Photographer: Noriko Hayashi/Bloomberg

Spotify's 40 Million Tunes Won't Go Far With CD-Happy Japanese

The music streaming service will have to fight record labels that still sell a lot of profitable compact discs.

On a recent muggy afternoon in Tokyo, 21-year old Shintaro Naganuma joined several hundred customers browsing CDs at the eight-story downtown outpost of music retail chain Tsutaya.

Having discovered a couple of new rock artists on YouTube, the third-year university student hit Tsutaya Co.’s flagship store in trendy Shibuya to look up their albums. That process encapsulates the dilemma now facing Spotify Ltd.’s head Daniel Ek, who on Thursday presided over the music streaming service’s long-awaited entry into the world’s second-largest music market.

On the one hand, the nation’s consumers have grown accustomed to finding music or listening casually through smartphones, which should help the Swedish company attract users for its free ad-supported version. But when it comes time to hand over the cash, most people in Japan continue to buy CDs and even vinyl. That’s largely because record labels remain wary of signing away their music to streaming services.

Tsutaya's flagship store in Shibuya. Photographer: Noriko Hayashi/Bloomberg

Tsutaya's flagship store in Shibuya. 

Photographer: Noriko Hayashi/Bloomberg

Even Apple Inc. and messaging service Line Corp., which introduced paid streaming services last year, have yet to take off in part because of limited song-availability. As a result, physical sales still dominate, making up 84 percent of the industry’s sales last year, compared to 39 percent globally.

 “Record labels hate to give music away for free, so Spotify’s initial inventory could look even worse than Line Music or Apple Music,” said Mikiro Enomoto, a commentator on the nation’s music industry who teaches popular culture at Kyoto Seika University. “These streaming services probably only have about half of the songs on Oricon’s charts,” he said, referring to Japan’s equivalent of Billboard rankings.

Some of that was evident at Spotify’s launch event, where executives shied away from mentioning any label deals or highlighting prominent Japanese acts. The company didn’t take questions from the press and a spokesman suggested reporters browse the app to see which artists were available. Fewer than half the artists responsible for Oricon’s Top 10 albums of 2015 -- including boy band idols Arashi and national icon Mr. Children -- were on the service as of Thursday afternoon.

Instead, the company unveiled a new feature that will show lyrics while tracks are playing, hoping to pull karaoke-loving Japanese users who want to sign along with their favorite songs.

Entering the market a year after Apple and Line also means the novelty of streaming services has worn off,  said Akiko Senoo, senior researcher at digital consultant MMD Labo. Still, she sees promise in Spotify’s integration with Facebook Inc., which should help it acquire users through word-of-mouth.

 “The industry is certainly buzzing because Spotify has entered the market, but it will take time for users to get excited,” Senoo said. “Growth will probably be weak at the outset, but as people began to see on their Facebook feeds that their friends are listening to Spotify songs, usage should spread slowly.” 

Daniel Ek

Daniel Ek.

Photographer: Akio Kon/Bloomberg

The irony for the music industry is that just eight years ago, Japan was home to the world’s most advanced mobile music market. Speedy networks and strong record label cooperation allowed mobile phone owners to download music to their devices. Sales of songs and ringtones surged to 79.8 billion yen ($790 million) in 2008, nearly tripling from 2005. Digital accounted for a fourth of all music revenue in the country, outpacing the rest of the world’s 20 percent.

Then the iPhone came along. It had limited support for ringtones and a cumbersome iTunes system that forced users to download songs through their computers. Consumers embraced the product anyway for its apps and other innovations, but digital music sales plunged in Japan and never recovered. Despite a small uptick over the past two years, it remains at less than half its 2008 level.

 “Back then, Japan’s ecosystem was actually working better than iTunes,” said Enomoto. “But the iPhone’s debut destroyed it. And as smartphone users learned to listen to music for free through YouTube, buying songs on iTunes never took off.”

Whether Japan can reclaim its digital music crown could depend largely on how many users Spotify can attract to its free service, and how many of them then decide to pay to get rid of ads. Globally, out of its 100 million users, it has successfully convinced 40 million of them to pay $10 a month to listen without ads. In Japan, Enomoto estimates the conversion rate will be lower, at about 20 percent.

Even that would add to Japan’s nascent streaming industry, and help convince more labels to sign on. Until then, Spotify may find it tough to win over music aficionados like 23-year old Shuhei Yamamoto, who was shopping for records to add to his 150-plus vinyl collection at an HMV Group Plc store in Shibuya. Having access to Spotify’s 40 million songs doesn’t hold much appeal unless it’s what he wants to listen to.

 “Whether its free or paid, I’d rather spend my time and money on a record I actually want to listen to.”

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