Japan is one of the largest music markets in the world, but streaming service Spotify keeps struggling.
Spotify had a global market share of 32% in the first quarter of 2021, dominating the market for music streaming. But one region has been particularly tough for Spotify, Japan. In Japan Spotify claims 21.4% market share, significantly lower than its global average. Why is the largest music streaming service struggling to get a foothold in one of the most prosperous economies in the world?
Music streaming has low adoption in Japan
In 2017, Japan was the second biggest music market in the world, having a retail value of $2.7 billion, outperforming Germany with $1.4 billion and the United Kingdom with $1.3 billion. It’s therefore no surprise that music streaming companies are trying to enter this lucrative market, but consumers in Japan seem particularly reluctant to switch sides. In Japan the amount of users who are using music streaming is expected to be around 12.7% in 2022 and potentially grow to 15.8% in 2026. These numbers are fairly low compared to other developed economies. In Germany the market penetration of music streaming is estimated to grow 26.8% in 2022 and is predicted to grow to 31.9% in 2026. In the UK adoption is expected to reach 30.2% in 2022 and will grow to 31.8% in 2026.
Physical music formats remain popular in Japan, with Vinyl sales increasing. In 2015, Vinyl sales reached 660,000 units in 2015 and grew to 1.21 million in 2019, an increase of 83%. Unit sales of CD have decreased from 168 million in 2015, to 132 million in 2019. But revenue remains strong for this product category reaching 149.5 billion yen. Despite the odds being against digital music streaming, Spotify dared to take the plunge.
Spotify comes to Japan
By 2014, Spotify had delayed its entry into Japan due to licensing issues according to the Irish Times. Spotify’s chief content officer, Ken Parks said that it wasn’t out of the ordinary and the company always experienced the licensing agreements as sluggish. The company also took two years to finalize its entry into the United States. But Parks expected to close a deal swiftly and be able to enter the Japanese market. Although it was heralded with the necessary skepticism.
In September 2016, Spotify launched in Japan. It would be a soft launch with the product only being available through a trial or invite only according to Spotify Director of Product Dave Price. The entry of Spotify into Japan would mark the introduction of the first music streaming service in the country which has a “freemium” model available. But the product has a limited Japanese music catalogue at launch, which severely limits its appeal with the domestic audience. According to licensing official at Spotify, Akira Nomoto, the limited availability is a result of Japanese record labels being reluctant to add their libraries to online streaming services, seeing no added value over physical sales, which are generating enough revenue.
The entry of Spotify into Japan would mark the introduction of the first music streaming service in the country which has a “freemium” model available
Daisuke Kikuchi at the Japan Times commented that the entry into Japan will not be an easy one for Spotify. According to a 2015 survey conducted by MMD Labo, one of the main selling points for music streaming services in Japan is an extensive domestic music library. In the survey, 61.6 percent of respondents took the number of available songs into consideration when selecting a service. Kikuchi cited president of online marketing company Version7, Tetsunori Watanabe, who said that Japanese consumers valued Japanese music over Western songs, emphasizing the need for a Japanese catalogue to gain any significant market share in the country.
Spotify launches advertising campaign to persuade consumers
In November 2016, Spotify launched its first branding campaign in Japan as the service opened up to all consumers. The ‘New Music, New Me’ campaign was created in collaboration with Wieden+Kennedy Tokyo. The advertising message focuses on new music discovery and how music can lighten up the mood. Viewers are encouraged to describe themselves in three emojis on Twitter, through which Spoitfly will return a befitting song.
After the launch campaign it has been eerily quiet at Spotify and its attempts to popularize its service through advertising. Reasons might be the reluctance of Japanese consumers to switch to paid streaming services. In a March 2018 consumer survey, results revealed additional reasons not to opt for music streaming services. In the survey, 43% of respondents said they didn’t want to spend money every month, followed by 24.7% stating that the fees are too high and 20.8% said they have free content available.
Spotify caught another blow when it lost Ichiro Tamaki, one of the leaders in popularizing music streaming in Japan, to Universal Music Group in 2020. Tamaki would be managing the Digital Strategy at one of the largest music publishers in the world and adding potential competition for Spotify, who was already struggling to gain a foothold in the country.
CD sales start declining, but remain popular
Four years into the launch of Spotify in Japan, CDs remained popular and despite decreasing sales, still accounted for 70% of all recorded music sales in 2019. But undeniable is the decline of physical sales with digital music streaming eating away market share at an unprecedented speed. Jamie MacEwan, Senior Media Analyst at Enders Analysis said to Reuters that it would just be a matter of time before digital revenues would ‘eclipse’ physical production.
Reuters noted that CDs remain popular due to product bundling, a practice where records labels add exclusive items such as priority vouchers for purchasing concert tickets or handshake events. Although these perks have been on the decline due to most offline events being cancelled during the global pandemic. Record labels have therefore moved to pay-per-view online events to make up for the damage.
Spotify is betting on podcasts with Japanese drama
In 2020, Spotify launched an original podcast in collaboration with popular influencer Kemio. Kemio invites celebrity guests to talk about a variety of topics such as life lessons, careers and much more. The first guest appearance comes from HIKAKIN-san, a fellow video influencer and according to Kemio one of the founders of video influencers in Japan.
Later that year, Spotify partnered with entertainment company Yoshimoto to launch a scripted stand-up comedy show starring Ryūji Akiyama, Hiroshi Yamamoto, and Hiroyuki Baba. The cast would voice janitors having fictional conversations with residents in their building. The streaming service noted it would be the company’s first original comedy show in Japan and through this medium would open up new opportunities for upcoming comedians.
A year later, Spotify announced an exclusive partnership with TV Tokyo through its audio drama “Omimi”, starring Marika Ito who plays the role of a podcast host for a show about chain restaurant food. According to the Japan Times, the collaboration would be the “boldest move yet” to popularise podcasts in Japan, which has yet to gain momentum.
Spotify found itself in a conversative market
Spotify is not the first company that is struggling to gain any significant market share in its category. Google has been struggling with Google Pay in Japan, who found a conservative consumer market who held onto cash. The same rings true for Spotify who tried to break into a market which was small to begin with and showed only limited growth.
Perhaps this was one of the reasons why Spotify played it safe with a relatively small launch campaign and not opting for large advertising campaigns as it did in other regions to boost its subscriber count. Through podcasts it tried to compensate for its limited Japanese music library, but the market for podcasts is still in its infancy in Japan, compared to other regions where the media format has gained enormous momentum.