The Global Outpost

March 12, 2009

iTunes ‘Crack’ Shows Chinese Users Willing To Pay For Music

Filed under: Music Industry — Mathew D @ 4:04 am

iTunes $200 Gift Certificate at RMB17.90

The belated revelation, courtesy of OUTdustry on the flow of cheap music from iTunes via codes sold in China – a practice obviously unsanctioned by Apple, which has been going on for quite a while (and on eBay too I’ve heard), has certainly set the blogosphere abuzz.
Gizmodo had the most succinct take on it, describing it as “Pirate money - and get legal material”.

The other international reactions which range from outright condemnation of the hackers to in-depth dissections on how it happened, including possibilities of iTunes algorithmic code cracks, credit card fraud and gift card supply chain hijacks amongst others have so far focused on the symptoms and failed to get to the nub of why it has happened.

A simplistic and lazy Edmund Hilary-esque explanation as some might attribute to the hackers as ‘we hack it because it’s there’ would be off the mark.

Instead, a few cognizant, and dare I say after a fashion, inconvenient truths emerge from this iTunes Music Store episode:

1) Chinese users ARE WILLING TO PAY FOR MUSIC

  • at prices determined by the Chinese market and NOT by labels and certainly not in US dollars

    • 2) There is only a limited selection of easily accessible legal full-length music in China currently

  • users are instead forced to trawl unreliable P2P networks and illegal search engines
  • others use the aforementioned backdoor iTunes method


    • 3) Labels in general are more willing to licence their music to iTunes (8 million and counting), but iTunes only serves the rich (markets) and ignores the rest of the world

    iTunes - Music for the Rich v1

  • Apple on the other hand happily makes money from everyone via the iPod, which is available everywhere where pirated music is the supply line!
  • Globally, a class divide and music distribution apartheid seems to be emerging where legal music is being priced out of the masses’ reach and legally accessible mainly in rich markets
  • Music is undeniably the opium of the masses – even in the absence of legalized distribution methods, it will inevitably find its way to the people, in the same manner that the referenced drug has been accessible.

    • 4) International Labels who decide to write off China for now and who state that they will license their music in China “when the market gets better” do so at their own peril

  • This attitude simply feeds into a vicious cycle. Many Western labels’ artists languish in obscurity in China, rather than suffer from piracy.
  • But more and more, sophisticated Chinese users are discovering new music on their own time and dime and this is inevitably via P2P networks and illegal search engines – in the absence of label supported mechanisms
  • And as these illegal networks like Baidu amass users and revenues, they become stronger forces and eventually break totally free from music royalty payments and the gravitational pull of labels.
  • Yes, the market indeed will get better, but unfortunately, for the wrong people - sometimes fed by some labels’ inertia and reticence to invest in nascent and developing markets

    • 5) Payment mechanisms & revenue collection methods are very much different in China than iTunes markets. We have to live with it!

  • Credit Card penetration is minimal amongst locals and pre-paid cards, Alipay (a PayPal-like system), online bank payment, mobile SMS, cash-on-delivery and digital tokens are some of the payment systems in play in China. Significantly, the more widespread and accessible payment engines demand up to 20% of gross revenues.
  • Furthermore, foreign labels will be subject to a withholding tax of around 15% on any revenues earned

    • My observations are shaped by the hands-on experience of launching the Wawawa Music Store (www.wa3.cn ) in China, which is now the largest online independent music store in China with more than 2,000 label partners offering more than a million songs at what we hope is an affordable price. There are still many other labels that are not offering users in China the opportunity to access their music legally, and this can only serve to feed the beast.

    On the plus side, for international labels and artists, China, though not quite fully a level playing field due to the language gap, at least presents them a fighting chance to make inroads viz a viz major labels. Canadian, Scandinavian and hitherto obscure central and eastern European artists have certainly been clever enough to capitalize on this opportunity so far. An example is Maximilian Hecker, a German pop artist who is one of the most popular Western artists in China.

    In conclusion, the silver lining of the iTunes ‘crack’ episode serves to highlight some positives – that users are willing to pay to access a wide collection of music at prices that they deem fairer.

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