Music 2.0 - Exploring Chaos in Digital Music

August 4, 2008

EMI Retreats from Greater China - and Asia

Filed under: Music Industry — maths @ 8:00 pm

The sun rapidly sets on the EMI empire as the guy at the top hands over entire Middle Kingdom in Typhoon deal.

Handover

EMI has sold off their Greater China operations and though we don’t have the full details, it has also divested its interests in Japan too, and as seems likely they have now almost fully retreated from Asia.

Yesterday in London, EMI Music’s President and COO Chris Roling agreed to sell all existing shares they own in Greater China including those of EMI Taiwan, Shanghai Bu Sheng (Typhoon) music and Hong Kong’s Gold Label Entertainment to existing Greater China JV partner Typhoon Group. With this agreement, Typhoon will not only take over all of EMI’s existing artist contracts for the Great China region, but will also serve as the exclusive physical and non-exclusive (update) digital products distributor for EMI’s international repertoire. EMI’s Chinese artists switching over to Typhoon include Jolin Tsai, Ah-mei and David Tao.

The acquisition is reported to be in the 9 figures in HK currency with EMI only retaining the right to distribute Typhoon’s recording repertoire overseas. EMI’s publishing arm which it values much more greatly than its recording assets still remains under its control, though there is every possibility that it might likewise be willing to let it go at the right price.

So as first highlighted here in Music 2.0 and OneTwo Music, EMI is abandoning various markets in Asia in rapid succession - and as the vestiges of a former powerhouse in the music industry mirror the decline of the British empire, it is fitting that just as the latter left behind a lasting cultural legacy, EMI’s final calling card has been that of Coldplay, probably the most downloaded English album in the last few months in Asia while EMI probably had little revenue to show for it. So it would be no wonder that they couldn’t wait to unload their baggage for some quick cash.

Roling stated,

We are very pleased to sign this contract with Mr. Norman Cheng, President of EMI Asia as he is one of the successful pioneers of the Asian record industry. The Chinese music market is very exciting with long term growth potential, particularly in the digital music sector but it is still challenging with regards to financial and other aspects, such as the rampant piracy problem.(translated from Chinese media reports)

Norman Cheng, who has been running EMI China, already owned 50 percent of the shares in EMI China and Hong Kong, and with this move, his Typhoon Group takes over full control.
Cheng added,

I am pleased to announce this news for Typhoon, as it is a great opportunity for us for the entire Greater China. We have a very good model of cooperation as the Chinese artists under Typhoon have developed in a familiar environment, while (at the same time) these artists can also enter the international market through EMI. The international music industry is indeed facing challenges, but with the increase in the number of consumers, the channels for music products have reached unprecedented numbers in many markets, and particularly in mainland China there will be excellent business opportunities.

Cheng said that the new company will transform the business into digital music as

the fact is we all know that the physical record business is in a slump. Although physical sales are declining, there are now more ways in which consumers can listen to music and it is diversified. Computers, MP3 players, mobile phones - different platforms, so that music can truly exist “everywhere” and that’s why I believe the potential is great.

With this acquisition, the Typhoon group edges a step closer to its aim of being an entertainment powerhouse with a focus beyond just music.

For music afficionados, it might be sad to see a historied marquee brand like EMI abandon a whole continent and run with the money, but in keeping with the cut-throat nature of the business, Typhoon and its management had already soiled the EMI name previously with a deal with the devil in the form of rogue search engine, Baidu.

Credits:

  1. Original Image courtesy of Time

July 22, 2008

iTunesless iPod Faces Music Piracy in China

Filed under: Music Industry — maths @ 3:45 am

After much anticipation, Apple opened its very first Apple Store in China on Saturday. The store will sell the usual array of enticing Apple products which have already been available in China via authorized and as expected of the China market, unauthorized dealers.

Apple Store - China

It will serve as a focal point for Apple in China from which it will not only lead the sales of its dazzling products but also prepare it for its foray into the potentially hugely lucrative mobile phone market via its upcoming iPhone.

In the meantime, consumers in China can still feast on the iPod and iPod Touch but without access to its integral other half, the iTunes Music Store (iTMS). For years, Asians have wondered aloud as to when Apple would make iTMS available in this part of the world, none more vigorously than Chin Wong of the Philippines Manila Standard in an open letter to Steve Jobs two years ago when he stated,

Where are Asian iPod buyers supposed to get their music? Limewire? Other file-sharing sites?
We don’t blame Walmart for NOT selling us a whole bunch of stuff, but being able to buy songs on iTunes is arguably part of the iPod experience - or at least Apple sells it as such. So, if they’re going to sell us a product here that only works part of the way, they should at least level with us and say why they have to do it, don’t you think?

It is true that officially, Apple has enigmatically never clearly addressed the iTMS issue for Asia, while it still continues to hawk - and profit from - its iPods in Asia. Business Week noted that China is the only country where Apple has a brick-and-mortar store but not a local edition of its iTunes online music store - however, again Apple’s Senior VP, Retail, Ron Johnson refused to comment on the continuing iTunesless anomaly.

And then in the other corner, cue the fanboys, techies and Apple apologists who would immediately deflect the blame for the absence of iTMS in Asia to the antithetical twin prongs of piracy and major labels. It is likely that the labels are to blame too but though there are others who have held back from building music repositories due to major label restrictions, foibles and anachronisms, Apple’s pursuit of an iTunesless iPod strategy inevitably feeds off piracy.
As Chin Wong further noted,

Ironically, by not selling (music) to large swathes of Asia, Apple is indirectly encouraging piracy because iPod owners wouldn’t be able to buy songs online even if they wanted to.

Even though Apple did launch iTMS in Japan, Australia and New Zealand, these are music markets more akin to Europe than Asia. It is a known fact that piracy is prevalent in Asia, and in 2004, Steve Job himself addressed the piracy issue stating,

Let’s understand piracy first: I found you get really unreliable downloads. You have to try several times to get the song, and then you get it and find it was encoded by a ten year old with four seconds missing at the end. You don’t get to listen first, you don’t get artwork, and it’s stealing. We (via iTMS) offer fast, reliable downloads from our vast server farms “we are very, very good at this. It’s not stealing, it’s good Karma. Website music stores suck - they don’t work.

The IFPI and other analysts have already cited that China has a piracy rate of about 90%, with paid online music barely managing 11% share - and it is certainly not Apple’s responsibility to rectify the piracy rate. But 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.

Online Music Access - China 2007

As seen on this chart, unlicensed music search led by Baidu, combined with P2P downloads dominate with its accompanying supply of pirated music in China. With physical CD piracy also around 90%, it cannot be claimed that most users in China are ripping their CDs into mp3 for legitimate use on their iPods. So if one strips away the reality distortion field, without a doubt the iPod in China is not only a repository of pirated music but one that is purpose built to organize and play this pirated music - with few non-infringing uses in China. Granted that in China, Apple itself is victim to piracy of their products, but just as the warehouse or shopping complex owner who makes a killing by knowingly being the primary repository or channel by which these fake products are consumed is complicit, the iPod itself echoes a similar role.

In 1984, Sony Betamax defended its case against Universal Studios successfully when it was absolved of any contributory copyright infringement for the potential uses by its purchasers, because the devices were sold for legitimate purposes and had substantial non-infringing uses - and personal use of the machines to record broadcast television programs for later viewing constituted fair use.

As such, much as the iPod is a beautifully engineered and designed device while arguably having a case for substantial non-infringing uses in the US and parts of Europe, it has to be acknowledged that its primary use by purchasers in China involves the infringement of music copyrights.

Analogically, let’s say the iPod was a gun allowed for use in the US primarily because its main purpose was for hunting, with Apple also providing access to the majority of hunting grounds in the US. But if this same gun was being sold in China which not does not have any suitable accompanying culture or hunting grounds, then its primary use would inevitably be for killing people! To cross metaphors, the iPod could be considered as an exquisitely designed double-edged sword which when used in another legal context, environment and culture, becomes a weapon with substantial infringing uses.

Yes, it is heretical by the book of Jobs to describe the iPod as such, and in 2004, Steve Ballmer of Microsoft albeit with vested interest, called a spade a spade with his biting observation that, “The most common format of music on an iPod is stolen,” and in the process he earned the ire of the fanboy clique.

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 Apple has seen it fit to expend energy and resources to distribute the iPod. The map vividly shows that 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. [It has to be pointed out that though Apple added 40 additional countries for limited access to the new iTunes Apps store last week this did not include music access.]

iTunes Music Stores Map

So one can’t be faulted when inferring that the iTunesless iPod is the pipe that delivers the opium for the masses in many parts of the world, with the realization that the opium is illegal especially in China.

It is especially galling for Chinese consumers to note that Chinese songs albeit in limited quantities are available to US & European iTMS customers but not in the country of origin of the music!

Pure Audio MP3 Sales by Volume - China 2007

In China itself, the pure audio MP3 player has undergone major consolidation in the last year and now 3 major brands having risen to prominence leaving numerous other smaller brands on the sidelines who will probably fade away - while Apple currently has a promising 10% volume share and considering that its devices are priced higher, there is revenue to be had here. At this point, it would only be proper to highlight that leading mp3 player manufacturer, Samsung has not conducted itself responsibly with regards to music marketing by aligning itself closely with Baidu’s pirate music search

Noting that the total revenue for 2007 for the pure audio MP3 player market in China was RMB 4.26 bil ($600 mil) and projected to rise to RMB 5.67 bil (US$ 800 mil) by 2012 which carries synergies with the developing music and smartphone market, and one can see why both Samsung and Apple are willing to battle it out for supremacy in this sector.

Pure Audio MP3 Player Revenue - China 2007 to 2012

So the launch of the new Apple store does seem to be a perfect platform for Apple to renew its efforts to dominate the MP3 Player market in China

However, the conundrum for Apple in China is that the pursuit of this goal can only be achieved by feeding on the very piracy that Steve Jobs himself labelled as “stealing” and without an iTMS or at least working with a legal online music store in China, it is incongruent to Apple’s stated philosophies.

Credits:

  1. Pirate Image courtesy of Gearlog
  2. Apple Store China Image courtesy of David Feng of Techblog86
  3. Map courtesy of Google Maps
  4. Good Evil Apple Image courtesy of Gizmodo

July 11, 2008

Baidu Ploy To Divide & Conquer Labels in China

Filed under: Music Industry — maths @ 9:34 pm
Kill 3 Generals with 2 Peaches
Illustration: Killing 3 Generals with 2 Peaches

China’s rogue search engine Baidu has recently come under intense attack from a large swathe of the music industry including government appointed bodies like the Music Copyright Society of China (MCSC), the China Audio-Video Copyright Association (CAVCA) and domestic labels joining forces with international major labels and publishers in an unprecedented alliance against it calling on advertisers to refrain from advertising on Baidu.With its advertising lifeblood under threat, Baidu has attempted a divide and conquer strategy against the labels by announcing a partnership with 3 labels “ Ocean Butterflies, Emperor Entertainment Group and Shanghai Huayi Group wherein it will be sharing advertising revenue on streaming music and music videos with them, though significantly, revenues from controversial mp3 downloads are not part of the equation. For dramatic effect, Baidu claims to have lined up an advertiser willing to put up a pool of more than RMB 10 mil (US$1.5 mil) which will be used for this revenue share, but has not even mentioned the advertiser’s name - and it is open to question if this advertiser even exists. In all probability, this announcement seems like a blatant attempt to deflect the music industry alliance’s call to advertisers to boycott Baidu.

It is most likely that Baidu is actually dipping into their huge revenue pool and taking out a small portion to give to these 3 labels, but this very act acknowledges the fact that they do realize that labels are due their cut and contradicts their previous claims to the contrary. So if they are only limiting it to just their so-called Baidu Digital Music Alliance including the 3 labels, surely that implies that they are hoarding the remainder of their ill-gotten revenue pool which belongs to other labels. So the manoeuvring and timing of this announcement shows that Baidu is clearly buying off 3 labels in an unsustainable manner with expensive advances rumored to be in the seven figure region (in Chinese yuan) each, simply to boost their position in the impending legal cases and to subvert public opinion - with no positive motivations towards the music industry at large. In fact, unless they extend similar revenue share deals along with compensation to all other affected labels for the sustained acts of infringement over the years, the true significance of this announcement is that their advances to these three labels have instead just created a precedent for suitable compensation claims for each label suing Baidu currently!

The following is the English translation of a great analysis of this latest development in the Baidu saga with kind permission of Beijing Digital Music Consulting, first published on the Sina Blog in Chinese:

Baidu’s Multi-Million Yuan Ad Payment Offer is a Ploy to “Kill 3 Generals with 2 Peaches”
Story - Kill 3 Generals with 2 Peaches
Original article by Zhang Zhi Yuan (translated below)

(My last article, Labels Finally Strike Baidu’s Vital Points had been blocked by Baidu but is still available via Google, Soso, Yahoo, iask, Sogou and other search engines)

News announcement: Baidu recently revealed that it has received the first RMB 10 million plus advertising payment for Baidu’s Digital Music Alliance, which will start from July implying that over 70 labels in this alliance will get over 8 to 10 times of the previous revenue share. Also, Baidu claimed that if all goes well, in a few years the revenue earned by this alliance will exceed that of the alliance of major Chinese websites (RMB 40 million per year)

Baidu’s ploy to sow mistrust amongst labels based on the “Kill 3 Generals with 2 Peaches” strategy
This news is quite timely as it seems to have come about as a result of the legal action against Baidu initiated by the recent music industry alliance. However, such a response from Baidu against the three major music associations - MCSC, CAVCA & IFPI - is unwise. It merely seems to be a public relations tactics and not a strategic solution - and will only serve to increase the conflict between two sides.

Baidu’s reaction can be likened to toothpaste being squeezed out of a tube in reaction to pressure from the labels’ actions. Before the music industry alliance collectively sued Baidu, it had no motivation to attract greater advertising revenue. Now it seems that in reaction to the alliance’s efforts, Baidu has somehow easily extracted a portion from their pool of over RMB 100 million ad revenue, and with even more effort, they claim that RMB 1 billion is possible too.

Till now, Baidu has not acknowledged the magnitude of the problem, and marking their lack of sincerity, they have resorted to the strategy of sowing the seeds of mistrust among labels in “Kill 3 Generals with 2 peaches” fashion.
Baidu’s practiced logic has become,

I stole one billion yuan from all of you, but since I am a rascal/ scoundrel, no one can do anything about me. So I will take out 10 million out of 1 billion yuan and whichever label gives in first by surrendering and promises not to accuse me, I will give them some money, but whoever insists otherwise, not a cent will be given out to them.

Such a move by Baidu is bound to frustrate the music industry. As a dominant player in the online music industry, Baidu certainly needs to show greater social responsibility. A more sincere way for them to deal with the labels is to provide a solution that will satisfy all copyright owners’ needs instead of providing limited scraps of money for a few labels to fight for. This kind of treatment of the labels can be likened to teasing a monkey. It can only serve to make most labels angry and force those who are insisting on legal content distribution more determined to sue for further compensation. Otherwise, those pursuing justice will get nothing, which is very much against the concept of a harmonious society as well.

The labels are not satisfied that Baidu offers revenue share of ads for streaming music webpages only
Let us suppose that the labels accept Baidu’s model of ad revenue exchange for copyright. Then, all music companies should ask for a share of all of Baidu’s mp3 channel ad revenue, in addition to all key word searches related to music in other Baidu pages and channels, instead of only the ad revenue from the streaming pages assigned to the digital music alliance. The scope of revenue share is now a major point of dispute between Baidu and the labels. The labels generally think that the money offered to copyright owners is only a small fraction when (it is known that) the whole amount is at least a hundred times this.
Of course Baidu likes to say that although the mp3 business brings huge page view traffic, the scale of revenue is still not big. However the music industry response is that, if this were case it shows up Baidu as not only failing to attract advertising, but also emphasizes their limited ability to run the music business too. This excuse cannot be accepted and theoretically it can be described as,

You stole my money, but when I ask you to give it back, you say that you have used the money to run a business and you are running a loss now, so now you claim that you only can give me a small sum of money.

To earn profits from the music business is not an easy task and taking into account the (illegal) circumstances, it is possible that Baidu has been constrained in this area. Otherwise, given Baidu’s platform reach, if they were more focused on running it more effectively, they could possibly earn more profits for the greater benefit of the music industry. For example, they could open up their whole platform and integrate services like Baidu Post Bar, music Zhang Men Ren , Baidu blog etc. The record labels can then have their own promotions on these pages with event or activity marketing which will be able to attract much greater major brand ad revenue than having just simple display ads.
Only when Baidu solves this dispute regarding copyrights will advertisers who have a comparatively greater sense of social responsibility feel assured enough to place their ads on Baidu. If Baidu can improve for the better, with its platform advantage, it should not be difficult to share several hundred million yuan with the music industry each year.
However, Baidu’s current calculation on (traffic and revenue) data with regards to the labels is surely not very scientific, and a necessary solution would be to find another trusted company who can monitor this data fairly.

The revenue from music on Baidu could be derived from the following areas:
Bidding for music related key words for search ranking, and key words matched with text ads are two major areas - with the other sources being image ads, text link ads, streaming player ads etc.
However, the most dissatisfactory aspect is Baidu’s offer to share only the ad revenue on music streaming with labels. Even though the streaming revenue share is offered, critically, the fee for music downloading is not solved. Streaming is streaming, downloading is downloading - the two rights are not the same. The key problem remains the monitoring of the frequency of music streams listened to by users. Most labels (belonging to Baidu” digital music alliance) only receive less than one hundred yuan per month which is unlikely to be true revenues, so they do suspect that Baidu is cheating in the accounting. So Baidu also needs to make their revenue accounting more transparent and public, by opening up its back-end data access to a third party to monitor in order to earn the public’s trust.

Legalization doesn’t necessarily mean that consumers have to pay
Many consumers mistakenly assume that the argument between Baidu and the labels is about whether music they consume should be charged to them or remain free. In fact, legalizing Baidu’s mp3 doesn’t necessarily mean asking consumers to pay. Consumers in future could still have a free legitimate music download service, with a better quality of downloaded music than the present system.

The labels think that Baidu has profited enormously using their songs, but has not shared any of this money with them and copyright owners. They are willing to try out new methods but Baidu does not have any sincerity. Baidu’s piracy has damaged the interests of copyright owners and legal web sites and especially dampened the enthusiasm of music creators, which will eventually lead to the shrinking of the music industry. This is also the reason why everyone feels that good songs are becoming fewer in number in the market now.

For consumers, music could possibly be consumed in various ways in future. Some can choose to view ads in order to listen to music for free, and bigger fans can opt to pay for better quality service. What the labels want is for the market to develop in an orderly and healthy fashion, but not by sacrificing the interests of general consumers. Instead, Baidu’s only interest now is for quick returns, and consumers simply cannot fathom the struggles the labels’ are undergoing in this situation, with many enthusiastic musicians putting in great effort towards music production but getting nothing back in return. This should not be tolerated in a harmonious society. It can be likened to protecting a rare animal from extinction, failing which no one will work on music production earnestly, with a discontinuation of investment in this area which could tragically result in the Chinese music industry dying off.

Other References:
Baidu Bites Back - China Music Radar
Silk Street Divides and Conquers Foreign Brands - Danwei

Credits:

  1. Image courtesy of Chinamengzi.net
  2. Kill 3 Generals with 2 Peaches Story courtesy of the book “More Than 36 Stratagems: A Systematic Classification Based on Basic Behaviours” by Douglas S. Tung, Kenneth Tung
  3. Baidu’s Multi-Million Yuan Ad Payment Offer is a Ploy to “Kill 3 Generals with 2 Peaches by Zhang Zhi Yuan
  4. Translation by SQ & Maths

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