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