Observing Changes in the Music Industry: Structural Shifts and Emerging Demands Brought by Digitalization (Part 2)

• Observing Changes in the Music Industry: Structural Shifts and Emerging Needs Brought by Digitalization (Part 1)

Digitalization is advancing across all fields today, and the music industry is undoubtedly one of the sectors most profoundly impacted. As the ways music is "consumed" and "sold" continue to evolve, the music business itself is entering a period of transformation. This article explores new business opportunities emerging from the current state of the music industry. We interviewed three representatives from Dentsu Music and Entertainment Inc. (DME), which operates businesses centered on "advertising" and "rights management" within the music industry: Mr. Hide Hosaka, Ms. Yoko Tonemura, and Mr. Yusuke Togashi. In Part 2, we will delve deeper into the future of the music industry and the specifics of "synchronization business," which matches visuals with music.

How has the music industry changed due to digitalization?

Q. DME has pursued its music business with the unique industry characteristic of having "advertising business" and "rights business" as its two main pillars. How do you perceive the changes in the music industry brought about by digitalization?

Hosaka: For the future of the music industry, and for considering DME's own future, I believe "Digital & Global" is the key phrase. I said "&" just now, but perhaps "Digital = Global" is more accurate.

Originally, the mainstream business model for music and video was packaging and selling them as CDs or DVDs. However, once these were suddenly made available online, they became accessible anywhere and to anyone. Just a short while ago, it was unthinkable that American video streaming services would be watched worldwide. Even if the platform is an American service, the same content can be accessed worldwide. Of course, language barriers exist, so localization for each country or region is necessary. But once that hurdle is cleared, the same content can be seen or heard anywhere. In other words, the music business, which used to be confined within a single country or region—essentially a "block economy"—has rapidly become globalized through digitization. You could even say that anyone can now become an artist and thrive globally.

In terms of music business scale, the US has long held the top spot, followed by Japan. However, while American artists sell globally, many Japanese artists sell primarily within the Japanese market. Yet Japan still boasts the world's second-largest market size, which is highly distinctive. Back when the music business was block-based, this might have been acceptable. But now, countries like South Korea are actively targeting the global market. Amidst this, Japan's position is gradually being threatened. I believe Japan's music industry must now operate with a stronger focus on the global market.

The "Synchro Business" Market with Further Growth Potential

Q. Looking ahead at the future of the music business, what areas are you particularly focusing on?

Hosaka: Looking at the global music market trends, CD and DVD sales have declined since the 2000s, while streaming revenue has been steadily increasing since around 2010. As a result, the overall music market has expanded, growing to exceed 3 trillion yen in 2021. Within this market, revenue from "synchronization business" (synch business), as explained by Mr. Tonomura in the first part, accounts for only 2.1% of the total. Looking deeper into this figure, the vast majority stems from music usage in films, primarily Hollywood productions. It's no exaggeration to say that Japan is virtually unique globally in developing synchronisation business tied to corporate advertising and marketing activities, representing a highly distinctive business model.

However, we believe this niche sync market holds significant potential for the future. With the advancement of digitalization and the proliferation of digital communication platforms like video streaming services and social media, the volume of digital video content has exploded. Consequently, more and more people want to add music to their videos. When creating videos for posting on streaming services, people want to add music. But music knowledge is specialized, so amateurs don't know how to proceed. That's why they want to consult professionals. We expect this demand to grow. Previously, major corporations were the main creators and distributors of video content, but now individuals can also publish, and many people are conducting business online. Music is likely to become an increasingly sought-after content asset.

Q. It was pointed out that the "synchronized business" between advertising marketing and music is a rare situation globally. Why has this business model taken root in Japan?

Hosaka: There are likely various reasons, but personally, I feel one factor is the difference in how advertising is created between Japan and other countries.

In Japan, the prevailing view is that advertising is essentially "the client's property," meaning client approval is required for virtually everything. However, in the global advertising market centered around the US, the dominant view is that "advertisements have copyright, and the rights belong to the advertising agency or production company." Consequently, the structure is such that clients pay usage fees rather than production costs.

With this foundation, especially overseas, advertising and commercial production proceed based on the idea that agencies and production companies "create their own work centered around the core appeal points." Using famous songs or featuring artists in tie-in collaborations is truly rare, unless it's for a national event like the Super Bowl. You can see this clearly by looking at overseas ads.

Conversely, in Japan, advertising—particularly CM production—has established a culture of featuring famous talents and artists as touchpoints connecting to corporate products and services. I believe this stems from the Japanese, being a homogeneous society, historically seeking easily recognizable icons shared by consumers. Consequently, music by famous artists, both domestic and international, is used significantly more in advertising expressions compared to other countries. This likely contributed to the development of the "synchronization business" for music in Japanese advertising.

Tonomura: Working on the front lines, I often sense that even major overseas artists are more likely to grant permission for Japanese commercials. I've repeatedly witnessed instances where they recognize the "quality of Japanese commercials." Even if it's not something truly special like the American Super Bowl, I've seen that Japanese commercials possess a very high level of creativity in embracing such music, creating an environment where approval is easier to obtain. Furthermore, knowing that the synch business is established there, I believe it has created a situation where they can confidently provide their music.

Q. What are your outlooks for the future of the music industry?

Hosaka: Music encompasses such a wide variety of types. Of course, there's music created by professionals, but nowadays, anyone can easily create music without even needing sheet music. Furthermore, music can be the main content itself, or it can play supporting roles like enhancing visuals or creating realistic spatial atmospheres. When people think of music, they might picture specific songs or artists, thinking "this is what's popular" or "that artist's music is great." But music is actually much more accessible and permeates every aspect of daily life. It's needed in video, in sports matches, in restaurants—truly required in countless situations. There's a demand for matching music to these contexts, and I expect this need will only grow. From that perspective, while we've focused on synchronizing music with "advertising" so far, I believe there are many other areas where this "synchronization" can be expanded.

At the same time, as people working in music, we always hold onto the desire to "spread the power of music." And the outlet for that can be anything. Even an outlet like "advertising" can be a major catalyst for spreading the power of music, right? I think "exploring these outlet directions" is also part of our mission. As communication becomes increasingly diverse, I hope we can leverage the expertise we've cultivated in the synch business.

In this interview, we discussed the changes in the music industry and also touched on DME's unique "synchronization business."

It's been said for quite some time that "CDs no longer sell." Domestic CD (12cm) sales in Japan peaked at 302.913 million units in 1998. Since then, sales have rapidly declined, reaching 137.205 million units in 2018 – less than half the peak volume over a 20-year period (Source: Japan Record Association, "Music Software Production Volume Trends by Type"). However, it is also true that globally, the music market itself is expanding when we include "new ways to enjoy music," such as streaming services. Furthermore, as Mr. Hosaka pointed out, the increase in digital content has actually expanded the "scenarios where music is needed." While big sales by major artists have declined, the music business itself is actually seeing growth in both demand and market size – a crucial fact. In other words, the music industry could be considered to be right in the midst of a major opportunity.

This time, we asked DME members about changes in the music industry. But broadening our perspective, what this music industry demonstrates is precisely the "transformation" that can occur in any industry: digitalization driving business structural reform, where existing players face challenges while new needs and opportunities undoubtedly emerge. "Change and challenges" are also gateways to "new opportunities and growth." If you are facing any challenges, hints for your next growth may be hidden behind them.