Music 2.0 - Exploring Chaos in Digital Music

Recent actions by Apple in and related to China have highlighted a conflicted approach especially with regards to the music business namely that of Apple’s retail push of its iPod, and its Songs for Tibet album promotion initiative.

Songs for Tibet on iTunes

China-based consultant, David Wolf has written an extremely incisive article entitled Apple’s Bipolar China Disorder onSeeking Alpha with a contrarian view to everything else that has been written on the subject he aptly describes as,

Apple (AAPL) starts selling an album called ‘Songs for Tibet’ on its iTunes Music Store (iTMS), and it does it right in the middle of the Beijing Olympics. Coincidence, or passive-aggressive middle finger to China?

A bit of background first.
The ‘Songs for Tibet’ album first started selling on iTunes from Aug 5th, and right from the start of the Beijing Olympics, iTunes Music Store deigned it fit to place it at the top Recommended New Release.

As of Aug 19th, with a huge flurry of bipolar comments accompanying this album on iTunes and in China , few of which were about the music itself, and a statement from the organization behind the album, the Art of Peace Foundation that 40 athletes had downloaded the album, access to iTunes was promptly blocked in China, presumably by the authorities.

The Associated Press reported Apple China spokeswoman, Huang Yuna explaining it as, “We are aware of the logon problems but we have no comment at the moment”. Further to that, as pointed out by Business Week, amidst the flurry of comments on iTunes Music Store, an Apple spokesperson posted the following statement,

My name is Bryan and I understand that you have not been able to connect to the iTunes store for the last couple days and that you are concerned that it would be an issue with China blocking the iTunes store. I’m sorry to hear that and I’m happy to assist you with this today.
ITunes is not being blocked in China from our end, but access to the iTunes Store IS restricted in some areas in China. This would also explain why it’s happening to your friends there as well.
I would advise that you contact your ISP about this matter. Please also note though that accessing the US iTunes Store outside of the geographic region of the United States is not supported, and that attempting to access it while in China is at your own risk.
The iTunes Store Sales and Service Policies are available for you to review

Much as the subject is volatile, multi-dimensional and nuanced, I will concur with David Wolf’s approach and look at the business issue and steer clear of getting into a debate over the politics. Here are a few observations of Apple’s recent actions.

The Internet is global, and the US iTunes Music Store has been made accessible within China for purchase of music provided the user has appropriate credit card and accounts in place. It is thus duplicitous of Apple to claim that access outside of the United States is not supported, and at the very least we do know that other users globally are able to see what is offered on the US store and comment on it, if not buy it. As such, the issue is not that iTunes’ role as a retailer of the Songs for Tibet album or timing is being questioned. But it is more its conscious decision to place the album in the most prominent position available on iTunes right at the start of the Olympics which seemed premeditated and any claims of it being based solely on musical merits seem disingenuous as has been clearly obvious to all - and as events have borne out - it has been a lightning rod for provocation and political views as manifested by comments on iTMS and elsewhere with the music now being relegated to a secondary role.

Interestingly, the iTunes Music Store access was restored in China on Saturday, with the observation that Apple has relegated the ‘Songs For Tibet’ album from its previously prominent position to deeper within the store.

Update: We have confirmed that the whole album plus the accompanying video is available for download in China.

It has to be noted that the accompanying media hubris claiming that it was media pressure that has resulted in the restored access of the album in China is both disingenious and self-serving as it could also well be Apple’s act of reducing its hitherto overt promotion of the album that is the reason - but in the absence of a formal explanation by either Apple or the Chinese authorities, this remains a matter of conjecture. (David Wolf tries to present a chronological and balanced analysis of the whole issue in his long article Apple’s China Debacle: The Corporation as an Agent of Social Change)

In fact, the collateral damage as a result of the iTunes issue had also resulted in access to it on Amazon in China being blocked too, and at the time of writing, the digital album is available while access to the CD version is still blocked.

To put it into perspective, as access to the album is restricted to expatriates in China, this is very much an exercise in preaching to the converted and much of the hardheaded Western media spotlight seems to be misguided and only serves to harden and close up the locals to the issue.

The many foreigners working in China have a relatively clearer view of the issue - whether one likes the situation or not - and this has been articulated best by David Wolf,

I am sure there were valid marketing considerations behind the decision to sell ‘Songs for Tibet.’ I’ll even grant the (specious) possibility that there was a good business reason to do so during the Olympics. If not, Apple was certainly within its rights to make a political statement. But Apple - and its shareholders - must recognize that its own actions are sabotaging its efforts to build a market in China right as those efforts are showing fruit. Such a bi-polar approach to this market is not sustainable. Apple management needs to choose between developing China as a market or the freedom to engage in random acts of passive-aggressive panda-punching.
Making that choice, as much as real estate and labor expenses, is part of the cost of doing business in China.

iPods Feed on Music Piracy in China

Apple’s recent opening its first Apple store in Beijing on 19 July and its stated aim of opening more of the same throughout China reiterates its ambitions to make up for lost time and sell more of its products in China including its iPods which have yet to dominate China as it has in Western markets. As mentioned before here on Music2.0 even though Steve Jobs has spoken out against piracy by describing it as stealing and has positioned the iTunes-iPod pairing as Apple’s legal product offering, the fact is that in China, without iTunes access for local consumers, Apple is well aware that it is music piracy that is feeding the sales of iPod.

By claiming the higher moral ground and invoking the theories of karma against piracy and merits of the iTMS as an important complementary platform for the iPod, it is disconcerting to note that Apple then proceeded to market and distribute it in China based on the Winona Ryder-esque advertising platform of having a “1000 songs in your pocket” when the source of the music is clearly dubious - especially in the absence of iTMS. Even though there are other device manufacturers that operate similarly in this environment, Apple is held to a higher standard of their own choosing and thus seem to be courting bad karma in China.

Even if we were to give Apple some Brownie points and cut them some slack for trying, it is only in 21 countries where it has launched the iTunes Music Store as opposed to the many more countries where it has seen it fit to expend energy and resources to distribute the iPod. In huge swathes of the world where the iPod is distributed, there are no iTunes Music Stores or in the case of China, barely any viable legal music stores currently.

Will the Real Apple Stand Up?

Part of the conflict in Apple’s approach with regards to China could possibly be best explained as another example of parochial head office-centric policies handed down by supposed global companies that are inimical or incongruent to its satellite markets in which it also has interests in.
In fact, a prime example of this was best illustrated coincidentally by the actions of Apple’s global agency TBWA via a couple of unrelated ad campaigns. While TBWA China was preparing an Adidas ad expressing support for China’s Olympic success, TBWA France contrived to run an ad critical of China’s human rights purportedly for Amnesty France. The furor generated in China by the latter ads, possibly to the horror of the unsuspecting TBWA China team led to TBWA Worldwide hastily disowning the contentious ads and blaming a lone rogue person as the fall guy though conveniently, no mention of returning the Cannes bronze Lion award it won was ever mentioned. (Update: The Cannes committee has since seen it fit to withdraw the award)

But yet as shown by Apple’s willingness to sell iPods in countries with no iTMS or sources for legal music and with it a tacit acknowledgement that its iPods are repositories for pirated music, Apple has shown that it is flexible enough to suspend its policies and philosophies for profit outside its home market.

As Apple now embarks on its negotiations with China’s mobile carriers for its much vaunted iPhone to conquer the lucrative Chinese mobile market, both it and other holier-than-thou self-styled “don’t do evil” type companies have to realize that the Internet exposes inconsistencies in policies and with the world being far from a homogenous market not just in terms of buyer profiles but also socially and politically, as David Wolf summarized it,

“Apple has just learned that the choices you make across your business can affect your prospects in China. Success in China does not mean avoiding such conflicts, but in dealing with them intelligently and proactively.”

And these hard choices will ultimately end up as the cost of doing business in China – or not.

In a sudden announcement in Hong Kong yesterday, the majors revealed that it was pulling out of the IFPI in HK and they will be setting up a parallel organization to manage their rights. In a press conference yesterday attended by management representatives from Universal Music, Sony, Warner Music and EMI (or what’s left and not owned by the Typhoon group), they announced their formal withdrawal from IFPI Hong Kong and proclaimed it an appropriate time for what they call a commercial decision - a decision that our sources say had been in the making for the past 2 months.

Ariel Feng of Sony Music tried to explain it as,

“Europe and the US have different music associations representing different companies with varied directions and interests as befits different labels and this has been the general trend over the past few years. Record labels develop in many diversified areas and it is time to establish a new organization to coordinate this development. This is a purely business decision.

Certainly if this is the true rationale for pulling out of the IFPI, then surely it is time for the majors in other parts of the world to similarly question and reconsider their membership of the IFPI.
On being asked if domestic powerhouses Emperor Entertainment Group (EEG) and East Asia would join the new organization, Feng stated,

“I cannot speak on behalf of other companies, we have had many discussions, but it starts with 4 companies first. In future there will be more than 4 companies and we are adopting an open attitude on it.

He also indicated that they have yet to have a name for the new association, and will hold a meeting to decide on it.

Hong Kong has had a thriving recorded music industry in years gone by and the changes in distribution and the internet have impacted it dramatically affecting both majors and domestic labels. Membership of the IFPI in Hong Kong extends beyond just the majors to include influential domestic labels with a total of around 76 members and it is likely that friction and power play between the majors and domestic labels’ influence within the IFPI could be the reason for this breakaway organization. On June 12, EEG’s Wu Yu was selected as the IFPI HK President and there is word on the street that dissatisfaction with EEG’s appointment could be a factor in the majors’ dramatic decision. Furthermore, sources have indicated that the majors have been unhappy with the IFPI’s progress on tackling piracy issues, and failure to capitalize on their bargaining power to obtain better revenue shares.

This certainly points to a more plausible explanation than Feng’s denial that there was “definitely no dissatisfaction with IFPI”. On a more immediate impact, this will certainly throw into disarray the upcoming annual IFPI Hong Kong Top Sales Music Awards presentation, an awards ceremony based on sales figures - and casts doubt on whether the majors’ artists would attend it. Universal Music’s Duncan Wong certainly did his best to leave it hanging in the air,

It is not a good moment to answer this, if we attend the ceremony, we will report the numbers to IFPI, if we feel it is good to attend, we will report, if not then we won’t report.”

So with the record industry already in near crisis mode brought about by the many past missteps especially by the major labels in the industry, the turf war seems to have exacerbated in Hong Kong and the biggest losers are likely to be the artists. Our sources have clarified that the pull out is contained within the Hong Kong market only and the major labels’ international membership with the IFPI will continue while the IFPI’s satellite office in China will still represent the majors but in due course, it is expected that the majors will reel in China too. However, such a Georgian middle finger action will certainly have implications beyond the local market.

I’m gonna live right in your face
I’m gonna lie here while you play
Fuck you, yeah and fuck this place
Don’t think you’re chasing me away
- World Falls Apart, Gang of Four

Credits:

1. Gang of Four
2. Sing Tao Daily
3. Major Label Representatives Image from Sina

So finally, the much talked about Google MP3 Search service is here at www.google.cn/music
And it’s certainly game on as they take on Baidu’s very illegal mp3 search with legal links from its search results provided by local music service Top 100.cn for free streaming, free mp3 downloads and lyrics supported by advertising revenue, and paid Caller RingBack Tones (CRBT) via China Mobile - with rights being cleared by most major labels (with probably one major holdout), publishers and a number of domestic labels for mainly Chinese music.

Inevitably the talk is going to be about whether this is going to be a game changer or not.

But first a quick preview of the site for the benefit of international readers as Google Music Search is inaccessible outside of China

Surprisingly, Google’s famed clean page lines have been sacrificed for the music search home page, for which charts are shown with the user being able to choose charts by album, artist or song.

Downloads are in 192kbps DRM-free mp3 format:

Streams are provided via a pop-up Flash player window:

Lyrics are shown in a pop up window:

Currently, most of the CRBT links are disabled as deals with China Mobile have yet to be sorted out.

Also, for some like No.1 artist Jay Chou and international artists , it seems that Top100.cn has yet to obtain free streaming & download rights.

 

For a start, this free ad-supported mp3 download service is invariably more impressive than similar international services like We7 and Spiral Frog as it is DRM-free and users can keep the downloaded mp3s forever while being able to transfer it to portable devices without any restrictions.

But the battle lines for this service are instead drawn in China as Google squares off with Baidu who have made a fortune from illegal mp3 search which accounts for as much as 30% of its traffic. Where Baidu has been greedily keeping all of its advertising revenue with the exception of the recent knee-jerk attempt to share revenue with a few selected labels, Google will be sharing advertising revenue - traffic being tracked via watermarking - with all content providers via Top 100, and that is already a plus point in favor of Google.

On the other hand, as many international analysts will inevitably fall over themselves to fawn over and laud Google’s mp3 search service from a distance, it has to be recognized that it is far from being a cakewalk for Google. Their partner Top 100 still has to convince quite a few more labels and artists to join the service without which, users will consider this an incomplete service not worth switching over from Baidu.

Inertia and force of habit may also result in users remaining with the Baidu mp3 service. It has to be noted that there are other music search engines in China - all illegal - but none have been able to make a dent on Baidu’s lead and the manner of its offering. As one local blogger pointed out, even Google’s very naming of its service URL as www.google.cn/music might be slightly flawed as Chinese users have become conditioned to the synonymity of “mp3″ with music in the naming of the URL. Citing the example of the rival music search engine Sogou, which introduced its service as d.sogou.com it then had to beat a hasty retreat to the current mp3.sogou.com URL.

With the launch of this service, Top100.cn’s existing paid DRM enabled download service will cease and will be replaced by the service described here. It has to be noted that Top100’s service has been mainly limited to low common denominator fare and the Google MP3 Search service will likely propagate more of the same in direct competition with Baidu. Already, the Google chart service seems to be under the tyranny of major label fodder, and for the many other artists and independent labels who may possibly be simply making up the numbers by languishing in the basement of this service, it is certainly in their interests to explore other options and models.

Where this will probably be a game-changer is that the authorities and Content Providers can now point to a viable alternative to Baidu’s mp3 search and snap out of their varying degrees of apathy and do something about it. Baidu’s recalcitrant attitude and financial abuse of so-called label partners as it pirates music in broad daylight will inevitably catch up with them now, and their efforts to finally reconcile with content owners will probably be too late.

Still, there is all to do as both Top100.cn and Google have not had any prior success in music distribution but by intent, a warning shot has been fired at Baidu.