What will it take for Spotify to fly in Japan?

After much toe-dipping, Spotify is at last officially present in Japan. The company will provide a free advertising-supported service and a paid service at 980 yen (around US$10) per month. It will also offer lyrics for karaoke enthusiasts. It’s currently operating in ‘invite-only’ beta mode.

It comes late to the game in the world’s second-largest music market, which accounts for around US$3 billion in annual sales (down from around $5 billion 10 years ago). Established players offering paid streaming services in Japan include Amazon Prime, Apple Music, and domestic brands such as Awa and Line Music. YouTube is also a powerful indirect competitor, since it also offers free content.

Open field

At the same time, those existing services have been slow to take off, leaving the field for music streaming open. Just around a quarter of Japanese smartphone users have subscribed to existing services, according to eMarketer, a consultancy.

Some have attributed this sluggishness to the continued popularity of physical CDs: while baffling to many in similarly developed markets, they still account for more than 80 percent of sales here. Tower Records, a dinosaur in the US, still operates 85 Japanese stores.

But eMarketer’s research suggests other reasons for the tepid response to streaming: basically, that it’s not cheap enough. Offering a permanent free service as well as a paid subscription service, rather than just a free-trial period as competitors have done, gives Spotify a strong point of difference. Yuma Sakata, from Dentsu’s Digital Platform Center, says he expects Spotify to attract more users than competitors as the market’s first freemium music provider. But other priorities are, understandably, the selection of music available, sound quality and playlist functionality, eMarketer says.

Marc Wesseling, co-founder of Harajuku-based creative agency UltraSuperNew, told Campaign last week that he is optimistic about Spotify’s prospects, but believes it’s ultimately “all about the catalogue” that it can offer. Negotiating with cautious record companies in such a highly fragmented market will not be easy.

See also: Will Spotify's arrival change music tastes in Japan?

Sebastian Mair, Tokyo-based president of music industry consultancy Music Solutions, says no service yet “even has close to a complete catalogue”. Despite claiming more than 40 million tracks, Spotify’s current offering seems to have “major holes—the minimum to launch”, he says.

With up to 85 percent of Japanese music fans in favour of domestic artists, Mair says that any service that wants to succeed needs to offer current top hits and be consistent in its lineup of artists—not have them available one day and gone the next, as they often are at the moment. He concedes however that Apple’s iTunes has been relatively successful in the download market despite starting out by offering a predominantly international range of music. It now also offers a large domestic catalogue.

Educate and localise

The streaming industry would be well advised to do more to educate potential customers. Unlike a number of markets, which leapfrogged download services like iTunes altogether and moved from CDs directly to streaming, Japan is still in that transitional phase. A large number of music fans under 25 do stream, but often unwittingly use illegitimate application services based on YouTube content that are not monetised.

Spotify is well known in Japan’s music industry, but most regular consumers are likely to still be “in the dark” about the brand and its service, Mair says. With it’s ‘invite-only’ launch strategy, it appears that Spotify aims to gain traction slowly, in a similar manner to Hulu in the video-streaming space. That would be in contrast to Google Play Music, which Mair says debuted with a high profile TV campaign and on-ground activations but has since receded into the shadows.

As well as needing a robust catalogue and clear brand positioning, Spotify will ultimately have to differentiate itself by catering to demand in terms of functionality—which might not be the same in Japan as in other markets. Mair points out that Japan is “always its own world”, where localised services are often necessary. The mobile karaoke lyrics and partnership with Sony PlayStation, to provide content for PlayStation Music, are a start.

It’s not clear whether Spotify’s launch will prompt competitors to launch ad-supported services. For advertisers, Mair has doubts about its value given that Japan has never been a strong radio market, partly due to the absence of a driving culture.

Audio advertising pioneer?

Others see things quite differently. In April, Dentsu launched a programmatic audio service in anticipation of the growth of online radio and music streaming. “The Japanese market remains nascent, with no single or widely accepted method to serve digital audio ads,” Dentsu said at the time.

Commenting on Spotify’s launch, Sakata says: “From an advertising point of view, Spotify’s ads are exposed to viewers who enjoy music anytime and anywhere, with high viewability formats. Dentsu expects Spotify to be a pioneer of digital audio ads in the Japanese market.”

Wesseling said last week that he thinks the Spotify platform is worth considering, but admitted that ads in the free model can become “annoying”. He thinks people’s willingness to tolerate commercial messaging “depends on the setting”: at home, people would be more inclined to opt for the premium service with no ads, while in an office environment, where Spotify as used as background entertainment, people would be more open to the ad-supported model, he said.

For Lyndon Morant, head of strategy at Mindshare Japan, Spotify will be valuable for its potential to deliver personalised messages to people at scale. To really make it work as an advertiser will mean planning around real-time consumer behaviour, says Morant. He sees Spotify’s relationship with Twitter as exciting. “If the two companies can combine data and targeting, then the possibilities for cross-platform planning really heat up,” he says.

Morant thinks marketers will need to consider why certain bands or genres are popular at precise moments, anticipate what will be popular in the future, and build in propositions that actually enhance the listening experience.

Globally, Spotify has around 60 million unpaid and 40 million paid customers. It has yet to turn a profit, but has been valued at $8 billion. Succeeding in Japan will be an important factor in the run-up to an expected IPO next year.