Japan's CD-ROM Market: Getting Up to Speed

In fiscal 1993, Japanese manufacturers produced almost seven million CD-ROM drives; that number is expected to double this fiscal year. Although about 80% of this production is shipped overseas, that still means almost three million domestically pro duced CD-ROM drives will make it into the Japanese market in 1994. These numbers might seem to indicate yet another burgeoning domestic market, but in fact Japanese produced titles sold only 294,000 CD-ROMs in 1993. While domestic CD-ROM production is exp ected to more than triple in 1994 (to 945,000 units), some quick arithmetic shows that three times as many Japanese-manufactured CD-ROM drives as CD-ROM discs will reach the market in 1994.

CD-ROM sales

There are no reliable figures for CDROM imports into Japan, but the number is conservatively estimated to be at least three times domestic production. Considering that this would mean a typical user buys only about one CD ROM per year, the actual numbe r of imported discs could be much higher.

The range of titles sold is diverse, but very few reach the 10,000-sold limit that marks the domain of "best sellers." The Nikkei Sangyo newspaper recently reported that the top-selling discs in Japan are a Macintosh demo of CD-ROM software (70,000 dis cs sold), Yellows (a CD-ROM photo album of nude Asian women; 20,000 discs sold), and Gadget (an adventure game; 20,000 sold).

According to Hypercraft, a chain of computer stores that concentrates in Macintosh-related CDROM products, some 1,300 titles are currently sold in Japan. About 800 of these are directly imported from the US, with little or no localization (at most, a J apanese manual is included). Another 300 titles are localized versions of titles originated abroad. Only about 200 titles are Japanese originals, and half of these are "adult discs" pornography).

Market composition

Considering the so-far small base of multimedia-capable computers (those that can integrate text, sound, and pictures on the screen), it may come as no surprise that the Japanese market for CD-ROMs is much smaller than that of the US. What might not be so obvious, though, is that the composition of the market is also very different. In the US, Windows based applications dominate the CDROM market; in Japan, Apple Computer (with about 15% of the personal computer market) has managed to grab a 60% share o f the CD ROM market. This will soon change, however, since Japan's IBM-compatible PC providers are jumping into the fray full force, providing complete multimedia configurations. Sales of CD-ROMs for DOS/V (Japanese DOS) and Windows systems will soon surp ass those for Macs. And, after a late start, NEC is now also providing CD-ROM support in its new PC-98 models. Japan is essentially at a point that the US weathered three years ago, and with the ready base of applications flowing in from abroad, it will a dvance quickly.

Pornography or art?

Some segments of the market have already diverged from the American path. In particular, due to the general acceptance of "soft" pornography in Japan, the adult CD-ROM market is already much stronger than in the US. Whether it is the sarariman (male wh ite-collar types) sitting in the train intently reading manga (comics) featuring a young female office worker being raped, or late-night TV no brainers like Gilgamesh, which feature scantily clad young women trying to tease the audience in creative (read: silly and provocative) ways, the inescapable fact is that in Japan, sex equals business. The entertainment industry always seems to be the fastest adapter to new technologies, and multimedia technology (including CD-ROMs) is no different.

In the US, adult CD-ROMs account for less than 10% of the discs sold. In Japan, the share of adult discs is estimated to be anywhere from 20% to 40%. Part of the uncertainty in these figures can be attributed to differing perceptions of what exactly is pornography. The best selling disk "Yellows", for example, which features nude Asian women, sits in a legal gray area and is considered not pornography, but "art."

Kuki Incorporated, an adult video company that has been pumping out films for over 20 years, saw the rage of the future and started Kuki Digital in August 1993. In its first year of operation, the company has produced fourteen CDROM titles, including s uch "creative" titles as Lez Mix, Abnormal Hollywood, Digital Ona-pets (from onanii, masturbation), and Fuckman. Twelve of the titles have been ported from Mac to Windows and DOS/V format. Digital Erotica, their #1 title contains clips from Kuki's best-se lling videos -- so far, it has sold over 15,000. Compared to games, which are very much a hit-or-miss business, adult discs consistently sell 6,000 or more per title. Much of the stability of the market lies in the fact that CDROM games and adult videos a re aimed at similar segments of the population -- males between the ages of 20 and 35.

Making an adult CD-ROM is a relatively quick and inexpensive process, compared to a full-blown game development cycle. The average adult title costs from 5 million to 10 million and takes about 2 months from start to finish. Film clips may be borrowed from video releases or be shot simultaneously, saving further time and money. Many successful start-ups have found that the multimedia porn market can be a stable nest egg on which to build other ventures. And, with future disks being produced in hybrid f ormat (to run on either Macs or Windows-based machines), development time and cost will be further reduced.

Cultivating the creative seed

In a recent survey of what Japanese company workers thought multimedia is, CD-ROMs came in fifth, with about 38% of the survey believing that CD-ROM applications constituted multimedia. The four technologies that placed before CD ROMs were personal inf ormation managers (65%), personal computer networking (62%), teleconferencing (45%), and CATV (42%). With everyone wondering what multimedia is, it is logical that most are also wondering what to put on CD ROMs.

Many might argue that a lack of creativity is the reason for the low number of original Japanese CD-ROMs. There are actually two, more practical reasons, however. The first is a lack of financial incentive for the creative would-be author of multimedia CD-ROMs. In a survey of copyright holders in Japan, only 2.7% replied that they were adequately compensated for their work. One problem cited is the current system's inability to manage the huge volume of copyrights that will be placed when authoring bec omes easier. In addition, start-up companies have a much harder time in Japan -- the skewed venture-capital system in Japan is strictly regulated by the Ministry of Finance. A measure of the degree to which this affects the industry is that the average ti me between incorporation and a company's initial public offering is 30 years in Japan, while only 5 years in the US.

The second reason is that no clear definition of multimedia exists in Japan. There are many disciples of the new technology, but few evangelists. The main problem is that, in the US, the idea of multimedia was conceived to fill a gap; in Japan, the ide a of multimedia was learned to enable companies to enter a market. Most Japanese who have heard about multimedia think of the concrete -- the technology and widely known applications but few see the ideas driving the development of the technology. This ga p in perception of multimedia will give Western companies an edge in remaining a strong force in the CD-ROM market.

However, Japanese developers are keeping their ear to the ground to discover the next wave to wash in from America. For now, it seems that Peter Gabriel has a hit with his Xplora CDROM, where the user can explore the process of producing music and lear n about Peter Gabriel's music in general. Market watchers believe that the current plans to make CD-ROMs exploring the history, music, and personality of singers will be extremely popular in the coming year. In addition, watching the success of author and photographer Akira Gomi and his CD-ROMs Yellows, Yellows 2.0, and Americans, many importers believe that digital photograph albums will also be popular. Currently in Japan, many female "talents" (TV personalities) release photobook collections of nude sh ots that are considered art by some and pornography by most. The transfer of those collections to the digital media will be a safe route to cheap success.

The medium is not the message Softbank estimates that the 1994 CD-ROM market will be 20 billion ($200 million), about 10% of the entire packaged software market. Nevertheless, with the great change going on in the Japanese marketplace, many businessmen are leery of this "media of the future" and are instead looking to leapfrog to the next step. Marketing manager Kobayashi of Hypercraft says that many forward-looking managers realize CD-ROMs are only a media for communicating data (currently the only me dium that can hold a sufficient amount of data for a multimedia application at a reasonable cost). The bottom line is that the real product is the data. When networks becomes extensive enough to support a customer base and fast enough to transmit the grea t quantities of data necessary, applications, entertainment, and information will be sold directly over the net.

That day is not likely to arrive, however, until the providers find a reliable and convenient way to charge their customers and restrict distribution. For the moment, the physical form of a CD-ROM represents a way to restrict data to the person who bou ght it. The next few years will find would-be providers looking for the proper systems to ensure that they get paid for their services. With all the talk today of video-on-demand, music-on-demand, or karaoke-on demand, in the final analysis it is all just data-on-demand.

For the next decade or two, CDROMs are likely to have the run of the market. The only probable changes will be to accommodate greater data densities, based on smaller wavelength lasers and new recording techniques, and to use an open format (e.g., the coming hybrid format). Even in Japan -- the land of Nintendo and Sega and adult graphics -- the CD-ROM market will remain a bastion of creative and artistic minds. And as long as it does, small start-up companies (domestic and foreign) will have a chance to make a profit in the multimedia market.