It didn't matter that they were packed into a drafty college dining hall or that they only had a few hours' notice. They were ready to rock. For four hours on a recent Sunday night, 3,000 students from the Beijing University of Science & Technology abandoned their books to enjoy the forbidden sound of a live concert. They chanted and waved lighters while six bands--including two of China's hottest stars, He Yong and Dou Wei--blared out Chinese versions of rock, grunge, and heavy metal.
Because Chinese authorities rarely grant permission for rock concerts, no tickets were sold. So neither the bands nor the music company that backs them made any money. But the underground concert was nonetheless a huge success. The event will help the bands sell hundreds of tapes and compact disks by word of mouth. And that will bolster the reputation of Taiwan's Rock Records, an independent label that's promoting local talent--and taking on PolyGram, Sony, and other giants in the region.
HOT SPOTS. Welcome to the new frontiers of the music business. New York and London are on their way out as the world's hottest music towns. And the standards for what's hip on the global music scene may no longer be determined primarily by U.S. megastars. Today, the action is shifting to spots such as South Africa, where Johannesburg's pop-jive sound--a mix of traditional African beat, jazz, and rhythm & blues--is gaining popularity worldwide. And to Hong Kong, where superstar Jacky Cheung is creating hits that sell like gangbusters as far away as Amsterdam.
These days, talent scouts are fanning out to coffee houses in Latin America, karaoke clubs in Asia, and even school dances in Central Europe. They are searching for singers and rock groups who can make it big in their own regions or catch on around the world. Says Ken Berry, president of EMI Music International: "The demand for American music is starting to recede. Now, the big growth is in local artists."
The $40 billion music industry is in the midst of a dramatic transformation. It is changing from a business relying heavily on U.S. sales and exports to one that is far more decentralized and geared to local and regional tastes. Many experts think the U.S. portion of the worldwide music market will shrink to just 20% by 2000, down from a third today and 50% in 1987. After years of selling the tunes of Michael Jackson and Mariah Carey to overseas markets, the five large companies that control 80% of the industry--PolyGram, Warner, Sony, EMI, and Bertelsmann--are pouring billions of dollars into regional studios, plants, and distribution networks.
Driving the changes is a sales slump in the U.S. After a decade of double-digit growth, music sales in the U.S. grew by just 2.6% in the first half of 1995 (chart). One reason is the slowdown in compact-disk sales. Over the last decade, music sales soared as collectors converted vinyl records and cassette tapes to CDs.
Now, that wave is cresting, just as other problems surface. A dearth of new superstars has forced companies to dig into their vaults and recycle hits by aging rockers to boost sales. At the same time, profitability is taking a pounding as top artists with global appeal are able to extract higher fees. EMI paid $50 million to sign Janet Jackson in 1991. Now, the company is close to signing a new contract for $80 million to keep her, or she'll bolt to a competing label. "You have to pay a [top] price to get a top artist to sign with you," says Rudi Gassner, CEO of Bertelsmann's BMG Entertainment International.
"TOO FAR." Overseas, the picture is far brighter. From Warsaw to Beijing, young people in emerging markets are spending their rising disposable incomes on tapes and CDs. And while they will still line up to buy the likes of Bon Jovi and Michael Bolton, they increasingly want to hear stars who speak their own language and reflect their own culture. The lifestyle of, say, Madonna, says an engineering student in Beijing, "is too far from our own." His favorite: Chinese rock singer Dou Wei.
Those preferences pose major challenges for the music giants. With tight government controls and rampant piracy still the rule in many countries, investing in the music business in India or Thailand is fraught with risk. In the old days, exporting Madonna's records and tapes involved little extra overhead cost and even less imagination. Now, music companies must scout out China's emerging pop idols--and struggle with all the cultural, political, and logistical difficulties of starmaking. While local artists make far less than their U.S. counterparts, they can snag $10 million deals if their music sells widely across a region. With recording and video production costs higher in overseas markets, the onus is on companies to find artists with wide appeal.
To make matters worse, the Big Five are facing new competition. Powerful new players such as Seagram Co.'s recently acquired MCA Inc. and DreamWorks SKG are both determined to build a global music business from scratch. Other media giants--Sumner M. Redstone's Viacom Inc., Rupert Murdoch's News Corp., and Michael D. Eisner's Walt Disney Co.--are nosing around the business. One of these companies is expected to pounce on EMI Music when its parent company, Thorn EMI, splits in two later this year.
The Big Five are also battling new regional independents, such as Taiwan's Rock Records, Brazil's Sigla, or Japan's Pony Canyon. Often run by street-wise local entrepreneurs, the independents are savvier about spotting new talent. In 16 years, Rock Records has built itself into eastern Asia's largest independent record company, with 50 Chinese-language artists, including the region's most popular stars. Sales were an estimated $85 million for 1995.
The strains of going global are causing turmoil in the gilded suites of music management. Squabbling over slumping domestic profits and the high price of international expansion are behind some of the tumult. Warner Music Group Inc. is on its third chief in 18 months. Sony's U.S. chief, Michael P. Schulhof, was ousted after poor performance in the company's movie and record businesses.
And while management is stable at PolyGram, weaker-than-expected sales plus delays in new albums forced management to issue a warning that 1995 profits will be flat. "We've all had a good run in the U.S., but it's slowing down," worries BMG's Gassner. "The question is, can we increase revenues in mature markets while we wait for the new ones to develop? It's a very critical time."
The changing currents initially took many music executives by surprise. Although music companies began to look offshore in the late 1980s, they were mainly selling successful U.S. artists. "Music from the rest of the world was an afterthought," says EMI's Berry.
Then came disappointing sales outside the U.S. Alternative rock bands, such as Warner Music's Green Day and PolyGram's Blues Traveler, haven't been as well received as were Nirvana and Pearl Jam in the early 1990s.
EARSPLITTING. Nor does rap music, so lucrative at home, travel easily. The lyrics conjure up the things Europeans and Asians fear most about the U.S.--crime and violence. French teens are opting for "rai" music, and Italians "ragamuffin," both less harsh Euro-equivalents to rap. Even more popular in Europe is "techno," or dance, music with its earsplitting bass and minimal lyrics. In 1985, U.S. and British artists accounted for 65% of music sales in Europe; now it's just 45%.
Finally, though, the Big Five music companies are starting to catch on to the demand for local music. "Developing local repertoire is our No.1 goal," says Robert M. Bowlin, president of Sony Music International. He estimates that 80% of the music sold in Latin America is by Latins, while 60% of that sold in Asia is by locals. Says Don Atyeo, general manager of Murdoch's Hong Kong-based Channel [V] satellite music-video channel: "At first, they threw us Stone Temple Pilots and grunge music, which doesn't work here. Now they send us 80% local repertoire and Western music that works in this market, such as love songs."
Another trend surprises even the most experienced music managers. Known as "the crossover," it's when music from one region outside the U.S. and Britain carves out a big niche in another. Continental European artists are now selling in astounding numbers in Japan, Korea, and Brazil. Warner's Italian chanteuse, Laura Pausini, has swept through Europe and, having recorded a Spanish-language album, is a big hit in Latin America. So is BMG's Italian superstar vocalist, Eros Ramazotti.
Warner's Luis Miguel, Mexico's favorite balladeer, last year sold 500,000 albums in Korea, where he was voted top international artist of the year. EMI's obscure Danish rock band, Michael Learns to Rock, sold 2 million records in Asia, including 500,000 in Japan.
So far, no one has discovered an emerging-market Madonna with worldwide appeal. But Warner Music maestro Seymour Stein, who discovered the U.S. singer, is rolling the dice by promoting a mainland Chinese singer called Dadawa worldwide. Warner's Elektra label will release her Sister Drum album in the U.S. in mid-January, following a European tour.
The Shanghai singer, whose real name is Zhu Zheqin, doesn't sound a bit like Madonna, but the two think alike: She adopted the name Dadawa because it's easily pronounced in both Asian and Western languages. Warner's hope is that the Chinese singer's music, which is a mix of Tibetan chants using such ancient instruments as the long trumpet, the barreled drum, and the erhu fiddle, will resonate with millions of Gregorian chant aficionados. Says Bill Roedy, president of MTV Networks International: "I think it's only a matter of time before a Michael Jackson or a Madonna [emerges] from Russia or Vietnam or India."
South Korea, Taiwan, and Poland, too, are quickly becoming reliable money-spinners, especially now that their governments are reining in illegal sales. Once the greater China market develops--including the 1.4 billion or so Mandarin speakers from mainland China, Taiwan, Indonesia, Singapore, and Malaysia--music companies expect to rack up big profits from investments in Mandarin artists.
And if Mexico and other large Latin American countries can stabilize their economies, the music business could see double-digit earnings growth once again, even without the U.S. Many companies are building a Latin American presence now that Brazil and Mexico are ranked No.7 and No.8, respectively, in the world in total retail music sales. PolyGram recently paid $57 million for the region's largest independent, Rodven Records in Caracas.
So far, PolyGram is the market leader. Asia accounts for 25% of its total sales, with such superstars as Jacky Cheung and Faye Wong under contract. Cheung's 1993 album, Kiss and Goodbye, sold 4 million copies worldwide, which made him the first Asian artist to get on PolyGram's annual Top 10 roster. "You've got to take your hat off to PolyGram, which was doing 15 years ago what the rest of us are starting to do now," says Michael Smellie, senior vice-president of BMG Entertainment, Asia-Pacific.
ROUGH PATCHES. Now, the others are racing to catch up. "We haven't grown by less than 50% for the past three years, and we expect that to continue," boasts Lachie Rutherford, regional managing director of EMI Music for Southeast Asia and China.
No doubt, there are still rough patches ahead. It will likely take years for government controls to be rolled back and for piracy to be curbed in markets such as China and Russia. But in the meantime, as the new middle class grows in places as farflung as Shanghai, Prague, and Mexico City, music lovers hunger for a mix of local, regional, and American tunes. As the music industry responds, some executives can already hear the sound of money.