Wednesday, 25 April 2012

The Record Industry in China

When I was in Secondary School, I was once offered a contract by a music publisher, but when I told Mum about my interest to join the music industry, her immediate reaction was, "玩音是没有前途的 (There's no prospect in joining the music industry) That was it. I never got to sign that contract but fortunately I didn't think too much about it then. Fifteen years later, as I recall her declaration, I can't help but reluctantly agree that Mum was probably right. Looking at the state of the record industry today, it's the record executives themselves who are calling it quits. During a recent Lifeweek interview with Song Ke (宋柯), the ex-AGM of Warner Music (China Region) painted a bleak picture of the Chinese record industry and shared his views for its demise.

1. Lack of a strong and cohesive ecosystem amongst the major players in the industry.
Song Ke feels that for the industry to sustain healthily, each content provider, including those from film and television, has to be able to maintain a 40% margin. In the '90s, record companies were at least able to obtain 8-12%. But today, they are struggling with less than 2%. Also, labels face the problem of a lack of negotiation power when approaching downstream e-distributors, and this problem is aggravated due to a lack of cohesiveness amongst labels themselves, resulting in a lack of standard rates to ensure the sustainability of all industry players. Song Ke himself had been lobbying for the past few years to create a united voice amongst labels to form a coalition and fight for better rates, but his repeated requests had been falling on the deaf ears of executives who merely see him as their competitor.

2. Lack of strong support from the government
Unlike film, television or the internet content industry which are multifaceted or interactive, the music industry does not seem to be able to generate the same level of buzz and media excitement, and hence there is little incentive for the Chinese government to support the industry in terms of infrastructure development or pushing for changes in legislation.

3. Lack of transparency/ dishonesty in trade dealing
In the Chinese mobile industry, Song Ke explains that the ideal business model for ringtones ("1585" service) is to have telco operators (e.g. China Mobile) receive a margin of 15%, while the remaining 85% is taken by the service provider enabler, which is to be shared equally between the enabler and the content provider (42.5% each). This model will be more equitable and sustaining. However, the common grievance from music labels is that almost all enablers are dishonest and have squeezed the share of the music labels to as low as 10%.

4. Even pirates know it better.
Song Ke laments it's ironic that even the pirate industry knows the importance of keeping a healthy 40% margin for sustainability. The cost of creating a pirate CD is about ten cents, and the typical mother who carries her child on the street to hawk pirated CDs is able to earn about $2 from the price of $5 per disc. With such an attractive margin, who would not resist?
5. Lack of innovation in the music industry
Song Ke has an interesting point of view about the lack of innovation in the music industry which has contributed to its demise. He compares this with the evolution of other media industries. In gaming, the industry has evolved from console to online; in film, movies have turned from 3D to IMAX. Such innovation has prevented pirates from keeping up. However, in the music industry, the MP3 has become accepted as the norm in place of the CD, and Song Ke considers it as a regressive and inferior format that does not improve the consumer experience. The MP3 has destroyed the need to read the lyrics. The MP3 does not allow the consumer to find joy in collecting album art. So why would the consumer want to pay a premium for an MP3? Furthermore, the MP3 format does not allow an equitable and robust business model to develop around it.

Since this blog is about the future of the music industry in Singapore and Asia, I thought it would be interesting to start off with Song Ke's pessimistic view of the music industry in China. Do you agree with his views? Is there any hope at all? Do send in your comments.