The CD Is Dying

The resignation of a renowned producer reflects the decline of the music industry By Bai Shi

The CD Is Dying

The resignation of a renowned producer reflects the decline of the music industry By Bai Shi

OLD FASHION:Consumers listen to recorded music albums using earphones in a music store in Haikou,Hainan Province back in 2006

Song Ke, CEO of Taihe Rye Music Co. Ltd., suddenly announced his resignation on January 5, shocking the Chinese music industry and again raising concerns over the future of the industry.

Song, born in Beijing in 1965, is a central fi gure in the development of Chinese pop music.He majored in environmental engineering at Tsinghua University and then studied at Texas A&M University in the United States, but he made recording and selling music his career.

“Learning how to turn a song into a marketable copyrighted product was probably the most important lesson I learned in the United States,”Song said to the press several years ago.

Over the past 15 years, the success of many Chinese music stars, such as Pu Shu,Wang Feng, Sun Nan and Lao Lang, among others, has been attributed to Song and his company. From 2000 to 2003, Song served as deputy general manager and production director of Warner Music China.

And until recently, Song was the head of Taihe Rye Music, a leading Chinese record company Song established in 1996.

For many, Song’s resignation seems to signify the end of the record business in China, and Song himself has often made the argument that“China’s recorded music sector is dying.”

While others in the industry have different opinions, it’s clear that the golden age of China’s recorded music is over and the sector now faces enormous challenges.

Bad news

2011 was a year of bad news for Chinese record labels and producers.

In March, Song declared that his company would no longer sign contracts with new musicians at an event in Shanghai. “The old business model—making money through selling recorded music, is at an end,” said Song.

In June, FAB, a 22-year-old Chinese music retailer, closed its store at the Oriental Plaza in Beijing’s Wangfujing downtown area. “Sales of recorded music are shrinking year by year. FAB will now focus on developing a broad array of digital music products instead of selling tapes and discs through high-cost street stores,” said Xiao Wei, sales manager of FAB’s Beijing of fi ce.

But FAB doesn’t think the street stores will completely disappear. Rather the company believes CDs, as a media product, will gradually become a collector’s item for dedicated music fans, said Xiao.

Problems in the music industry aren’t confined to China. Internationally the recorded music market is facing the same challenges.Sony Music Entertainment, one of the world’s largest record companies, announced that it would shut down its three music brands: Jive,Arista and J last October.

Meanwhile, Avex Group, Japan’s biggest music company, closed its of fi ce in China due to the depression of the music industry.

EMI Music, another leading music company, was acquired by its rival Universal Music Group (UMG) last November.

Digital storm

For decades, recorded music companies followed a fixed business model—companies contracting an array of singers and artists to make albums, and then selling those albums in the form of long-playing records, tapes and compact discs. This business model was also introduced to China as Chinese pop music emerged in the 1980s. Between 1980 and 2000, the vast majority of music fans in China primarily listened to music from cassette tapes and CDs.

However, from 2000 onward, with the rapid penetration of the Internet and the advent of easily transferable digital music fi les,mp3s, digital products became the mainstream of the global music industry.

As digital music has swept the planet, CDs,cassettes and vinyl records have become obsolete; the traditional business model of record labels and music companies is no longer viable.

Song foresaw the inevitable primacy of digital music and began to shift the focus of his company to producing and publishing digital music in 2003. In collaboration with China Mobile, the country’s largest mobile phone operator, Song and his team developed the fi rst polyphonic ringtones for the Chinese market.

The digital business was highly pro fi table.Song earned 20 million yuan ($3.17 million)from his ringtones download service in 2004.The profits Song earned from his cellphone and Internet-focused music ventures stood in stark contrast to the declining revenues he saw in the conventional records business.

By 2011, digital music services accounted for 40 percent of the revenue of Taihe Rye Music.

Unfair distribution

Song said unfair revenue distribution, a longstanding problem of China’s music market,is the key factor in the collapse of so many Chinese record labels in the past few years.

“We failed to establish a fair income distribution system to sustain the sound development of Chinese music,” said Song.“Content providers should receive 40 percent of the revenue from sales, otherwise, creating music won’t be sustainable.”

While it is now clear that digital music is the future of the music industry, the revenue distribution remains a problem.

“Today, Internet service providers have a larger share of that revenue than recorded music publishers do. The share of content providers has been squeezed to just 2 percent,” he said.

“Music production is creative work and continual investment is needed to support composers and train singers. Low income can’t sustain recorded companies and a lot of companies and studios have gone bankrupt,” he said.

In terms of a model for the industry, Song spoke highly of Steve Jobs, former CEO of Apple Inc. About 70 percent of the revenue from music sold through Apple’s market leading iTunes platform goes to content providers and 30 percent is retained by the service provider—Apple.

“This percentage shows Apple’s respect for creativity and innovation. More importantly, a reasonable approach to distribution promotes the sound development of digital music and other digital content,” he said.

At the beginning of his ringtone business,Song received high returns of up to 42.5 percent. Using the money, he hoped to reform the country’s music distribution system and ensure a higher percentage of revenue is retained by labels. However, he soon found that service providers were grabbing a larger than fair share of the pro fi ts by concealing their real income and the real volume of their online sales.

Copyright woes

In addition to the imbalanced revenue distribution issue, China’s record industry has long been plagued by another intractable problem—piracy.

Consumers in China have become accustomed to buying cheap pirated copies, instead of expensive legal albums.

The pro fi ts from sales of pirated CDs are low, but the trade scale of piracy promises enormous total revenue, attracting numerous pirates into the business every year. The government has made a considerable effort to counter piracy, but illegal copies are still easily available in the Chinese market.

Compounding the problem of CD piracy is the ease of distributing digital music, which means that downloading free online music is now the default mode of acquiring new songs for most Chinese consumers. With the click of a mouse, users can download music directly to their PCs or hand-held devices, for free.

Internet piracy is even more difficult to eliminate than physical CD piracy.

Given the depression of the recorded music market, more and more Chinese artists have become dependent on commercial performances and advertising endorsements for revenue. Rather than making albums, singers now rely on the success of just one or two songs and hope to rise to fame overnight by releasing songs online.

CONTROVERSIAL REMARKS: Song Ke, a wellknown fi gure in the Chinese music world, concludes that Chinese recorded music has come to an end

China’s online music revenue system remains extremely underdeveloped compared to sophisticated markets and file-sharing platforms overseas in the United States,Europe and Japan. In these markets, despite the dominance of digital formats, artists and labels continue to make money due to welldeveloped intellectual property protection systems.

Consumers in the West are used to paying for music products.

Song began a paid music download service in 2004 and he is con fi dent that Chinese consumers are willing to pay to download music. “The key is whether your digital product is attractive,” Song said.

“Music suppliers should develop their services in the direction of paid downloads.We must foster the habit of buying music and continue to improve the quality of digital music,” he said.

Song mentioned that Taihe Rye Music now focuses on two aspects: one is copyright management; the other is how to create new digital music products.

The decline of recorded music has become an indisputable fact. No matter what measures music companies take to operate the business,they must continue to promote new singers and make new songs. Otherwise, music will lose its appeal and creativity and consumers will be left with no music to enjoy.

8-12 percent of the revenue from sales in average.