So far there is not much in the way of English language coverage of this story, but here is a translated version of Google’s blog post on the matter. This service is intended to boost Google’s fortunes in China, a market in which it is being comprehensively outgunned by resident search behemoth Baidu. Baidu themselves have responded to these announcements, translated here.

A quick search suggests that they do indeed have a deep catalogue. Try it for yourself here.

Bizarrely, however, at least one song we found had the following in the tagging: “RiP BY MUJi”, suggesting that their MP3s are not from the most wholesome of origins.

When unknown Chinese singer Yang Chengang wrote and recorded the song Mice Love Rice in Wuhan, Southern China in 2000, he would have had no way to predict it’s eventual impact. While the pop ballad languished in relative anonymity on CD format for four years, it’s eventual arrival on the recently booming internet in 2004 sparked off a word-of-mouth phenomenon that would ultimately peak with 6 million legitimate ringtone sales on China Mobile in one week as well as a rumoured 200 million illegal MP3 downloads within a year.

Once exposed to the powerful Chinese internet, Mice Love Rice and it’s exemplary use of instantly recognisable melody as well as inoffensive, syrupy lyrics – in this case a chorus that includes ‘I love you, loving you, just like mice love rice’ – came to define what is now known as a ‘wang luo ge qu‘ or ‘network song’, a literal reference to the exponential spread of a song through internet networks. This process of musical ‘crowd sourcing’ has proven to be the paradigm of the modern Chinese musical landscape.

Song Ke, founding CEO of one of mainland China’s leading record labels, Taihe Rye, employs a team who use software to monitor the various chart systems and music networks around the internet, looking for songs that are ‘making noise’ and stepping in and signing them up once they have proven to be a crowd pleaser. The practice has paid off: a few songs by unknown artist Dao Lang were “making a lot of noise on the internet,” says Song “We got in touch with him, signed all his digital rights, put our new media marketing team behind it and sold 30-40 million ringtones in 2005 alone.”

Unlike in the west, however, this ‘democratisation’ of music success – where the web organically decides which songs reach the top of the pile, or at least the attention of the likes of Taihe Rye – has not led to a vast broadening of musical tastes. In fact, the chat boards, blogs, instant messaging systems and peer to peer networks that organically built Dao Lang and Mice Love Rice into hits have shown the opposite to be true. Instead of a range of defined sub-genres, the network effect has crystallized music into one much larger homogenous category, based on the commercial pop song style and format exemplified by Yang Chengang’s hit. The much-feted ‘long tail’ of alternative music and niche genres has, to date, failed to emerge.

Songs that satisfy the ‘network song’ criteria for mass acceptance and go on to become internet hits are frequently gathered together by portals and websites into charts of ‘deep links’ to unlicensed MP3s or streamed music. “The charts we present are simple marketing tools to attract visitors, who mainly love pop. We do have a social network section for discovering music but it is our MP3 search which represents on average 40% of our entire traffic“, says Gregory Wu, Associate Director of Digital Entertainment for music search behemoth Baidu. While the IFPI estimates that China’s physical market was worth only $37.7 million dollars to the labels in 2007, Wu says that Baidu receives roughly 100 million MP3 search enquiries every day, giving some idea of the gulf between the ‘paid for’ and ‘not paid for’ music markets.

According to the latest China Internet Network Information Center report, 84.5% of Chinese netizens listen to music on the web, making it the most popular internet usage ahead of even search and email. These legally suspect music charts are therefore key traffic drivers and are typical of the average Chinese music browsing experience. They also represent bottlenecks that impair music exploration and “perpetuate low common denominator music, leaving music discovery to chance,” according to Wu Jun, CEO of digital distributors R2G, the company behind Wawawa, a non-mainstream legal MP3 store. “The big players are not necessarily music specialists, so have no real desire to develop music recommendation/discovery facilities beyond the simple chart format”.

The Chinese internet user base, which reached 253 million in June, is also getting, on average, poorer, younger and less educated every year as the socio-economic barriers to internet access are gradually lowered. Song Ke explains how this increasingly worse off audience skews the tastes further towards mainstream pop. “People who do not have a lot of money want to look up to their pop stars and imagine what life is like up there. Alternative music is a luxury for the middle class; for people who have tasted some of the high life and are looking for something else”.

What has resulted is a kind of echo-chamber effect, in which only low common denominator, crowd approved pop music is fed back into the network through these curated bottlenecks. The priority for the Chinese labels is to please the network and make it into these bottlenecks, not push musical boundaries forward, as failure to make it into these top strata of recognition brings with it a hefty price. As one of the only other major sources of music industry income, brands focus the bulk of their sponsorship monies on the highly visible hit artists, compounding the relatively anonymous non-chartees to further suffering.

According to analyst group Music 2.0, however, 64% of users surveyed said that they frequently could not find the music they were looking for on a music search engine suggesting that there is at least some desire to stretch beyond what is presented, but as Song Ke puts it “these music sites, search engines and charts are run by a generation of people who grew up on melodic Hong Kong and Taiwanese pop. They are pushing what they know and like. Future generations will want to change this and demand more variety, but it may take some time”.

© Ed Peto 2008

China never fully adopted the “traditional” tools of music discovery and consumption: TV, radio and the print press are all heavily monitored by the government and relatively anodyne as a result; CDs never really gained any meaningful traction; live music events are circuses of permits and arbitrary cancellations.

The bleak circumstances of China’s music business have resulted in the Chinese consumer inadvertently leapfrogging into the next generation of music consumption, even before their western counterparts.

In February this year, after a 53% growth rate in 2007, the Chinese Internet Network Information Centre (CNNIC) finally declared the Chinese internet base to be the largest in the world with 221 million users. At 16% penetration, this still leaves huge room for growth.

The internet has not only afforded a freedom of expression and identity previously unavailable to the Chinese, it has also almost totally usurped the roll of all offline music media: portals, webzines, bulletin boards (BBS), video sites, music blogs, music streaming. In fact, so important has it become as a medium that a full 86.6% of all netizens use the web to listen to music – the highest of any usage including search and email.

Despite a vast audience, hungry for music, the Chinese internet suffers from poor depth of catalogue with an almost negligible “long tail”. Super portals like Sina, Sohu and clear leader Baidu (with 75% of the search market) bottleneck music into charts of 100, 200, or 500 songs on their front pages and pay little attention to anything else, meaning that while it is possible to find deep catalogue, the average user simply does not look past the hits. High charting – and therefore high visibility – is crucial and, as a result, payola and chart rigging reputedly abound.

Full track downloadable MP3s have been (illegally) free to user from the outset, partly because 86% of internet users earn less than $430 per month and partly because China’s poorly enforced copyright law is only just becoming a topic of public debate ie. too late.

Baidu’s MP3 search efficiently presents “deep links” to copyright infringing material, free for download. It is through this service that the vast majority of full track digital music is consumed in China, while Baidu generates revenue through advertising and mobile services such as ringtones and Caller Ringback Tones (CRBT) ie. the tone you hear when you are calling someone and waiting for them to pick up. No surprise then that the company is facing various lawsuits.

Leaked reports earlier this year suggest that Google China (g.cn) are planning on partnering with legal music site Top100.cn to offer free-to-user major label catalogue found through Google MP3 search. This arrangement, due to launch towards the end of 2008, would allow Google to compete with incumbent behemoth Baidu in the music search sector but would also signal a seismic change in music consumption: major labels conceding that music must be free-to-user. China is increasingly being seen as a brutal testing ground for radical new models that can survive in a “more than 99%” (IFPI) digital piracy market.

In this climate the real currency is the CRBT. The strength of this as a product is its “walled garden” environment: mobile operators China Mobile (69% of the market) and China Unicom (the rest) host a catalogue of music on their servers – the user pays USD $0.70 CRBT service charge a month and then USD $0.29 for every new CRBT, all without the music ever leaving the operators’ servers or payment systems.

China Mobile’s CRBT revenues might have leapt 74.7% to nearly USD $1.7billion, according to their end of 2007 report, but there is some way to go with the distribution of wealth. The operator keeps the service charge in its entirety and only divides the individual tone purchases up, with roughly 35% for master and 10% for publishing if the deal is direct with China Mobile rather than an aggregator.

According to M:Metrics an astounding 34.8% of the 530 million mobile subscribers in China use their phones to listen to music, compared to 5.7% in the US. China’s networks, infrastructure and data capabilities might need to improve but the mobile juggernaut is well on its way.

China Mobile launched the first over-the-air full track MP3 download service in February this year and expect brisk business. When you consider there are some 300 million people who own a mobile but not a PC, their phone is likely to be their first personal access to the internet and only consistent access to digital music. Whether this convenience will result in people paying for that music remains to be seen.

There is a lot of money to be made within that enormous walled garden. It might be a long time, though, before anyone other than the monopolistic mobile operators and a select few music stars can see any of the benefits.

© Ed Peto 2008

Ahead of his MidemNet panel appearance, Mathew Daniel, VP of R2G (digital distribution company) in Beijing has a few observations and words of advice for labels seeking digital licensing opportunities in China:

As Olympic hosts and country-of-honor at MIDEM, China’s music industry is an increasingly common feature on the western agenda. There is, however, almost a whiff of the ‘Wild East’ in the way companies are approaching licensing in the Middle Kingdom.

It has to be realized that the vast majority of labels at MIDEM are probably currently unscathed by piracy in China and that’s likely because their music is so obscure in the Chinese consciousness that they have not even had the dubious honor of gracing the servers of China’s notorious MP3 search engine, Baidu.

Piracy in China often gets a lot of attention but many forget the other Ps of marketing and these are the basics that labels intending to come into China should first focus on. For dramatic effect, let me first quote Tim O’Reilly when he said that “Obscurity is a far greater threat to authors and creative artists than piracy“.

I wouldn’t go so far as to say that one is worse than the other as it is a case of horses for courses. I would also add that in China, in true Darwinian fashion, one man’s piracy is another man’s marketing. But as O’Reilly explained, piracy eventually develops in a manner akin to progressive taxation in exchange for greater exposure and appeal: There is always the regretful possibility that one may eventually despair at the crossroads of Robert Johnson.

Ed Peto’s piece about the music business in China also noted the labels’ part in engendering piracy in China:

“The arrival of western product in the early 90s came courtesy of ‘saw-gashed’ CDs: Excess stock and deleted titles from western majors attempting to avoid taxation and disposal costs. These CDs had their cases cut to mark them as defective and were then shipped in to China through free-market economic ports like Guangzhou, only to end up on the black market. An end result that can be seen as a partial shooting-in-the-foot for the western majors who then had to come in and fight against the pirate networks they inadvertently helped set up.”

Kaiser Kuo, one of the pioneers of China’s rock scene added, “During the 1990s they were an important source of foreign music”. And so, this rejected music from Western shores – a good proportion being hitherto obscure – has bizarrely taken root in China while the majors also propagate low common denominator fare like the Backstreet Boys, Britney Spears, Celine Dion, Sarah Brightman et al in CD stores. A recent alumnus of this group, UK’s X-factor winner Shayne Ward was in Beijing this week and was awarded a Gold Record for sales of 15,000 for his new CD ‘Breathless’.

The major labels are still counting on physical distribution to help make their numbers in China and International Marketing Director at Universal Music China, Danny Sim has worked tirelessly to develop the market for international artists. In 2007 his efforts resulted in “a significant increase in revenues for CDs and I expect it to be even greater in 2008″, but in general international artists still account for probably less than 10% of the majors’ overall digital revenue in China. As more Chinese are being exposed to Western music via the internet and the media playing more Western music, Danny also hopes that the labels and SPs can work together to cultivate music genres and themes instead of single song hits.

However, this cannot happen in a vacuum and other Western labels who do not have the benefit of an existing network in China will have to do their part to sow the seeds in areas that are often taken for granted, like pro-actively providing artist information in Chinese, building artists’ websites in Chinese and, in general, stimulating more literature and musical discussions about artists online.

The following is an important checklist for labels intending to license digital music in China and illustrates the prior requirements before their music even tempts the pirates:

In this chart, ‘Music’ refers to whether the song is present or absent on the Chinese networks and highlights the necessity to take control and seed the song in China as the first step. Even if the label has not managed this, third parties might already have done so, which gives rise to the pirated presence. Only when the content has been put in front of the consumer in a meaningful way can they judge whether it appeals to them or not. There are multiple applications and formats in which music manifests itself in China and the challenge in the last mile is to manage the revenue collection or at least ensure that the application mix results in net positive revenue overall.

It is of paramount importance that an infrastructure is developed wherein information about artists is propagated combined with recommendation engines to guide the user along in unfamiliar territory. Ian Rogers recently lamented the death of the album cover but in China a more profound barrier exists that stunts the dissemination and understanding of Western music: The lack of basic and standardized metadata including genre classification that allows listeners to recognize song titles and artists.

As part of this initiative, R2G has developed one of the largest Chinese music metadata databases in the world complemented with licensed lyrics.

Much fuss has been made about the impressive revenue from mobile music in China – iResearch estimates that Service Providers (SPs) and Content Providers (CPs) earned up to RMB 3 billion (US$400 mil) in 2006 and China Mobile reported revenues of RMB 5 billion in the first half of 2007 for Caller Ring Back Tones (CRBT) alone, but before prospectors start packing their digging tools, it is important to note three facts:

1. Of all the mobile applications, Caller Ringback Tones generate the largest revenues but it has to be noted that the bulk of it goes to China Mobile. When a user first subscribes to their CRBT package of choice (from one song to ten), only the first sign-up fee is shared amongst China Mobile, the SP, the distributor, the label and the music publisher after which the full monthly subscriptions of 5 RMB goes solely to China Mobile. However, substantial amounts can be made by top Chinese singers who can sometimes sell between 10 to 20 million subscriptions, but this is a rarefied space that is not breached by Western artists. (Graphics by China Mobile. Note: In Chinese lingo Color Ring = Caller Ringback Tones):

   

2. The bulk of the revenue in mobile music is being garnered by Chinese music albeit dominated again by low common denominator fare – and I do suspect that the rural population does sway the popular vote. An examination of the CRBT sales charts for 2007 reveals a dearth of non-Chinese tunes with notable exceptions being Groove Coverage’s ‘God Is a Girl’, with 2004/05 hits Michael Learns To Rock’s ‘Take Me To Your Heart’, Emilia’s ‘Big Big World’ and Backstreet Boys’ ‘As Long As You Love Me’ still earning residual revenues in 2007.
3. Small CPs and especially Western CPs are at a natural disadvantage in negotiating deals with SPs and regardless of whether a deal is struck, there is every possibility that the CPs songs (assuming that they have sufficient appeal) will appear on SPs properties for distribution/sale. And it being an extremely time consuming and technology intensive effort to find out who is pirating the songs, and also to verify how much is being actually made by existing SP partners, CPs are likely to realize much lower revenues than those actually being earned.

William Bao Bean, analyst at Softbank China has calculated that such slippages or under-reporting of revenues to CPs averaged at between 20%-35% while R2G‘s close monitoring via its proprietary SCM system has caught a number of SPs under-reporting CRBT revenues by as much as 50%. It is thus critical that a trusted music partner is sought in China in order to maximize one’s revenues whilst monitoring accounting piracy levels.

Mobile for now seems to be the domain of Chinese music so Western labels coming to China would do well to invest and focus on developing their training wheels in other areas so that they too can make the leap into this relatively more lucrative arena.

The Chinese song universe is estimated to be not more than 300,000 with a smaller commercial subset with the potential to provide meaningful revenue – and in discussions that some of us had with Chris Anderson during his trip to Beijing last month, he also concluded that there is currently no Long Tail of Music in China. This Long Tail will evolve in China and will be populated by international music and this is where the opportunity lies. Evolving tastes and growing individualism are already seeing Chinese listeners trying seek out non-mainstream music, but this music is poorly represented on the free networks and that is an opportunity to be tapped by Western labels.

It has to be realized that almost all full-length mainstream music in China is currently being downloaded for free, facilitated by P2P networks and search engines like Baidu and Yahoo (who have both already been found guilty of infringements by the courts). And until music labels pro-actively put in more effort to inhibit Baidu’s ability to illegally deliver music, the few existing paid full-length music retail download stores will have a hard time. However, I do believe that with better metadata and genre classification, music education and accessible representation of some of this niche music eg. classical, jazz, heavy metal, punk etc, a paid model at fair prices can exist.

Tim O’Reilly encapsulated it best in 2002:

“Services like Kazaa flourish in the absence of competitive alternatives. I confidently predict that once the music industry provides a service that provides access to all the same songs, freedom from onerous copy-restriction, more accurate metadata and other added value, there will be hundreds of millions of paying subscribers. That is, unless they wait too long, in which case, Kazaa itself will start to offer (and charge for) these advantages. (Or would, in the absence of legal challenges.)”.

For ‘Kazaa’ read ‘Baidu’ and certainly, China is currently in such a situation where if a viable alternative is not delivered soon, the opportunity will be hijacked by less well-meaning entities. Labels who are seeking to move into China should first seek trusted partners and forget about seeking a quick buck via minimum guarantees or advances and instead should help to build up the infrastructure accordingly. Labels that do not do their homework will inevitably get burned by unscrupulous partners.

Likewise, licensing music for streaming to SPs will only provide returns if there is sufficient marketing support for the artists and also supporting literature and metadata. For example, one of the top music streaming sites 1ting.com records Avril Lavigne’s Girlfriend as the top ranked English song for 2007 at a lowly position of 132 with 25,000 streams. The top song for 2007 registered 3 million streams in comparison.

In conclusion, it is important to note the following:

1. China offers its opportunities but when a new Western label comes into town, it naturally falls into the Long Tail.
2. The Long Tail will be a black hole unless the supporting information and tools are provided to help the labels’ acts stand out.
3. This will involve working with a trusted partner who not only knows the China market but also understands the label’s culture and potential of its acts. It might possibly also involve sharing of investment and development costs.
4. Giving away music is not the solution – there is potential to develop a paid model with a valued service. The search engines would have us believe otherwise as befits their objectives.

There is no silver bullet in music for China and the gold at the end of the rainbow can only be mined with a proper infrastructure supported by the labels and retail partners.

© Mathew Daniel 2008

How To Do Business In China, China CEO, The New Chinese Consumer… my shelves here in Beijing are stacked full of such books, all trying to throw some light on a country and market of seemingly endless allure to the west. A population of 1.3 billion people has marketeers around the world girding up their loins to do business here, each with a How To Do Business In China book tucked under their arm.

Unfortunately for the western music entrepreneur or artist, these books are helpful in only the most general terms. While there is a slew of practical, detailed advice on how to deal with rubber-ball factories and sales chains, the fledgling music industry here is such a bewildering state of affairs that fully-rounded advice simply isn’t available yet.

As in most other Asian markets, pop music has a real stranglehold over the mainstream – Mando-Pop, Canto-Pop, J-Pop, K-Pop – glossy, inoffensive music that satisfies the censors as well as the ‘bland criteria’ necessary for across-the-board media coverage. Despite the diverse musical heritage of China, mainstream pop is almost entirely informed by western music, from the basic pop song format through to instrumentation and lyrical content, although general production quality is still fairly poor. The Chinese audience, therefore, are already well familiar with all of the stock traits of western music: Guitar solos, crap raps in the middle-eight of pop songs, warbly diva vocals, key changes at the end of ballads, pseudo-rock bands, pseudo-hip-hop bands etc.

Your average western band, therefore, does not sound totally alien, it’s just that no one is willing to spend money promoting an international (and therefore niche) act when 90 per cent of CDs are counterfeit and an even higher percent of online music is pinched. It’s all about hitting the mass market straight out of the box and selling big, if you want a chance of making money.

Such a high piracy rate leaves you with a legitimate physical market of only $86m a year (2006 figures), making China – a country of 1.3 billion people, remember – into only the 20th largest market in the world. Physical has never really had a good time in China. The all-important distribution process never really found its feet, and labels find it a constant battle to get their product on the shelves before, or instead of, the pirate versions. The pirates, though, were given a surprising headstart…

The arrival of western product in the early 90s came courtesy of ‘saw-gashed’ CDs: Excess stock and deleted titles from western majors attempting to avoid taxation and disposal costs. These CDs had their cases cut to mark them as defective and were then shipped in to China through free-market economic ports like Guangzhou, only to end up on the black market. An end result that can be seen as a partial ‘shooting-in-the-foot for the western majors who then had to come in and fight against the pirate networks they inadvertently helped set up.

A standard pirate CD retails for about 60p, whereas the legitimate product goes for around two to three times that – £1.50 to £2. This obviously makes piracy a big business with plenty of people profiting, plenty of vested interests and not a whole lot of will to change. There is the occasional very public haul of counterfeit CDs, but realistically this is already a lost battle when you consider the impending end of the CD format.CD manufacturing plants are mainly state run but this does not deter rampant ‘third shift piracy’ in which, once the two normal daily factory shifts are completed, a third one goes on through the night to make the same product for the pirate market. That’s right, state-run piracy.

As with most areas of business, the retail sector is a black hole of statistics, where misinformation and mendaciousness are key pirate protection devices. A visit to China will clear this up for you nicely as you only have to wander around a few streets and speak to a few ‘legitimate’ retailers to see the impossibility of gathering any meaningful statistics. Even legitimate retailers like FAB stock some pirated goods and it takes a very keen eye to spot the difference in some cases, although most pirated CDs are laughably poor quality.

As you might imagine in this environment, the major labels are shadows of their western motherships and there is a gaping hole where the independent record label scene should be. While the traditional record label model isn’t exactly going through a golden age in the west, it never even had a golden age in the Middle Kingdom. In order to survive it has become necessary for labels to take over an artist’s entire life – recording, publishing, management etc. – obsessively tapping all revenue streams in order to survive. You can count the number of recognisable independent labels on a pair of chopsticks.

Modern Sky is one such label. It has just celebrated its tenth year in existence and, much like its rabbit warren of an office in West Beijing, it’s business model is a convoluted arrangement of media company, record label, artist management and design house – a model that has allowed it to survive in this most hostile of environments. In the process of surviving it has also amassed a significant percentage of the Chinese rock catalogue. Physical releases are practically a loss leader for Modern Sky with digital revenue also remaining a minor consideration.

Label Manager Meng Jinhui explains that they normally take over management, allowing them to promote the hell out of the artist rather than the album. Resultant brand co-operations with these artists and the label itself generate the bulk of Modern Sky’s income, alongside consultancy for mobile content and a wide range of video production and design projects. You have to be versatile to survive for 10 years in China.

The ‘big four’ majors are all over here in some form or other. However, like all foreign companies wanting to operate in China, they have had to enter into joint ventures with Chinese companies, yielding 51 per cent of the new China collaboration in the process. Warner Music Group created Warner Music China, EMI joint ventured with Push Typhoon, SonyBMG with Shanghai Audio And Visual Press, and Universal Music partnered with Shanghai Media Group.

Normally taking up just one or two floors of an office building, the majors have also had to adopt different tactics in order to survive. They own the lion’s share of domestic pop music (“domestic” in this case would be better translated as “regional” – Taiwan, Korea, Japan, and Hong Kong all contribute heavily as their less pirated markets allow for better artist development) but with regards to international repertoire, they stick very much to front line releases and global priorities with the occasional catalogue title. Universal Music China, for example, is pushing its reggae catalogue throughout the year to see if it can find any sort of audience.

Danny Sim, international marketing manager at Universal Music China, is optimistic about growth in western music sales. UMC will release 40 per cent more international titles this year – bringing it to roughly 100 albums – and expect to see a 10-15 per cent growth in revenue. Sim puts his optimism down to: “a) More people getting a better education, and therefore more people with English as a second language, b) More western music spread through the internet, and c) More media channels will become western music friendly.”

Sim has neatly summed up the problems facing western music marketers in China. While there is already a smattering of English in a lot of homegrown music, a full English language track is a different thing altogether. Learning English is a high priority for your average urbanite and consuming English language media and entertainment is a natural part of this. There is some way to go, however, before this manifests itself in legitimate music sales. As Sim points out, a good starting point would be an increase in western music coverage in the media. As a niche concern, very little western music is played on China’s state-run radio. An exception would be a station like Beijing’s HitFM which plays US and UK Top 40 hits to an audience of English language students, expats and western-trend-conscious young people. This is an exception, though.

The government is very protective of its airwaves and rules its own network of regional licensee stations with a rod of iron, both in broadcast policy and physical presence. The live studios are frequently under armed guard for fear of them being stormed by subversives. The same applies for TV as the Chinese government are acutely aware that broadcast media is the most effective medium for delivering key cultural and political messages. China Central Television (CCTV), the state-run national station operates a range of channels, which, in the main part, are barefaced propaganda and state trumpet-blowing. Their large scale, televised music galas showcase traditional and government approved music forms and are regularly watched by audiences in the hundreds of millions. These are the kind of viewing figures that excite people about China, but in reality the shows are impregnable fortresses of glittery, spandex-clad state guff.

When Pop Idol imitator SuperGirl hit China in 2004, the final was watched by 400 million people. The rush of mobile votes sent the government into a panic and severe restrictions were implemented, preventing the show ever happening in the same format again. The idea of a democratically decided pop show proved too much for a one-party state to countenance.

So for international music marketeers there is a limited spread of outlets through which to promote artists. This is especially true when you consider that music coverage is based more on cold hard cash than on merit. You could turn up to one of the few music-specific TV channels like Newscorp’s Channel V or MTV (which has a minute presence in China) with the best pop video in the world looking for airplay, but the response is likely to be “What’s in it for us?”. In this sort of climate – where media needs to be bought – the returns simply do not justify a label allocating a significant marketing (or coverage) budget to “break” niche foreign artists. They generally rely on larger artists’ spill-over publicity from the west.

As in the rest of the world, the internet is changing everything. Where broadcast media and press are government owned or heavily government-monitored, the internet is seen as a more effective way of promoting releases, with freedoms and readership figures that make printed press almost insignificant.

It’s actually possible to find niche audiences and interact with them effectively on bustling chat boards and blogs. While the internet is reportedly monitored by 30,000 “internet police”, the sheer volume of activity means that smaller, non-threatening outfits can operate in a relatively uncensored capacity.

The problem is that niche online audiences are very niche indeed. Genre awareness is perhaps one of the biggest spokes in the wheels of music development in China. It is possible to find all major genres – as well as a great deal of sub-genres – represented in tiny fan-groups online. However, the elaborate categorisation of music we seem to so enjoy in the west is the preserve of only a few music obsessives in China. While Converse trainers and drainpipe jeans might make your average Chinese high street hep-cat seem like an alternative cognoscenti, the chances are that understanding is lacking and there is very little consistency between any two elements of their identity, including music preference. Whilst hanging at the bar in Beijing underground live venue D-22, I noticed a Chinese girl next to me with crazy hair, blackened eyes, torn clothes and black fingernails. I got talking to her and asked her what kind of music she listened to. “Backstreet Boys,” was her immediate reply.

The kind of deeper involvement with a genre that would mean a goth could never admit to liking the Backstreet Boys is noticeably absent here. This girl is just as likely (or unlikely) to go out and download an Aaron Carter track as she is a Lacrimosa one. Music online is rarely searched out or bought according to genre. In fact, not only is your average MP3 not sold as part of a genre, it is also almost certainly pirated, completely DRM-free, with no meta data attached and, in a huge number of cases, doesn’t even have a file title. You are left with a completely ‘naked’ piece of audio. China simply never went through the age where music was bought at a premium on vinyl, cassette or CD, then lovingly horded, categorised and put on display for all your dinner party guests to see, encouraging in-depth dinner discussions about prog-rock or jazz.

Today’s China sees single-track, naked MP3s being Bluetoothed, file-shared, emailed, flash-disked, hard-drive-dumped and herded around the digital sphere in complete anonymity. Targeting potential listeners for your band in this scramble of a market is incredibly difficult because, in a great deal of cases, even your potential listener doesn’t know what he or she is listening to.

Despite this, digital is the hot topic in China. Due to the under-developed, pirate-dominated physical market and burgeoning mobile environment, China is on track to becoming the world’s testing ground for the digital age.

The statistics are pretty staggering, with some suggesting a digital market of US$1.5bn by 2010. With the second largest broadband network in the world, the advent of 3G later in 2007, 460 million mobile users and five million new mobile subscribers a month, who, on face value, would doubt them?

The view from the ground, however, is that all of these statistics need to be taken with a bucket of salt. All attempts by the Chinese government to combat online MP3 piracy, including all public ‘victories’ against pirates, should be seen as totally superficial – a lip service to the lobbying western majors. Internet MP3 piracy remains endemic, with fewer than 10 per cent (a very generous estimate) of downloaders actually paying (average price) 14p/download for the privilege.

Even the big boys are at it, with market leader Service Providers (SPs) like Baidu (over 50 million users per day) openly hosting ‘deep links’ to pirated tracks and making money through advertising while they’re at it.

Legal sites such as Top100 and 9Sky are on the rise, but change will be painfully slow due to a dislike of DRM, lack of will from the government, and a public who have been getting free music off the internet from day one. It is becoming increasingly common for record labels to give away MP3s for free in order to build profile for a track and then profit from where the real money potentially lies, namely Mobile Value-Added Services (MVAS).

While only a tiny percentage of Chinese people own a credit card (thereby making online download purchases difficult), the cash-pre-pay nature of mobiles means there is an established, digital payment system existing between the user and the mobile operators.

This allows for easy purchase of MVAS such as ringtones, caller ringback tones, background music and wallpaper. MVAS generate revenue of over half a billion dollars (US) a year but accounting is far from sturdy – SPs are habitually siphoning off millions of dollars by simply under-declaring sales in what is known as “accounting piracy”.

Even the legitimate numbers don’t look too rosey at the moment. The breakdown on your average truetone (for example) looks something like this:

15 per cent is returned to the telco, and 10 per cent to the publisher. Of the rest, the service provider takes half, with the remaining 37.5 per cent being split between the aggregator and the sound recording rights owner, with the aggregator taking anywhere from 20 to 50 per cent for his troubles. In this example, assuming you have a 50/50 deal with the aggregator, this leaves you with a grand total of 2.6 pence for every ringtone sold.

Micro numbers like this are hard to get excited about, but if the devil is in the detail, then the angel is in the scale. Music and the booming Chinese nation are at the start of a wonderful relationship on a scale that will dwarf any other territory in the world. It’s just that no one is making any money out of it – certainly not with conventional, western business models.

China needs to be seen as a blank canvas. While the numbers might suggest it is already going through a “boom” period, this is clearly not the case in relation to the copyright dependent industries. The boom is yet to come and the salient business models are yet to show themselves. What is certain is that the record label as you know it is dead and in its place have risen “digital entertainment companies”, who only produce single-track MP3s and are just as savvy at dealing with brand partnerships, pre-loaded mobile content and online guerilla marketing as they are at making music. While all these facets are increasingly important in the west, they are essential in China.

It is understood that DRM is not the horse to back. The pay-per-download system is also looking shaky and attention is increasingly turning to subscription models. China will be quite a way ahead of the west in turning the corner into this more fluid consumption of digital music.

So while there is no How To Make Money Out Of Music in China handbook yet, I suspect that when it is eventually written, it will be translated into a hundred different languages and ultimately be tucked under the arm of every music industry executive in the west, from London to New York.

© Ed Peto 2007

The view from the ground, however, is that all of these statistics need to be taken with a bucket of salt. All attempts by the Chinese government to combat online MP3 piracy, including all public ‘victories’ against pirates, should be seen as totally superficial – a lip service to the lobbying western majors. Internet MP3 piracy remains endemic, with less than 10% (a very generous estimate) of downloaders actually paying 14 pence/download for the privilege.

Even the big boys are at it, with market leader Service Providers (SPs) like Baidu (who allegedly see over 50 million users per day) openly hosting ‘deep links’ to pirated tracks and making money through advertising while they’re at it.

Legal sites such as Top100 and 9Sky are on the rise but change will be painfully slow due to a dislike of DRM, lack of will from the government and a public who have been getting free music off the internet from day one. It is becoming increasingly common for record labels to give away MP3s for free in order to build profile for a track and then profit from where the real money potentially lies…

Mobile Value-Added Services (MVAS): While only a tiny percentage of Chinese people own a credit card (thereby making online download purchases difficult), the cash-pre-pay nature of mobiles means there is an established, digital payment system existing between the user and the mobile operators. This allows for easy purchase of MVAS such as ringtones, caller ringback tones, background music and wallpaper. MVAS generate revenue of over half a billion dollars (US) a year but accounting is far from sturdy – SPs are habitually siphoning off millions of dollars by simply under-declaring sales in what is known as ‘accounting piracy’.

Piracy aside, the big question for you as a western rights owner is “can I get a piece of this?”. The answer is “not easily”. Put simply, western music does not sell well digitally, with only a couple of examples of English language tracks making any sort of returns. In the current climate, there is very little financial incentive for digital distributors and SPs to push foreign language (ie. niche) music, as Mathew Daniel, VP Strategy Development at R2G, China’s largest digital distribution company explains:

“There is certainly the potential for Western music in the long run but this can only materialize if there is more investment in the form of music promotion and even education of music styles, genres and history but to reap the benefits of this investment, there ultimately has to be better revenue accounting.”

If you do end up with digital distribution, the breakdown on your average truetone (for example) looks something like this:
Average cost of truetone: 2RMB = 14pence
15% to Telecommunications Company
10% to publishing
37.5% (half of the remainder) to Service Provider

The remainder (in this case 37.5%) is then split between the aggregator and you, with the aggregator taking anywhere from 20% to 50% for his troubles. In this example, assuming you have a 50/50 deal with the aggregator, this leaves you with roughly…..2.6 pence for every ringtone sold.

There are deals to be had but they are few and far between. Companies like R2G, The Orchard, Artspages, Ioda etc. are pushing western content online in China, but the returns are minimal. The general advice is that, for independent western music, the internet should be seen as an excellent way to get your music heard in order to make money elsewhere, at least for the moment. Piracy isn’t all bad.

© Ed Peto 2007

NOTE: This is an extract from the ‘Access China’ report commissioned by UK Trade and Industry Department and British Underground.