Ayumi Hamasaki Sekai - Foreign investment in J-music industry [article for chsf]

Quote:

Investing In The Future.
Steve McClure
09/08/2001
Billboard

TOKYO--Can foreigners help put the Japanese music business back on track?

Two years ago, French automaker Renault took a 36.2% stake in troubled Japanese automaker Nissan and named Renault executive Carlos Ghosn as Nissan CEO/ president as part of its plan to put the Japanese firm back on track.
The appointment of a gaijin ("foreigner") as Nissan's CEO/president caused a few eyebrows to be raised in Japanese business circles. But through radical cost-cutting measures and restructuring, Ghosn has restored Nissan to profitability.

Now Japan's oldest record label--Nippon Columbia--finds itself in a situation similar to that of Nissan two years ago. In May, the U.S. investment firm Ripplewood LLC announced that, effective October, it will take a 41.7% stake in Nippon Columbia, with former parent company Hitachi holding a 27.5% share. The label's Denon hardware division will be spun off as a separate company that will be almost entirely owned by Ripplewood. As part of the plan, former BMG Entertainment CEO Strauss Zelnick--who heads New York-based holding company ZelnickMedia--will become Nippon Columbia's chairman while continuing to be based in New York. Ripplewood, meanwhile, is searching for an experienced Japanese music executive to replace outgoing president Tadahiko Shinohara.

"We are in the process of recruiting a senior management team, including a CEO and CFO, although we have nothing yet to announce," says Zelnick. "The deal is anticipated to close Sept. 30, and we hope to have our team, as well as a reorganization plan, fully ready to go at that time."

Whoever winds up in the driver's seat at Nippon Columbia can expect a rough ride as they deal with thorny issues such as staff layoffs and restructuring. "The new management has to place priority on finding new domestic acts," comments one industry source. "They can't live off of the catalog of Hibari Misora [Japan's late, great queen of enka ballads] forever."

Nippon Columbia, with its long and illustrious history (the company was founded in 1910), enjoys an enormous amount of goodwill in the Japanese music business. Notwithstanding its takeover by a foreign company, people in the business here want to see Nippon Columbia survive. Its demise would be a huge psychological blow to the Japanese music industry.

Seeking the help of an overseas investment firm--an unprecedented move by a Japanese label--illustrates the serious problems facing Nippon Columbia and other old-line Japanese record companies that have failed to move with the times. Top executives at several Japanese labels say privately they expect a major shake-out in the industry in the next few years against the background of the territory's increasingly tough market conditions.

In the first six months of the year, shipments by the Recording Industry Assn. of Japan's 23 member labels were down 10% over the corresponding period of 2000, dropping to 194.4 million units, representing a wholesale value of 262.6 billion yen ($2.1 billion), down 4%.

Another aggressive move by a foreign company into the Japanese music market that attracted a lot of attention was Zomba Records Group's decision to set up a standalone operation in Japan. Zomba Records (Japan) K.K. began operations last Oct. 1, with Tak Kitazawa, formerly head of the international division of publisher Fujipacific Music, serving as president of the new company.

Zomba isn't going it alone in Japan, though. Sales and distribution are being handled by Avex, Zomba's licensee in Japan since 1996, via Avex Distribution Inc. A characteristically upbeat Stuart Watson, managing director of the Zomba International Records Group, sees the recent downturn in sales of international product in Japan as a golden opportunity for Zomba.

"The entire Japanese music industry is currently bemoaning a decline in international music sales, instead of looking at ways to grow sales," says Watson. "Zomba believes this is the very time to launch a new company.

ENTER PRODUCTION AGENCIES

While Zomba Japan has so far concentrated exclusively on marketing non-Japanese product, the new-look Nippon Columbia will face the challenge of finding hot domestic talent ASAP. And that will likely mean forging key alliances with Japan's powerful production agencies, which wield enormous power. Some of the most successful labels operating in Japan today-the Being group of labels, Zetima and Johnny's Entertainment-- were set up relatively recently by production companies who decided to take the record companies on at their own game.

The latest Japanese production agency to set up its own record company is the enormously powerful, long-established Yoshimoto Kogyo organization, which launched the R&C Japan label in May. R&C's president is Takeyasu Hashizume, who, until August 1999, was president of Warner Music Japan, division east west Japan, and a Sony executive prior to that. Hashizume half-jokingly describes the production agencies' labels as "the revenge of the Japanese."

"The major record companies [in Japan] are going to crash," he says, criticizing what he sees as the short-term-oriented thinking at foreign-affiliated labels, which are under pressure to show a profit each quarter.

But, as one industry source notes, a lack of fiscal discipline at Nippon Columbia--which could rely on the support of parent company Hitachi--led to that label's buyout by Ripplewood.

While Ripplewood is bullish about the prospect of reversing Nippon Columbia's declining fortunes, Liquid Audio's recent experience with its Japanese operation highlights the potential pitfalls of doing business in Japan.

In July, Liquid Audio Inc. severed connections with its troubled Japanese franchise, Tokyo-based Liquid Audio Japan (LAJ), which had been set up in 1998. Alex Abramoff, former president of Universal Music K.K. label Mercury Music Entertainment, quit as LAJ president less than a year after taking the job (Bulletin, June 7), noting that he had been forced to take care of unexpected "clean-up work" at LAJ.

Specifically, soon after Abramoff took office in September 2000, Masafumi Okanda, a former LAJ president, was arrested in Tokyo along with four other men on suspicion of kidnapping and beating a former company board member in June 1999. That kind of internal turmoil prevented LAJ from becoming a serious player in the Japanese market, much to the frustration of Liquid Audio in the U.S.

Liquid Audio now plans to set up a wholly owned operation in Japan.

TIES TO SOUTH KOREA

And, just as various overseas players are plunging headfirst into the Japanese market, many Japanese music companies have been taking a closer look at neighboring South Korea, Asia's second-biggest music market. South Korea began liberalizing its markets to Japanese imports in 1998 as part of President Kim Daejung's efforts to improve bilateral ties. Among the items that have since been allowed into South Korea are Japanese magazines, comic books, non-age-restricted movies, award-winning animated films, TV documentaries, computer games and non-Japanese-language music recordings.

But a recent controversy over a high-school textbook that China and Korea say whitewashes past Japanese aggression resulted in a decision by the South Korean government to freeze the ongoing liberalization of Japanese pop-culture imports.

Regardless of politics, several Japanese music companies are steadily expanding their presence in the Korean market and forging links with their Korean counterparts. Avex, for example, signed a licensing deal last November with leading South Korean label S.M. Entertainment, under which Avex CDs will be released in South Korea by S.M. and Avex will release S.M. recordings in Japan. It was the first such deal between a Japanese and a Korean label.

One of the first fruits of the collaboration between Avex and S.M. Entertainment was the Japanese debut of Korean female vocalist BoA, whom Avex is giving the full-on promotional treatment in Japan.

RISING FOREIGN MUSIC

One bright spot amid Japan's grim market conditions is that foreign music, which in the past few years has seen its share of the Japanese market get smaller and smaller, showed a slight upturn during the January-June period, with shipments up 3%. The main reason for that is astute marketing--including prime-time TV commercials--by Japanese labels of compilations of non-Japanese music, such as Toshiba-EMI's Classical Ever! series and Sony's series of Max releases.

In an unusual joint project, Warner Music Japan and Universal Music K.K. in June released Super Stars, a two-CD set featuring 40 blasts from the past by such Western acts as Eric Clapton, the Monkees, a-ha, Ben E. King and Enya. While the concept for the album came from the labels' European affiliates, fully half the tunes on the Japan edition of Super Stars were chosen by the two Japanese labels. The set has sold some 250,000 copies so far, according to WMJ.

"If we 'localize' foreign music, we can reverse the trend of declining foreign-music sales in Japan," explains WMJ spokesman Akira Takeuchi. WMJ's next big foreign-music compilation is Sweet Melodies, a two-CD set of Burt Bacharach songs culled from Rhino Records' previously released 3-CD Bacharach boxed set.

The kind of "localization" mentioned by Warner's Takeuchi is what MTV knows it needs to do if it wants to succeed in the Japanese market. The music-video broadcaster returned to Japan at the beginning of 2001 after a two-year hiatus. MTV Japan, which reaches some 3 million households, scored a major coup in July by signing up Japanese superstar Utada Hikaru to do the first-ever made-in-Japan Unplugged.

MTV Networks International president Bill Roedy says MTV Japan will closely reflect local culture and points out that MTV's re-entry into Japan marks the first time the U.S.-based music-video channel has simultaneously launched its TV and online (MTVi) services.

"There are tons of convergence shows that we're doing, because Japan is a leader in text-messaging," Roedy says. "Cell-phone use is big-time; young kids love their cell phones. We've got all sorts of shows that intertwine the two, which gives them a chance to communicate with the channel, and the channel to communicate with the audience."

HI-TECH TECHNIQUES

Roedy isn't the only person who sees mobile phones as playing a key role in promoting and marketing music in Japan in the future.

Toshiaki Hioki, manager of Sanyo's Hypermedia Research Center, says cell phones--not the Internet--are the key to digital distribution of music in Japan. "I don't think the Internet will work," he says. "It'll never be viable. [Marketing will] only succeed through mobile phones."

While mobile-phone music downloads could be the shot in the arm that the Japanese music industry needs, right now Japan's ubiquitous cell phones are the bane of the music business.

Ask anybody in the Japanese music industry why music sales are falling, and they'll likely give you a simple, one-word answer: keitai (mobile phones). Young Japanese spend much, if not most, of their disposable income on their mobile phones.
Besides chatting with friends, Japanese also use their keitais to exchange E-mail and, through services such as NTT DoCoMo's i-mode, to surf the Internet.

According to the Japanese government, just over 47 million Japanese, or 37% of the population, were connected to the Internet at the end of last year. That's a 74% increase over the previous year, and much of that growth was due to users connecting to the Internet via their cell phones.

Many Japanese--approximately 8.16 million-have no other means of gaining access to the Internet than their cell phones. And most of those users are teenaged or in their early 20s--the music business' key demographic.

This means that, while Internet use is steadily gaining ground in Japan--where Internet penetration has lagged behind that in other industrialized countries-- music downloads may not become big business until it becomes easy and cheap to do so via mobile phones.

That could start to happen after October, when NTT DoCoMo is scheduled to introduce third-generation (3G) mobile phones. The 3Gs promise to make downloading music by phone much more attractive, since the new service has a much wider bandwidth than current keitai and PHS (personal handy phone) services.

DoCoMo hopes to attract 150,000 subscribers nationwide to the 3G service before next April and 6 million by the end of fiscal 2003.

Some Japanese companies have already introduced music-download services to get in early on what they see as a promising new business field. Late last year, for example, Sanyo Electric Co. launched the first such service in Japan, keitai de music (music by keitai), in cooperation with electronics companies Hitachi and Fujitsu and record label Nippon Columbia. Until 3G becomes a reality, however, plans to use mobile phones to revive music sales in Japan will remain on hold.

Between music via mobile phones and foreigners moving aggressively into the market, it promises to be an interesting year ahead in the Japanese music business.