Piracy is alive and well in China, as a visit to any large city will instantly reveal. Hawkers and relatively legitimate retail stores selling fake copies of CDs and DVDs are ubiquitous and the authorities responsible for policing them appear halfhearted and overstretched at best. Currently, piracy accounts for 95% of all music sales in China despite stringent copyright laws that allow courts to impose criminal sentences. The Chinese legal system is short of trained judges and there are insufficient resources for police and prosecutors to bring the majority of cases to trial. Piracy in China has been a feature since the 1980s when the government strictly controlled all forms of expression. Western pop music was considered bourgeois and consumers who wanted to listen to it had to buy pirated or smuggled cassette tapes.
The situation in China is rather unique in that piracy is not destroying an established record industry (such as in the US), but instead is trying to make its way in a culture where piracy has traditionally been the only way to distribute music. One reason it has continued to flourish for such a long time is that consumers themselves face financial barriers in buying legitimate CDs, which cost on average between US $3-$4, compared with US$1 for a pirated CD.
Chinese producers and sellers of pirated journals have been linked with some of the country's largest and best-known publishers and over half of all copies of academic journals found in university libraries within China are unauthorized copies. The likelihood of China solving its piracy problems anytime in the near future is extremely slim.
Over the past decade, all of the 'Big Five' record companies have established representative offices in China. Sony Music is currently the music industry leader with its joint venture (JV), Shanghai Epic Music Entertainment, holding a 20% market share of legitimate sales.
EMI is not far behind. The company entered the China market in 1992 by opening a representative office in Beijing, which it used to license local companies to sell and distribute products in return for a minimum guarantee of sales units. By 2003, EMI was able to set up a JV in Shanghai to market and distribute its products.
All audio and audiovisual products are subject to strict scrutiny by the Ministry of Culture before being published, reproduced or imported into China. Products sold in China which contain content which opposes the basic principles of the Chinese Constitution, divulges state secrets, advocates cults or superstitions, disrupts the social order, promulgates obscenity or violence or incites criminal activities are strictly forbidden by the Chinese authorities. This censorship policy is far more stringent than exists in most entertainment centers around the world.
China's strict censorship policies have not only affected record companies and artists but also the choice of music available to Chinese consumers on the legal market. Record stores in China have mostly stocked made-in-China packaged pop bands and some Hong Kong or Taiwan pop. This is because only a few foreign artists (such as Mariah Carey) have been able to pass the government approval process.
China's investment laws greatly restrict the ability of foreign media concerns to enter the country's music market. If a foreign record company wishes to establish a presence to manufacture or distribute records, it is only permitted to form a JV with an approved domestic publisher and can only hold a maximum 49% interest in the company. Aside from the restrictions on reproduction and distribution, foreign media companies are only permitted to import and publish records through contractual relationships with authorized state-owned entities in China. The Chinese government also controls the number of music records imported each year by issuing quotas to those authorized state-owned entities.
One of the key questions currently facing record companies is whether there is a sufficient market in China for them to offer music services via phone handsets and on the Internet. China has the world's largest mobile phone market, with more than 269 million mobile phone users by the end of 2003, and according to George Huang, vice president of Nortel Networks China, that number is expected to break the 500 million barrier by 2007. There is no other market in the world that has anywhere near the growth potential of China, with four to five million new subscribers joining the ranks each month.
The music industry is now struggling to cope with the evolution of its product from being a packaged consumer good to a purely digital format. It is felt by some that the industry is moving into a period in which record companies have no choice but to offer net users free or temporary music downloads and software.
Industry players in China not only have to develop strategies which can match the pace of the Internet and mobile phone development, they also have to deal with the ongoing problem of piracy in the new media. Even two of China's leading websites, Sina.com and Sohu.com, both of whom are listed on NASDAQ, have been accused of hosting unauthorized copyrighted materials on their websites.
There are less than 20 local albums produced per year in China. This is not surprising when a label is said to earn only US$4,831 if a 10-song album is able to sell 100,000 legal copies – making every song worth only US$483.
In response to this, foreign record companies have adopted a 'survival strategy' for the China market. They have largely abandoned the classic album format and formal distribution channels and eliminated any possibility of a top-40 chart based on sales. Instead of signing an artist on anticipated sales, record companies are now contracting to manage all aspects of their career, including arranging promotional events and negotiating product endorsements. To further counter piracy, record companies in China are now more inclined to record single songs for radio play instead of albums for consumers.
It is clear that for all companies in the music industry, China provides opportunities that cannot be matched anywhere else in the world. From a legal perspective, China today is much more accessible to foreign investors compared to a decade ago. But from a business perspective the challenge to foreign record companies is to lobby the Chinese government to remove entry barriers, relax censorship, build a more favorable environment for Internet development and, most importantly, deal with the pirates.