It is official. Spotify has finally launched in Japan, sounding the starting gun on its race to secure customers in the world’s second largest music market.
I think that the Swedish company will quickly find that it is a race that is littered with so many roadblocks that it will make it feel like running with your shoelaces tied together.
Here are three of the main reasons why I think that Spotify will struggle mightily in Japan.
1: The right things - or wrong?
Spotify announced the launch with a special press conference in Tokyo, featuring founder and CEO David Ek.
“I’m very excited to be here with all of you. This is the dream come true to me, to be here today, to be able to bring the 2 million artists around the world to Japan and of course to take the Japanese artists that we all love to the rest of the world,” Ek said, according to the Japan Times.
Spotify will initially offer invite only access with full service to launch in November.
It announced that it will introduce a new service, where song lyrics display on the screen of your device while it is playing. Kind of a karaoke feature.
Spotify has been in Japan for over a year, getting ready for the launch. It has signed deals with several record labels with the aim of being able to deliver more Japanese music. The company says it can offer 40 million songs, as well as playlists tailored for Japanese listeners.
While the idea of bringing millions of international artists and songs to Japan and Japanese artists to the world sounds great on paper, it seems to ignore a very simple fact.
The Japanese music market tends to be extremely focused on Japanese bands and artists, and while Spotify has signed contracts with some Japanese labels, its reach is still limited.
As the Tokyo digital music consultant Mikiro Enomoto pointed out to the Japan Times, less than half of songs on Japan’s popular Oricon Chart are available on Spotify at the moment.
The same problem comes when taking a closer look at the "karaoke" feature. There is no denying that karaoke is (pardon the music cliche) big in Japan. However, every town has at least one karaoke bar, and it is a social phenomenon – not usually something enjoyed in the comfort of your own home. Karaoke bars already have sound systems, complete with scrolling lyrics, so it is unclear exactly what – and where - the feature is supposed to add extra value to Japanese users.
2: The numbers game
A number of streaming services - both Japanese and international - launched in Japan in 2015, and have seen good initial numbers. Perhaps Spotify will have a good beginning to life in Japan.
Let us imagine that it even comes close (it won’t) to the 8 million downloads that Line Music saw in its first eight weeks.
However, Spotifiy and other streaming services often find problems with converting users of free services to subscribers.
Japan Times quotes a study in Engadget that showed an average conversion rate from non-paying to subscriber for streaming services of just about 40%.
Take into account that Spotify’s monthly fee of 980 yen ($9.60) is equal to the likes of Google Play and Apple Music, but higher than the likes of Line Music and AWA, and that conversion rate might be lower still. Add that it seems to be lacking some of the content that Japanese users will want – Japanese artists – and the number plummets even further.
And the conversion rate is just one part of the equation that might not add up for Spotify.
While it - and other streaming services - would probably beg to differ, data from Statista shows that the combined market for music streaming in Japan amounts to just $173 million in 2016. That is set to grow by an annual growth rate of 10% in the coming years, and the market is forecast to reach $279 million in 2021. In comparison the US market for streaming reached revenues north of 2 billion last year.
If we imagine an even split, that gives Amazon, Apple, Google, Line, AWA and Spotify revenue of $46.5 million – before taxes or paying the artists.
And that figure is probably set high.
3: Welcome to Galapagos
Japan is only beaten by the U.S. in terms of market size when it comes to music. The industry sees almost $3 billion sales per year.
The weird thing – for most outsiders, anyway – is that most of the revenue still comes from CD sales. Eighty per cent of music sold in Japan is sold on CD, and most of it is sold to the older generations who don’t want streaming, but physical objects.
It is something particular to Japan, where you will often hear someone say the word "Galapagos". It is a reference to how Japan is unique, and functions in a way that is at times almost cut off from the rest of the world.
And while Spotify may have signed deals with some Japanese record labels, it still seems to me that it has not quite understood what Japanese customers wants, in a market where the competition is only going to increase over the coming years.
Spotify should be particularly worried about one specific competitor, that I have not even mentioned yet.
Towards the end of 2015, SoftBank announced that it was working on Uula, a music and video offering. The company is working with the famous J-pop mogul Max Matsuura’s Avex Entertainment group on the service, meaning that it has access to much of Japan’s most popular artists.
Verge reported the price for unlimited viewing to be ¥480 ($6.04) a month across smartphones, iOS devices, and TV via an HDMI dongle.
It leaves Spotify with an initial offering that is more expensive than many of its competitors, with less relevant content and fighting for shares in a relatively small, but extremely competitive market.
