When you think of streaming music, the first two companies you probably think of are Apple and Spotify. With good reason: Apple, already a music-tech titan, announced its entry in the space with much fanfare last week, including an appearance by Drake, pictured above. Spotify, for its part, is the leader in the streaming market, with 15 million paying customers. 

Yet neither company has launched a streaming service in Japan, despite a market there that seems ripe for it: More than 80 percent of music sales in Japan are in physical formats like CDs. With just under $3 billion in overall annual sales, Japan is the world's second-biggest, after the United States. 

And last week, just three days after Apple's big announcement, Line Corp., a company that makes a Japanese messaging app, debuted its Line Music streaming service in Japan, offering unlimited access to more than 1.5 million songs for Y1,000 ($8) a month or 20 hours of monthly streaming for Y500 ($4) a month.

"It's not the first time for an Internet company to try breaking into the Japanese music market," Serkan Toto, a Tokyo-based mobile industry consultant, told the Wall Street Journal. Groovy, a music streaming app made by DeNA, a Japanese gaming company, shut down in March of 2014 after one year.

All of which begs a few questions: Why has this ostensibly ripe market proven tough to crack? Why have Apple and Spotify not yet debuted there? Here are three reasons: 

Licensing Agreements 

To launch a music streaming service, you need licensing rights to the music. To get rights to the music, you need to negotiate with record companies. That takes time. In Japan's fragmented industry, there are numerous companies to negotiate with. That takes more time.

"The country's music industry isn't dominated by a few major labels, as it is in much of the world," notes the Wall Street Journal. For instance, in the U.S., the major labels own roughly 85 percent of the music. In Japan, the majors control about 36 percent. 

Which means any company hoping to crack Japan has a long list of companies to speak to. Moreover, those companies are hardly in a hurry to negotiate with streaming entities: They still have major profits tied up in CDs. And they've seen services like Groovy come and go. (Line, based in Tokyo and partially owned by Sony Music Entertainment, has one less record company to negotiate with.) 

Moreover, there's "a protectionist business climate in Japan that still views the digital business with suspicion," notes the New York Times. Spotify, for example, "has been stuck for two years in licensing negotiations with music companies in Japan, where homegrown pop idols by far outsell Western acts."

The Margins and Marketing Power of CDs

Because of the selling power of those "homegrown pop idols," Japan's record companies view CDs as a major piece of marketing machinery. 

The group AKB48 famously sold CDs containing tickets to live events. Tactics like this often compel fans to buy a CD more than once. The Wall Street Journal interviewed a 22-year-old who said he bought 15 copies of AKB48's most recent CD single in one month. The reason? Each purchase gave him the chance to win an in-person intro to a band member. 

Customers like that are why Tower Records--which closed its 89 American outlets in 2006--still has 85 outlets in Japan, raking in $500 million annually. Another factor is Japan's idiosyncratic retail ecosystem, which imposes pricing restrictions on retailers, preventing them from waging ruthless price wars with each other. These restrictions, notes the Times, keep the price of new CDs at about $20--or more if the CD comes with merchandise or perks.

This allows record companies to make a comfortable margin on CDs. "Our margins are much higher on physical sales so that is what we try to focus on," a spokesperson for Avex Group Holdings Inc., one of Japan's biggest music companies, told the Journal. 

The Looming Presence of YouTube 

In a fantastic analysis of Apple's market entry, Grantland's Steven Hyden makes a compelling point:  

Apple Music's chief competitor is Spotify, which has 15 million paying customers, making up a quarter of the service's 60 million active users, who listen to the ad-supported service. But the real player in streaming music is YouTube, which claims 1 billion users per month who watch 6 billion hours of video. About 38 percent of that traffic (or approximately 380 million people watching 2.28 billion hours of content) comes from the Vevo channel of music videos. A lot of that music isn't currently available on other streaming sites--live tracks, obscure 7-inch singles, bizarro cover versions by amateur randos. Oh, and it costs nothing.

What does this have to do with Japan? A lot. Tatsuyoshi Kimura, another 22-year-old the Journal spoke to, said he used to spend 3,000 to 4,000 yen a month on CDs. But that has changed. "There are many sites like YouTube where I can listen to music free," he said. 

How will YouTube monetize this? It's an open question. As Hyden points out, last year YouTube launched a beta of its streaming service, Music Key, for listeners who preferred paying to watching ads. "But when Music Key finally goes wide, it will have a hard time competing with its parent site," he writes. 

The larger point is that YouTube/Google looms as a large potential competitor to Apple, Spotify, Line, and anyone else. You could see how its official entry into Japan's market--to the extent it's not already there, and everywhere, thanks to YouTube--could give Japan's record companies one more reason to take their time before settling on terms with another music-streaming service.

Published on: Jun 15, 2015