MMW-124 -- Japanese Fair Trade Commission Rules Against Label Mobile

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

Issue No. 124


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++ FEATURE: Japanese Fair Trade Commission Rules Against Label

** Eurotechnology says at least 75,000 iPhones sold in Japan
for July
** Yamaha announces release of Sequel 2
** mF247 to suspend operations at end of August
** Tsutaya to partner with Usen on music service
** JRC becomes first Japanese company to join DDEX consortium

++ FEATURE: Japanese Fair Trade Commission Rules Against Label Mobile

After nearly four years of investigation, the Japanese Fair Trade Commission (JFTC) handed down a ruling last month against the founding companies of Label Mobile, the joint venture that is Japan's overwhelmingly dominant mobile music content provider.

As first reported in our feature for MMW #74 (March 2005), these companies - Sony Music Entertainment, Avex Networks, Toshiba EMI (now EMI), Universal Music and Victor Entertainment - were issued an official advisory notice by the Japan Fair Trade Commission in March 2005 over their refusal to grant licenses to third-party chaku-uta (master ringtone) providers. This notice followed a nine-month preliminary investigation which included a raid on the offices of several record companies back in August 2004. The investigation was reportedly triggered by complaints from mobile music providers accusing the record companies of colluding to exclude other mobile music providers from the highly lucrative market for chaku-uta in Japan.

The original notice issued to the five record companies contained several specific findings, including the following (initially reported in MMW #74):

1. Due to their dissatisfaction at losing income to providers of MIDI-based ringtones, the five record companies decided in 2001 to collaborate on the development of a new mobile music service that would take advantage of their control over the master rights to popular songs.

2. Because any provider of Musical Instrument Digital Interface (MIDI)-based ringtones can obtain song rights by paying a standard royalty to JASRAC (Japanese Society for Rights of Authors, Composers and Publishers), there are a large number of providers and a lot of competition based on price. In order to avoid this situation, the labels established a joint venture called Label Mobile which would be the exclusive content provider for the new service.

3. From its inception, the Label Mobile Board of Directors has consisted solely of executives from the five labels.

4. At a Label Mobile management meeting in May 2002, Sony Music proposed to the other labels the idea of a "chaku-uta" service requiring the master rights to songs. The service would be inaccessible to companies other than record labels, thereby avoiding price competition.

5. The five labels agreed to make Label Mobile the exclusive provider of songs for the chaku-uta service and to refuse license requests made to any of the five companies by other chaku-uta providers.

6. Chaku-uta providers other than Label Mobile have since been denied song license requests for no justifiable reason.

Of the five record labels named in the original notice, four of the companies decided to fight the ruling and subsequently submitted their counter-arguments to the JFTC. Only Toshiba EMI opted to accept the findings of the notice and begin licensing its catalog to other content providers. As the legal arguments dragged on, Label Mobile further expanded its already dominant position as the only mobile music content provider able to offer catalog from all major Japanese labels. In fact, it is now estimated that 70% to 80% of all paid mobile music downloads are made from a Label Mobile service.

The JFTC ruling in July was a long time coming, but did not come as much of a surprise to anyone involved in the mobile music industry. While Sony and the other labels argued that they refused third-party license requests based solely on the business merits of each request, the evidence made it clear that Label Mobile was established largely for the purpose of excluding third party providers in order to avoid competition and save on distribution costs.

Despite all of the time and effort spent in the four-year investigation, though, it is highly unlikely that the ruling will have any real impact on the industry. Provided that the labels agree to comply with the ruling this time, there will be no penalties or fines levied against any of the companies. And of course, at this point, it really doesn't matter much whether or not the labels increase their licensing activity to outside companies. Simply by keeping other providers out of the competition for the first six years of real-music mobile downloads in Japan, the record companies have more than accomplished their objective of exclusivity and control.

It's hard to imagine this kind of scenario occurring outside of Japan. Cooperation among business rivals here regularly approaches levels not often seen in the West, and can be very effective in keeping outsiders at bay. Even iTunes, after three years of business here, has been unable to make much of a dent in Japan's highly exclusive market for mobile music. Similarly, Napster has had little success in Japan with its subscription model, due in no small part to a lack of major Japanese catalog.

Whatever your views on collusive business practices and the JFTC ruling, the bottom line for the music industry here is that Japan remains the only major market where digital revenues have compensated for the decline in physical sales. Because the labels were able to come up with a system that has worked for all of them, there has been no real incentive for them to experiment with other business models and services such as subscriptions or streaming. And this will likely remain the case for as long as mobile revenues are able to hold strong.


** Eurotechnology says that at least 75,000 iPhones were sold in Japan during July
In brief: During a panel discussion at the Foreign Correspondents Club of Japan on August 13, Gerhard Fasol, CEO of Eurotechnology, estimated that between 75,000 and 125,000 iPhones were sold in Japan from July 11 through July 30. Fasol went on to predict that Apple will sell between 640,000 and 1 million iPhones in Japan by the end of 2008.

** Yamaha announces release of Sequel 2
In brief: On September 1, Yamaha will begin selling Sequel 2, the latest version of its music production software developed by Steinberg. Sequel is a simplified version of Steinberg's Cubase software, similar in features and functionality to Apple's GarageBand. Steinberg is a wholly-owned subsidiary of Yamaha.

** mF247 to suspend operations at end of August
In brief: mF247, a site that distributes DRM-free independent J-Pop music, announced that it will suspend operations after August 31. Shigeo Maruyama, the president of mF247 and former president of Sony Music Entertainment, said in a written statement that mF247 had accomplished its initial objectives. The site opened in August 2005, and became known for its realtones that featured complete musical works which were under 47 seconds in length.

** Tsutaya to partner with Usen on music service
In brief: Tsutaya Discas, which operates the large Tsutaya chain of CD and DVD rental shops throughout Japan, announced on July 31 that it would team up with Usen to offer its own online music store called 'Tsutaya Discas Ongaku Haishin.' The new service will offer essentially the same catalog and pricing currently found on Usen's 'Ongen' store. In addition, users will also be able to order CDs for rental from the site.

** JRC becomes first Japanese company to join DDEX consortium
In brief: In July, JRC (Japan Rights Clearance) became a member company of DDEX, a consortium of companies working on international standards for distribution of digital content and data. Included among the 14 charter members of DDEX are Apple, Microsoft and RealNetworks.

-- Steve Myers

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