Across south east Asia, traditional relationships between record companies and music retailers are being transformed, creating new challenges and opportunities for everyone involved.
Just days before its handover to China, Hong Kong passed a series of laws making parallel importing of audiovisual materials a civil offence, and making retailers responsible for ensuring their product has been supplied by the legitimate licensee for the territory. The local record industry breathed a sigh of relief, but the impact of the parallel import law must be seen in the wider context of the ongoing transformation of the retail/record company relationship.
It is widely expected that the new law will result in increased communication – and tension – between retailers and record companies, as well as higher prices on some titles. But the improved information exchange that will follow also presents an exceptional opportunity for music publishers to improve dramatically the collection of mechanical royalties. And it has wider implications further across the region.
An immediate impact of the new law will be to force better communication between major retailers and local record company affiliates. Unable to purchase from any other source, large retailers will demand better service, particularly from the majors. In effect this means an easily useable catalogue, knowledgeable sales reps, and greater responsiveness on special orders.
In fact, closer relationships are already the trend. Traditionally, record companies have delivered product to a few powerful wholesalers, which then distribute to hundreds of small ‘mom and pop’ outlets. This arrangement, which still dominates most south east Asian markets, has usually limited communication between record companies and retail.
The emergence of major retailers like HMV, KPS and Tower during the past few years has placed new demands on record companies. Building joint promotions around key new releases, creating informative and attractive point-of-sale displays and driving second-line sales through product education are standard practice in more mature markets, but relatively new in south east Asia.
Under the traditional model, the key success factor for labels was good relationships with a few individuals at major wholesalers. In the maturer retail environment, factors such as quality of service, successful account targeting and salesforce efficiency have become more important. Record companies have been reacting by upgrading and professionalising their sales forces, sometimes taking concepts and people from more mature consumer industries. The result will be a significant increase in the efficiency and professionalism of sales forces around the region.
In addition to stimulating better communication, it has been claimed that banning parallel imports will force retailers to raise prices since low-cost suppliers are no longer an option. While this may be true for a limited amount of repertoire, the impact is unlikely to be significant in value terms, because most current sales are not of parallel imports. The hit product that drives retail, in particular, is almost always supplied by the local affiliates.
The large-scale trend is towards higher prices – urged by record companies as well as major retailers. With a few exceptions, record companies in Asia reported disappointing sales and profit growth for 1996. Prices remain low, driven by powerful wholesalers which demand not only large discounts but also significant free goods. These free goods are then passed on to the small outlets, allowing them to lower their prices to razor-thin margins. The ‘value’ of recorded music has been driven to a new low point.
If this structure is unpleasant for record companies, it can prove disastrous for major retailers which simply cannot compete on price due to their far higher overheads. No matter how far they discount, small outlets (and hypermarkets in some territories) will always go lower. Thus a consensus is emerging that these economics do not make sense, and that prices must rise. Specifically, record companies must give smaller discounts to wholesalers, pushing up the prices in traditional outlets and enabling major retailers to raise their own prices and earn a reasonable margin.
Record companies are reluctant to offend wholesalers, but the process need not be as painful as it may first appear. First, margins need not decrease: if major retailers raise their prices, small outlets will follow and still remain cheaper. Second, with a better-educated and more professional sales force, record companies can also increase their level of service to wholesalers, thus driving up volume.
The need for improved communication between retailers and record companies comes as music publishers are themselves pushing for improved access to information. The Memorandum of Understanding between major publishers and labels means that mechanicals should theoretically be paid on every valid copyright on every song on every album sold in the territories it covers. In reality, antiquated information systems mean that music publishers have manually to wade through record company listings of albums sold to find copyrights they control.
It’s somewhat like looking through a major city phone book hoping to find people who live in your neighbourhood – assuming you remember every street name. The result is that music publishers concentrate on chasing after their major copyrights and secondary catalogues, and less important songwriters do not get paid.
The need to monitor parallel imports means that retailers and record companies must communicate clearly about exactly who owns what master copyrights. Better information systems are needed and Hong Kong’s new law is a strong incentive to invest. This is an opportunity for Asian music publishers to participate in building an infrastructure to collect on all copyrights. Publishers should be able to search effortlessly for copyrights under their administration and collect on them. They should not wait for record companies to build those systems for them.
Henry Winter is a consultant with Booz-Allen & Hamilton, based in Hong Kong and specialising in the Asian music industry