce customers are using smartphones rather than personal computers. The government’s push for expanding cashless transactions will likely accelerate consumers’ reliance on online shopping.

The impact of the revolution in distribution will take on an even greater proportion when it comes to e-books, computer games and music/video software. Once a book is digitized, the marginal cost for selling an additional copy of that e-book will be nearly zero. In August 2016, Amazon Japan launched a new service called Kindle Unlimited which enables subscribers to choose from among more than 120,000 titles in Japanese and over 1.2 million titles in foreign languages at a cost of ¥980 per month.

As the number of subscribers increases, so does Amazon Japan’s revenue without incurring any incremental cost for coping with the expansion of the subscription base. An important point of this service is that the number of books that can be downloaded per month is limited to 10, because beyond this limit any book that subscribers find interesting or useful would most likely be downloaded for a fee or purchased in its print edition. In other words, the Kindle Unlimited service can lead to a growing number of e-books being downloaded for an additional fee or print books being purchased.

Meanwhile, more than 10 companies have already established a broad customer base for another type of service, which offers a subscriber who pays a monthly fee of around ¥500 unlimited access to over 200 magazine titles, most of them weeklies. DMagazine, the largest among these services, reportedly had 3.25 million subscribers as of March 2017, according to an e-book business survey. Assuming that subscribers pay an average of ¥400 per month, its annual turnover is calculated at ¥15.6 billion. The same survey estimates that the combined total sales of these 10-plus firms offering all-you-can-read services for magazines exceeded ¥40 billion in fiscal 2018.

To encourage publishers to have their magazines placed in the subscription service, these companies presumably link their payments to the publishers to the frequency or the number of pages subscribers have read. Even if such payments to the publishers and the cost of digitizing magazines are taken into account, services like DMagazine are assured of stable profits as long as a certain level of subscriber base is maintained because no marginal cost is incurred to meet an increase in the number of subscribers.

It is well-known that the publishing industry is beset with declining sales, with magazine sales showing a particularly steep fall. Magazine sales, which were valued at ¥869.4 billion in 2007, plummeted to ¥499.7 billion in 2017. It is not statistically possible to estimate how much of that decline is attributable to the introduction of all-you-can-read online services. But judging from the large decrease in magazine sales since 2010, it would be reasonable to assume that the impact of the services on print magazine sales has been considerable.

In my view, however, it is likely that publishers will receive enough revenue from all-you-can-read service companies to such an extent as to more than offset the declining sales of paper magazines. It is my hope that in the zero-marginal-cost society, magazine publishers will flourish in the new world of the internet — with them bidding farewell to paper editions and specializing in creating content that will be enjoyed by those who subscribe to online reading services.

Takamitsu Sawa is a distinguished professor at Shiga University.

GET THE BEST OF THE JAPAN TIMES
IN FIVE EASY PIECES WITH TAKE 5