Asia's Maddening Music Biz

Universal Music is on a star search for hot acts in China and Japan, but illegal file-sharing and CD piracy woes present major headaches

Young, urban Asian consumers are among the most tech-savvy people on the planet, and they love their music. Teens and twentysomethings in Japan, South Korea, Taiwan, and Hong Kong are "mashing up" music and video content from every imaginable source by integrating applications from their feature-laden mobile handsets, personal computers, and the Net.

And then there is the vibrant array of musical acts to choose from, everything from J-Pop acts in Tokyo to Vedic heavy-metal bands out of Mumbai and New Delhi. Yet much of Asia is nothing but trouble for the world's biggest recording companies. They're casting about for a business model that works in a region where pirated CDs and illicit music and file-sharing sites are ubiquitous.

Universal Music International's Asia-Pacific President Max Hole knows the short-term headaches and long-term potential better than most. He's pushing the world's biggest music recording company, which controls such labels as Decca, Geffen, Island, Def Jam, and Mercury, to cultivate more quality local talent in-house and via tie-ups with regional studios.

'Mando-Pop' for the Mainland

On July 16, Universal announced a deal to promote and distribute pop artists under contract with Taiwan's Linfair Records, which also distributes and sells in Hong Kong and Southeast Asian markets such as Malaysia and Thailand. Linfair boasts such artists as Angela Chang, a Taiwanese singer and actress who is fluent in both Mandarin and English and was nominated for Best Female Singer at the 2007 Taiwan Golden Melody Awards.

Universal is hoping that Chang and other Linfair content in Mandarin will click with music lovers on the mainland, where "Mando-pop" is starting to gain traction. The idea is to cultivate Chinese talent like Chang, and other artists on the mainland, in the hope that when China's notorious piracy problems someday ease up, Universal will be in an ideal position to grow profitably with China's emerging music industry.

Right now, making money in China for Universal or any other major global record company is devilishly tough. "China is very, very difficult," says Hole, who notes that that 80% to 90% of the CDs purchased in China are knockoffs. On top of that, "online piracy is almost total," he laments, adding that "I am not sure that the Chinese government is particularly interested in enforcing copyrights to keep Western record companies happy."

Upbeat About China's Enya

Another problem is that China's music culture is still in its infancy in many ways. Local artists have to avoid controversial cultural and political topics, and there isn't a plethora of bands to check out in cities such as Beijing and Shanghai every night as in the West or even Japan.

That's not to say there isn't some extraordinary talent on the mainland. Hole, for instance, is very upbeat about the prospects for an artist known as Sa Dingding, a singer, musician, and composer who combines traditional Chinese ethnic music with Western electronica and other sounds. Hole thinks she could emerge as China's version of Irish recording artist Enya and someday garner an international audience.

In the meantime, a star search is under way by Universal and its local recording partners such as Beijing's Dong Music International and Tian Yun out of Shanghai. Universal's own Beijing office has a recording studio, and the company has talent scouts scattered around the mainland. "When the [business] model eventually changes and there is a way to monetize recorded music in China, I will be in a good space," says Hole.

Hitting Pay Dirt in Japan

While China remains a challenge, Japan continues to be a far more reliable and interesting market for Universal, given the quality of the artists, the range of styles, and the willingness of most consumers to actually pay for quality music. "In Japan, the music scene is very strong," says Hole. "It's our third-biggest market" outside of the U.S. and Britain, he points out.

Universal's Japan operation has struck it rich this year with a new act called GReeeeN. This group, formed by a bunch of medical students who remain anonymous to the public, has been a huge hit for Universal Music Japan. Their latest single, Aiuta, has sold more than 2.5 million downloads, and their debut album, A Domo Hajimemashite, sold 400,000 units in three weeks after its June 27 release.

Universal and other music recording companies could really use some sustained growth in Asia, given the somewhat depressing industry outlook expected in the years ahead. Legitimate physical sales of music (LPs, cassettes, CDs, DVD audio, and so on) have been falling or remaining stagnant this decade, and the $29.3 billion in worldwide sales the industry raked in last year is expected to fall 61%, to $18 billion, by 2009, according to a study by Soundbuzz, a Singapore digital music provider.

And Asia, despite its huge mobile-phone base and dynamic economies, is a big part of the problem for global record companies trying to embrace digital technologies as distribution channels for their artists. In China, about 350 million knockoff CDs are in circulation and these in turn are being ripped, burned, and transferred to PCs and MP3 music players, according to the International Federation of the Phonographic Industry (IFPI). It is by far the biggest black market for pirated CDs, which cost the recording industry more than $400 million in lost sales per year. The mainland is also a growing player in online fraud.

At the urging of major recording labels such as EMI, Mercury Records, Sony BMG, Universal, and Warner (WMG), the IFPI has gone after regional Web sites and search engines such as Yahoo! China. The concern is that Internet service providers have allegedly maintained links to illegal music download sites, where one can gain access to tracks by international artists such as Coldplay and Gorillaz and any number of popular regional acts for no charge. On Apr. 24, a Beijing court ruled that Yahoo! China should be responsible for blocking access to such sites.

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