MMW-109 -- Japanese Mobile Music Providers Returning Home from Overseas

J@pan Inc Magazine Presents:
Commentary on Japan's music technology news

Issue No. 109
Friday March 9, 2007



++ FEATURE: Japanese Mobile Music Providers Returning Home
from Overseas

** Nagasaki man receives 2-year sentence for illegal
ringtone distribution
** RIAJ releases mobile download sales figures for Q4
** KDDI 'One-seg' handset users top 2 million
** Label Gate jumps into mobile space
** IMJ releases iPod remote that doubles as mobile phone
headset controller

++ FEATURE: Japanese Mobile Music Providers Returning Home
from Overseas

Having been involved for the past five years in bringing
Japanese mobile music services to overseas markets, I've
developed a deep interest in the differences between mobile
content (and music in particular) between Japan and other
countries. In fact, the very first issue of this newsletter
(MMW #1, January 2002) covered the launch of i-mode and
Japanese ringtone services in Europe. Since then, I've
done periodic updates on Japanese music providers in the
US and European markets and have closely followed the
progress of Japanese companies in these regions.

Four years ago, it seemed like a total no-brainer for
Japanese companies such as Yamaha, Faith, For-side,
Index, Dwango, Cybird and Hudson to take their mega-hit
ringtone services into Europe, the US and Taiwan. They had
huge song catalogs of western music, efficient production
systems, and experience in running successful mobile services.
Wherever NTT DoCoMo launched a new i-mode service, a pack of
music and game companies followed in the hopes of cashing in.
They set up subsidiaries, bought up local content providers,
and made an agressive push into these foreign markets.

Although there have been some moderate short-term successes,
in the end most of these expansions have not gone well, and
many of the companies have folded up their tents and
returned home to Japan. Last month, Faith sold its content
subsidiaries in the US (Moderati) and Europe (Digiplug),
Dwango severed ties with its US partner last year, and
the larger companies have recently called their overseas
staff back to Tokyo.

So what went wrong?

The main differences and problems that plagued the Japanese
music providers can be broken down as follows:

1. Carriers - In contrast to Japan, where wireless carriers
stay out of content and allow hundreds of third-party music
aggregators to compete, most of the larger overseas carriers
have adopted a 'white label' approach whereby they license
content from only a select few providers and sell it through
their own services. When overseas carriers do allow
third-party content, they usually extract an exorbitant
cut of the provider's revenue (up to 50% in some cases).
This stands in stark to contrast to the 9% cut taken by
Japan's main carriers.

2. Copyrights - Although music content providers often
complain about JASRAC, the fact is that having a 'one-stop'
clearing house for mechanical royalties at a reasonable rate
(5% to 7%) is a tremendous help to CPs, especially ringtone
providers. In the US, there are three such organizations and
it has often been difficult to determine exactly who owns
the copyright for a particular song - especially if it is
shared among individual artists. In other areas such as
Russia, China and Latin America, most Japanese CPs gave
up their efforts at starting a service when they were
unable to determine who exactly was in charge of collecting
mechanical royalties.

3. Billing Models - Music CPs in Japan have flourished by
using a flat-rate monthly subscription model, where the user
continues to pay even for months when they don't download
anything. This model was used by the various i-mode carriers
overseas, but for the most part has not caught on outside of
Japan. In the US, most billing has been done on a per-download
basis, with ringtones in particular selling for 10 to 15 times
the price charged in Japan. The end result has been that
Japanese CPs have not been able to enjoy the kind of stable
revenues on which they built there businesses here.

Despite all these problems, there are still several Japanese
companies who are not giving up on the overseas market for
mobile content. Even as their budget for overseas development
is reduced, they continue to look at alternative models
such as the off-portal ad-supported services (described
in last month's feature) which are currently doing so
well in Japan. In addition, organizations such as the
Mobile Content Forum (a consortium of Japanese mobile
content companies) have also become involved recently,
setting up a task force to investigate the overseas markets
in more detail in the hopes of improving prospects for their
member companies.

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** Nagasaki man receives 2-year sentence for illegal
ringtone distribution
In brief: On Feb. 22, the Nagasaki District Court found a
45-year old Nagasaki man guilty of illegally distributing
ringtones and sentenced him to two years in prison (suspended
for three years). The man was arrested last November, and
his case has received much attention, as it is the first
such arrest in Japan related to mobile music piracy.

** RIAJ releases mobile download sales figures for Q4
In brief: The RIAJ recently published sales data for
mobile downloads from October to December 2006. In all,
mobile downloads accounted for JPY13.64 billion
(US$113.7 million), a 43% increase over the same quarter
last year. Full-song download sales more than doubled,
showing a 137% increase, while ringbacktones went up
76% and mastertones 6%.

** KDDI 'One-seg' handset users top 2 million
In brief: KDDI and Okinawa Cellular announced that the
number of users using handsets supporting One-seg broadcasts
reached 2million on February 23. The first One-seg handset,
the Sanyo W33SA, came out in December 2005. Since then, an
additional 12 models have been released, and KDDI has claimed
a 57% share of the market for handsets that play One-seg.

** Label Gate jumps into mobile space
In brief: On March 5, Label Gate - a joint venture made of
many of the same major record labels that comprise Label
Mobile - launched its own mobile download site for full
songs and videos on NTT DoCoMo's i-mode menu. Label Gate
runs the online download shop 'mora', while Label Mobile
runs the popular 'Reco-choku' series of mobile sites.

** IMJ releases iPod remote that doubles as mobile phone
headset controller
In brief: On March 1, IMJ released an iPod remote called
BluRing that features connectivity to a mobile phone via
Bluetooth. The iPod earphones can be used for the mobile
phone as well. When a call comes in, the song is paused,
and the user can talk through a microphone equipped in the
controller. Telephone numbers that the phone received are
displayed on the iPod screen, with the nine most recent
calls kept in the history. The remote sells for JPY 12,800