Ahead of his MidemNet panel appearance, Mathew Daniel, VP of R2G (digital distribution company) in Beijing has a few observations and words of advice for labels seeking digital licensing opportunities in China:

As Olympic hosts and country-of-honor at MIDEM, China’s music industry is an increasingly common feature on the western agenda. There is, however, almost a whiff of the ‘Wild East’ in the way companies are approaching licensing in the Middle Kingdom.

It has to be realized that the vast majority of labels at MIDEM are probably currently unscathed by piracy in China and that’s likely because their music is so obscure in the Chinese consciousness that they have not even had the dubious honor of gracing the servers of China’s notorious MP3 search engine, Baidu.

Piracy in China often gets a lot of attention but many forget the other Ps of marketing and these are the basics that labels intending to come into China should first focus on. For dramatic effect, let me first quote Tim O’Reilly when he said that “Obscurity is a far greater threat to authors and creative artists than piracy“.

I wouldn’t go so far as to say that one is worse than the other as it is a case of horses for courses. I would also add that in China, in true Darwinian fashion, one man’s piracy is another man’s marketing. But as O’Reilly explained, piracy eventually develops in a manner akin to progressive taxation in exchange for greater exposure and appeal: There is always the regretful possibility that one may eventually despair at the crossroads of Robert Johnson.

Ed Peto’s piece about the music business in China also noted the labels’ part in engendering piracy in China:

“The arrival of western product in the early 90s came courtesy of ’saw-gashed’ CDs: Excess stock and deleted titles from western majors attempting to avoid taxation and disposal costs. These CDs had their cases cut to mark them as defective and were then shipped in to China through free-market economic ports like Guangzhou, only to end up on the black market. An end result that can be seen as a partial shooting-in-the-foot for the western majors who then had to come in and fight against the pirate networks they inadvertently helped set up.”

Kaiser Kuo, one of the pioneers of China’s rock scene added, “During the 1990s they were an important source of foreign music”. And so, this rejected music from Western shores – a good proportion being hitherto obscure – has bizarrely taken root in China while the majors also propagate low common denominator fare like the Backstreet Boys, Britney Spears, Celine Dion, Sarah Brightman et al in CD stores. A recent alumnus of this group, UK’s X-factor winner Shayne Ward was in Beijing this week and was awarded a Gold Record for sales of 15,000 for his new CD ‘Breathless’.

The major labels are still counting on physical distribution to help make their numbers in China and International Marketing Director at Universal Music China, Danny Sim has worked tirelessly to develop the market for international artists. In 2007 his efforts resulted in “a significant increase in revenues for CDs and I expect it to be even greater in 2008″, but in general international artists still account for probably less than 10% of the majors’ overall digital revenue in China. As more Chinese are being exposed to Western music via the internet and the media playing more Western music, Danny also hopes that the labels and SPs can work together to cultivate music genres and themes instead of single song hits.

However, this cannot happen in a vacuum and other Western labels who do not have the benefit of an existing network in China will have to do their part to sow the seeds in areas that are often taken for granted, like pro-actively providing artist information in Chinese, building artists’ websites in Chinese and, in general, stimulating more literature and musical discussions about artists online.

The following is an important checklist for labels intending to license digital music in China and illustrates the prior requirements before their music even tempts the pirates:

In this chart, ‘Music’ refers to whether the song is present or absent on the Chinese networks and highlights the necessity to take control and seed the song in China as the first step. Even if the label has not managed this, third parties might already have done so, which gives rise to the pirated presence. Only when the content has been put in front of the consumer in a meaningful way can they judge whether it appeals to them or not. There are multiple applications and formats in which music manifests itself in China and the challenge in the last mile is to manage the revenue collection or at least ensure that the application mix results in net positive revenue overall.

It is of paramount importance that an infrastructure is developed wherein information about artists is propagated combined with recommendation engines to guide the user along in unfamiliar territory. Ian Rogers recently lamented the death of the album cover but in China a more profound barrier exists that stunts the dissemination and understanding of Western music: The lack of basic and standardized metadata including genre classification that allows listeners to recognize song titles and artists.

As part of this initiative, R2G has developed one of the largest Chinese music metadata databases in the world complemented with licensed lyrics.

Much fuss has been made about the impressive revenue from mobile music in China – iResearch estimates that Service Providers (SPs) and Content Providers (CPs) earned up to RMB 3 billion (US$400 mil) in 2006 and China Mobile reported revenues of RMB 5 billion in the first half of 2007 for Caller Ring Back Tones (CRBT) alone, but before prospectors start packing their digging tools, it is important to note three facts:

1. Of all the mobile applications, Caller Ringback Tones generate the largest revenues but it has to be noted that the bulk of it goes to China Mobile. When a user first subscribes to their CRBT package of choice (from one song to ten), only the first sign-up fee is shared amongst China Mobile, the SP, the distributor, the label and the music publisher after which the full monthly subscriptions of 5 RMB goes solely to China Mobile. However, substantial amounts can be made by top Chinese singers who can sometimes sell between 10 to 20 million subscriptions, but this is a rarefied space that is not breached by Western artists. (Graphics by China Mobile. Note: In Chinese lingo Color Ring = Caller Ringback Tones):

   

2. The bulk of the revenue in mobile music is being garnered by Chinese music albeit dominated again by low common denominator fare – and I do suspect that the rural population does sway the popular vote. An examination of the CRBT sales charts for 2007 reveals a dearth of non-Chinese tunes with notable exceptions being Groove Coverage’s ‘God Is a Girl’, with 2004/05 hits Michael Learns To Rock’s ‘Take Me To Your Heart’, Emilia’s ‘Big Big World’ and Backstreet Boys’ ‘As Long As You Love Me’ still earning residual revenues in 2007.
3. Small CPs and especially Western CPs are at a natural disadvantage in negotiating deals with SPs and regardless of whether a deal is struck, there is every possibility that the CPs songs (assuming that they have sufficient appeal) will appear on SPs properties for distribution/sale. And it being an extremely time consuming and technology intensive effort to find out who is pirating the songs, and also to verify how much is being actually made by existing SP partners, CPs are likely to realize much lower revenues than those actually being earned.

William Bao Bean, analyst at Softbank China has calculated that such slippages or under-reporting of revenues to CPs averaged at between 20%-35% while R2G’s close monitoring via its proprietary SCM system has caught a number of SPs under-reporting CRBT revenues by as much as 50%. It is thus critical that a trusted music partner is sought in China in order to maximize one’s revenues whilst monitoring accounting piracy levels.

Mobile for now seems to be the domain of Chinese music so Western labels coming to China would do well to invest and focus on developing their training wheels in other areas so that they too can make the leap into this relatively more lucrative arena.

The Chinese song universe is estimated to be not more than 300,000 with a smaller commercial subset with the potential to provide meaningful revenue – and in discussions that some of us had with Chris Anderson during his trip to Beijing last month, he also concluded that there is currently no Long Tail of Music in China. This Long Tail will evolve in China and will be populated by international music and this is where the opportunity lies. Evolving tastes and growing individualism are already seeing Chinese listeners trying seek out non-mainstream music, but this music is poorly represented on the free networks and that is an opportunity to be tapped by Western labels.

It has to be realized that almost all full-length mainstream music in China is currently being downloaded for free, facilitated by P2P networks and search engines like Baidu and Yahoo (who have both already been found guilty of infringements by the courts). And until music labels pro-actively put in more effort to inhibit Baidu’s ability to illegally deliver music, the few existing paid full-length music retail download stores will have a hard time. However, I do believe that with better metadata and genre classification, music education and accessible representation of some of this niche music eg. classical, jazz, heavy metal, punk etc, a paid model at fair prices can exist.

Tim O’Reilly encapsulated it best in 2002:

“Services like Kazaa flourish in the absence of competitive alternatives. I confidently predict that once the music industry provides a service that provides access to all the same songs, freedom from onerous copy-restriction, more accurate metadata and other added value, there will be hundreds of millions of paying subscribers. That is, unless they wait too long, in which case, Kazaa itself will start to offer (and charge for) these advantages. (Or would, in the absence of legal challenges.)”.

For ‘Kazaa’ read ‘Baidu’ and certainly, China is currently in such a situation where if a viable alternative is not delivered soon, the opportunity will be hijacked by less well-meaning entities. Labels who are seeking to move into China should first seek trusted partners and forget about seeking a quick buck via minimum guarantees or advances and instead should help to build up the infrastructure accordingly. Labels that do not do their homework will inevitably get burned by unscrupulous partners.

Likewise, licensing music for streaming to SPs will only provide returns if there is sufficient marketing support for the artists and also supporting literature and metadata. For example, one of the top music streaming sites 1ting.com records Avril Lavigne’s Girlfriend as the top ranked English song for 2007 at a lowly position of 132 with 25,000 streams. The top song for 2007 registered 3 million streams in comparison.

In conclusion, it is important to note the following:

1. China offers its opportunities but when a new Western label comes into town, it naturally falls into the Long Tail.
2. The Long Tail will be a black hole unless the supporting information and tools are provided to help the labels’ acts stand out.
3. This will involve working with a trusted partner who not only knows the China market but also understands the label’s culture and potential of its acts. It might possibly also involve sharing of investment and development costs.
4. Giving away music is not the solution – there is potential to develop a paid model with a valued service. The search engines would have us believe otherwise as befits their objectives.

There is no silver bullet in music for China and the gold at the end of the rainbow can only be mined with a proper infrastructure supported by the labels and retail partners.

© Mathew Daniel 2008

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The Mechanical Copyright Society of China (MCSC) was set up in 1992 as the sole administrator for composition but it’s effectiveness is often brought into question by the publishers. In the last few years, the majors have taken it upon themselves to either do their own collection or find independents to take it on for them.

While the MCSC claims that they maintain a good flow of revenue back to the western rights owners, there is no mechanical collection agreement in place between MCSC and, say, the MCPS in the UK. There is a 6% first-run mechanical (PPD) but the draw back is that you need to be a China registered company to collect direct from the MCSC. One way mainland international independents get around this problem is by dealing with The Composers and Authors Society of Hong Kong (CASH) who have a reciprocal representation agreement with MCSC and are more approachable/transparent.

The PRS entered an agreement with MCSC in 1995 but due to a non-existent airplay royalty system last year’s PRS China returns were roughly equivalent to the likes of Estonia, Jamaica and Kazakhstan. Up until amendments to the Copyright law in 2001, broadcasters were not obliged to pay publishing royalties. Now, six years after these amendments, there has been no real pay off. Such is the way in China – Surface impressions are all important and it often takes many years for public gestures of compliance to gain any traction in real-terms, if at all.

MCPS-PRS International Manager Liam Donnelly explains:

“PRS is working closely with MCSC by helping to lobby the Chinese authorities along with other international rights bodies, governments and the European Commission to bring about improvements in the Chinese collection system. These won’t happen overnight – indeed we’re taking a long term view of the market – but I think we’re making some progress.”

In truth, there really isn’t a lot of western content currently being broadcasted anyway but this situation will slowly improve – a very long-term view is the only way to go. Optimists are suggesting that broadcasters will be paying performance royalties by late 2008 but, knowing China, you might have to wait a lot longer.

As with other areas of the industry, digital is a glimmer of light as the payment structure actually has publishing factored into it at source. The accounting system is still far from perfected but this represents a tiny foothold in a relatively promising area. The unspoken consensus is that the industry is moving towards 10% publishing at source for Mobile and 8% for Digital. As I mention elsewhere, when you consider that a ringtone retails for 14 pence and even frontline western digital catalogue tends to be sold in the hundreds and thousands rather than the tens of thousands, no-one is going to be triumphantly high-fiving anyone any time soon.

Covers are hard to come by as the standard practice is for the songwriter to sell their songs lock-stock to the label, meaning that western practice seems awkward in comparison.

Ad syncs show promise. You do hear of the odd reasonable sync license but even major operators are regularly caught with uncleared tracks in campaigns, with no real repercussions. Once again, very early days and a sea-change in copyright attitude is required for this to become the staple it is in the west.

It really needs to be said that publishers are not having a fun time over here. There have been a couple of brave, pioneering outfits setting up shop but they have been met by a very bleak landscape and their futures are uncertain.

© Ed Peto 2007

NOTE: This is an extract from the ‘Access China’ report commissioned by UK Trade and Industry Department and British Underground.

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The view from the ground, however, is that all of these statistics need to be taken with a bucket of salt. All attempts by the Chinese government to combat online MP3 piracy, including all public ‘victories’ against pirates, should be seen as totally superficial – a lip service to the lobbying western majors. Internet MP3 piracy remains endemic, with less than 10% (a very generous estimate) of downloaders actually paying 14 pence/download for the privilege.

Even the big boys are at it, with market leader Service Providers (SPs) like Baidu (who allegedly see over 50 million users per day) openly hosting ‘deep links’ to pirated tracks and making money through advertising while they’re at it.

Legal sites such as Top100 and 9Sky are on the rise but change will be painfully slow due to a dislike of DRM, lack of will from the government and a public who have been getting free music off the internet from day one. It is becoming increasingly common for record labels to give away MP3s for free in order to build profile for a track and then profit from where the real money potentially lies…

Mobile Value-Added Services (MVAS): While only a tiny percentage of Chinese people own a credit card (thereby making online download purchases difficult), the cash-pre-pay nature of mobiles means there is an established, digital payment system existing between the user and the mobile operators. This allows for easy purchase of MVAS such as ringtones, caller ringback tones, background music and wallpaper. MVAS generate revenue of over half a billion dollars (US) a year but accounting is far from sturdy – SPs are habitually siphoning off millions of dollars by simply under-declaring sales in what is known as ‘accounting piracy’.

Piracy aside, the big question for you as a western rights owner is “can I get a piece of this?”. The answer is “not easily”. Put simply, western music does not sell well digitally, with only a couple of examples of English language tracks making any sort of returns. In the current climate, there is very little financial incentive for digital distributors and SPs to push foreign language (ie. niche) music, as Mathew Daniel, VP Strategy Development at R2G, China’s largest digital distribution company explains:

“There is certainly the potential for Western music in the long run but this can only materialize if there is more investment in the form of music promotion and even education of music styles, genres and history but to reap the benefits of this investment, there ultimately has to be better revenue accounting.”

If you do end up with digital distribution, the breakdown on your average truetone (for example) looks something like this:
Average cost of truetone: 2RMB = 14pence
15% to Telecommunications Company
10% to publishing
37.5% (half of the remainder) to Service Provider

The remainder (in this case 37.5%) is then split between the aggregator and you, with the aggregator taking anywhere from 20% to 50% for his troubles. In this example, assuming you have a 50/50 deal with the aggregator, this leaves you with roughly…..2.6 pence for every ringtone sold.

There are deals to be had but they are few and far between. Companies like R2G, The Orchard, Artspages, Ioda etc. are pushing western content online in China, but the returns are minimal. The general advice is that, for independent western music, the internet should be seen as an excellent way to get your music heard in order to make money elsewhere, at least for the moment. Piracy isn’t all bad.

© Ed Peto 2007

NOTE: This is an extract from the ‘Access China’ report commissioned by UK Trade and Industry Department and British Underground.

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The majors are all here doing their stuff, struggling away, but like all foreign companies they have had to enter into joint ventures to operate in China, slashing their already slender profits. They own the lion’s share of domestic pop music but with regards to international repertoire, they stick very much to frontline releases and global priorities with the occasional catalogue title. Universal Music China, for example, are doing a reggae push throughout the year to see what sort of audience there is for the genre. Danny Sim, International Marketing Manager at Universal Music China, is optimistic about growth in western music sales. They will release 40% more international titles this year – bringing it to roughly 100 albums – and expect to see a 10-15% growth in revenue. Sim puts his optimism down to ‘a) More people getting a better education, and therefore more people with English as a second language, b) More western music spread through the internet, and c) More media channels will become western music friendly’.Truth be told, the returns (and therefore the marketing budgets) are really not there for majors to ‘break’ niche foreign artists. They have to rely mainly on larger artists’ spill-over publicity from the west, so for the emerging independent, there is very little fun to be had with regards to major licenses.

There is a gaping hole where the independent record label scene should be. You can count the number of truly viable independent labels on a pair of chopsticks.

Modern Sky has just celebrated its 10th year in existence and, much like it’s rabbit-warren of an office in West Beijing, it’s business model is a convoluted arrangement of media company, record label, artist management and design house; a model that has allowed it to survive in this hostile environment. It has amassed a significant percentage of the Chinese rock catalogue in the process. Physical releases are practically a loss leader for Modern Sky with digital revenue also remaining a minor consideration.

Label Manager Meng Jinhui explains that they normally take over management, allowing them to promote the hell out of the artist rather than the album. Resultant brand co-operations with these artists and the label itself generate the bulk of Modern Sky’s income, alongside consultancy for mobile content and a wide range of video production and design projects. You have to be versatile to survive for ten years in China.

This business model means that Modern Sky gain very little from licensing foreign albums and only really do so occasionally, as with their release of Radiohead’s ‘Kid A’. They are very open to approach on the subject of licensing but prefer to look down the route of collaborative work between their artists and the west – to create something new. In general, if you’re looking to license an independent album over here, be prepared for a luke-warm response. Modern Sky have been trying to release Mogwai’s ‘Mr Beast’ for over a year now but still have not been cleared by the censors at the Ministry Of Culture. Even when it eventually is released they only really expect to shift 2,000-3,000 albums. These guys are in it for the love. As you can imagine, advances are very difficult to come by.

© Ed Peto 2007

NOTE: This is an extract from the ‘Access China’ report commissioned by UK Trade and Industry Department and British Underground.

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