Despite a steady deterioration in the Japanese economy, demand for prerecorded CDs continued to climb through most of the 1990s. But sales leveled off in 1998, and since have slid sharply (chart). CD production is down 14% so far this year. That's important for global recording companies like BMG Entertainment, Sony Music Entertainment, and Warner Music. Japan, after all, accounts for 18% of worldwide CD sales--equaling $6.5 billion--and 83% of sales in Asia. "It's pretty alarming," says one Tokyo executive for a major record label. None of the multinationals will comment on their Japanese profits, but a local Tokyo label, Avex Inc., admits earnings sank 36% for the year ended Mar. 31.
In an ominous sign, no CD single in Japan has crossed the million-seller mark so far this year--the first time that has happened in 12 years. Even top artists like pop sensation Hikaru Utada aren't immune. Her latest No. 1 hit single for Toshiba-EMI Ltd. has sold only 850,000 copies since being released last November, according to Tokyo-based market data firm Oricon. One of her 1999 singles sold 1 million copies its first week.
Why the sudden decline? Analysts cite factors such as an aging population and artificially high prices. But these have been part of the Japanese music mix for many years, even while sales kept rising. What's new: an epidemic of illegal copying. Even as album sales slide, demand is soaring for the blank CDs used to "burn" music downloaded from the Internet on home PCs. Output of blank CDs formatted for music hit 40 million in Japan in 2001, and will top 62 million in 2002. Yoko Takeuchi, 28, who was lucky enough to get a ticket to the MTV awards show, says she has stopped buying CDs of her favorite artists. "My friends taught me how to download music from the Internet," she says. "It's easy, and best of all, it's free."
The Recording Industry Association of Japan (RIAJ) estimates that online music services such as File Rogue Inc. cost its members well over $100 million in lost sales last year. On Apr. 10, RIAJ and another trade group were granted a court injunction to stop Internet service company MMO Japan Ltd. from using File Rogue to offer free music. That won't solve the industry's woes, though, as long as the underlying technology exists. "Illegal copying is the biggest problem facing the industry by far," says Taizo Shinya, spokesman for RIAJ, which represents 23 major Japanese and Western labels. The plague of copying is abetted by a peculiar Japanese institution--the 3,746 CD rental shops that seem to occupy every urban street corner in Japan and make it easy for anyone with a CD burner to copy at will. New CDs can't be rented out until three weeks after their initial release.
Other factors are hurting the studios. Last year, Japan's Fair Trade Commission buckled to domestic industry pressure and rejected a move to abolish the "price maintenance system" that prevents discounting of Japanese-made CDs (also of books and newspapers). One result of the system is that locally repackaged versions of foreign albums by artists like Boyz II Men end up costing more than English-language imports. That turns buyers off. For instance,
Sheryl Crow's newest CD, C'mon, C'mon, sells for $19.40 in the Japanese-labeled version, but only $15.12 for the same album imported from the U.S. "It's a ripoff," says 23-year-old Backstreet Boys fan Madowa Takahashi.
One final factor may be suppressing CD sales: widespread disenchantment with Japan's signature bubblegum pop. A recent survey found that "unappealing artists" was the No. 2 reason, after copying, that Japanese teens are buying fewer CDs. "Major labels aren't meeting the needs of many listeners," says Tadashi Takahashi, an official with market research firm SoundScan Japan.
So the studios now have to offer a wider variety of music catering to a more sophisticated, and older, audience. Recent breakthrough successes like English-language crossover artist Utada and R&B-style singer Misia show that fans will buy CDs of true singer-songwriters with the right combination of windpipes and talent. "Going forward, there will be more music appealing to an older demographic," says John Possman, director at Zomba Records in Tokyo. That may be the only hope for an industry in a panic about its future profitability. By Chester Dawson in Tokyo