For a song

On the morning of May 25, 2006, John Kennedy, CEO of the International Federation of the Phonographic Industry (IFPI), mapped out the state of China’s music industry during his keynote address at an event in Shanghai. He spoke on behalf of the 1,400 record companies his association represents. The speech began full of optimism as he cited the "extraordinary growth potential for the music sector in China" and listed his reasons for being "cautiously optimistic" about the coming years.

Then, his voice turned grave as he took aim at public enemy number one:

"First and foremost, [China] needs a wholesale sustained attack on piracy levels which have long debilitated a fledgling legitimate music sector in China. Illegal sales of music in China are valued by IFPI at around US$400 million [€ 292 million], with around 90 percent of all recordings being illegal."

Four years later, Kennedy’s numbers seem conservative. The IFPI now claims 99 percent of music consumed in China is illegally downloaded for free. It seems like an impossible market in which to do business. For the "Big Four" major music labels – EMI, Sony Music Entertainment, Warner Music Group and French-owned Vivendi’s Universal Music Group – it largely has been.

The surprise is that while the Big Four have floundered, smaller, more nimble companies have found new ways to turn profits in a market of nearly three billion ears.

Mobile movements

The same month as Kennedy’s speech in Shanghai, QD Wang and Jesse Liu, CEO and CFO respectively of NASDAQ-listed Chinese firm Hurray!, called investors with good news. They said that Hurray!, which provides wireless value-added services (WVAS) to mobile phone users, had seen music-related revenues grow to 47 percent of gross revenues during the first quarter of 2006, up from 20 percent the previous year.

The heady times came from the fact it was Hurray!, and not a major record label, that held the rights to the biggest music hit of 2005 in China: "Laoshu Ai Dami" or "Mice Love Rice." The saccharine love song did not win popularity on the radio, in record stores or on the dance floor. "Mice Love Rice" became ubiquitous as China’s most popular mobile phone ringback tone – the sound a caller hears while he waits for you to answer – in history. It generated a rumoured 200 million (legal and illegal) downloads, and at its peak registered 6 million legal downloads in one month, making more than€15 million in the process.

Mobile music, or music in various forms that is downloaded to one’s mobile phone, has done what the internet has not in China: turned digital music into money.

Money for nothing

"The crazy thing in China is people are not willing to pay anything to download music to their computer – it’s all on Baidu for free," says Anthony Tartaglia, co-founder of mobile marketing agency 21 Communications. "But people are willing to pay for music on their cell phone and that’s what companies have been able to take advantage of."

Tartaglia chalks up the phenomenon to the history of both music mediums in China. Whereas MP3s have always been "free" in the eyes of consumers, ring/ringback tones were introduced as a paid service and have "real perceived value." To illustrate, he relates a "Music in Every Bottle" marketing campaign his company designed for Sprite, giving away free ringtone downloads with each bottle. He observes that the campaign that would never have worked as "free internet MP3 downloads."

The revenue-sharing arrangement for mobile music typically involves three entities: mobile operators (China Mobile, China Unicom and China Telecom), WVAS providers and internet portals (such as Hurray!, Tom Online, Sohu and Kongzhong) and content providers (artists and music labels). Mobile operators get a 15 percent cut for providing customers and the download billing platform. Service providers (SPs) convert songs into mobile downloads and aggregate vast amounts of content, pocketing the other 85 percent, which they then share with the content providers (typically 70-30 respectively). Consumers pay a low monthly fee for the option to change their ring/ringback tone and a few yuan each time they do so.

"The SP business model is based on low transaction amounts but high volume," explains Dave Carini, managing director of Maverick China Research. In a recent report on mobile music in China, Maverick estimated the total ringback tone market would exceed€1.7 billion this year.

Carini adds that this revenue-sharing scheme is still in flux, with both mobile operators and SPs jockeying for a bigger share.

Operators have also enjoyed some success bypassing SPs altogether and working directly with content providers. "Operators have grown more powerful since 2006. Over time, they have been able to watch user preferences and think of ways to take over the market," Carini says.

Foreign music labels entered the mobile music market belatedly, partnering with SPs, after many local companies already had a sizeable head start. WVAS provider 9Sky has content agreements with EMI, Sony and Universal. Sony also has a licensing agreement with Linktone, while Warner has partnered with web portal Sina.

Source of hope

In China, as well as worldwide, subscription-based online and mobile music streaming services are also a source of hope for the undermined music industry. For a monthly fee, site subscribers instantly have access to millions of songs without the need to store data or spend time hunting for quality MP3s. Spotify, the Swedish leader in online music streaming, has partnered with Chinese portal Tom Online and is planning a launch soon.

According to Ed Peto, managing director of Beijing-based music industry projects company Outdustry, one reason for the majors’ limited success is that "their stellar international catalogues are of limited relevance to the mainland Chinese audience." While a handful of Western musicians have enjoyed immense popularity in China, the international music scene has not embraced Chinese-language artists, who make up the bulk of most locale listeners’ playlists, in the same way.

Another has been their trouble keeping up with the home-grown competition. "Due to limited returns in any one area of the industry, a label needs to be involved in all major areas of business if they hope to survive," Peto says. "This is a fairly new idea in the West but has always been the default setting in China. The larger Chinese labels have been built from scratch in this environment and so necessarily have a wide range of business interests."

Legal woes

Instead of looking for innovative ways to enter the mainland market, the Big Four – each of which turned down interview requests for this article – have spent much of their time in court fighting internet piracy. The companies have launched numerous lawsuits against Chinese websites Baidu, Yahoo! China and Sogou, which they claim provide "deep-linking" to pirated music.

There have been minor victories, but the efforts have brought about little real change. Most recently, in January, Beijing No. 1 Intermediate People’s Court ruled in favour of Baidu and Sogou, clearing them of€6.5 million in damages from copyright infringement. Despite new copyright laws that went into effect in the country in 2006, it was the second time the music labels lost to Baidu in court. The IFPI called the January ruling "extremely disappointing" and said it was "considering [the] next steps."

In the meantime, the Big Four have already taken an unprecedented step to counteract the "free music" mentality of the China market. Last April, the companies signed an agreement with Google to give away their music for free as downloads on Google’s music service site in China, Top100.cn. In exchange, the music labels receive a portion of the online advertising revenue.

It is an experimental business model – one both Google and the music labels emphasized will be limited only to China – and no one is saying how the arrangement has worked thus far. Still, the move itself is a testament to how unmanageable the situation has become.

"The idea of major labels conceding that their catalogues should be made available free to the consumer is fairly amazing and goes to show just how desperate the digital music environment is in China," says Outdustry’s Peto. "The real growth area is live music, so international booking agents have more to be interested in than label execs, in the short term at least."

Keep it simple

Firms not conventionally associated with the music industry have found creative ways to profit from Chinese music fans. Chivas Regal Scotch whisky wooed hip-hop lovers when it sponsored a Black-Eyed Peas benefit concert in Shanghai in the wake of 2008’s Sichuan earthquake. The promotional event for 700 "VIP guests" raised€632,000 for Red Cross relief efforts.

In the long term, it may have benefited Chivas even more.

"That was the most successful music ad campaign that I’ve seen in China. It was quite simplistic: Create a lot of buzz by bringing in famous people," says Archie Hamilton, managing director of Shanghai-based music-promotion agency Split Works. "Chivas became the biggest-selling whisky in China off the back of a very clever first-mover music strategy."

Live music

Chivas’ success, according to Hamilton, did not stem from that particular concert, but rather from a long-term marketing campaign centred around live music, which, unlike the piracy-plagued recording industry, has shown real signs of potential.

Beijing and Shanghai have held a number of high-profile music concerts and festivals in recent years, proving that Chinese consumers are willing to pay Western ticket prices to attend live performances of well-known international acts such as the rock n’ roll band Rolling Stones, R&B diva Beyonce and rap-metal ensemble Linkin Park. Still, due to haphazard visa conditions and undeveloped events infrastructure, the bread and butter of live concert sponsorship and tour promotion is based on smaller, independent overseas artists and local Chinese bands.

Split Works’ Hamilton says events promotion has grown faster than branding campaigns for his business in recent years. Dealing with layers of bureaucratic approvals, arranging visas, booking venues, promoting events and simply getting bands from point A to B has not come easy. His advice: Be patient and flexible.

"I think we’ve come up with something that’s workable. Western companies come in here for a quick fix. I’ve been here five years, and I feel that I’m just beginning to understand a little bit about how things work here," he says. "When the industry is a bit of a blank canvas, you have to build the bits and pieces for yourself."