Today in Tedium: For years, the U.S. music industry seemed to have lost its mojo, something it blamed on piracy. A big sign that it has that mojo back is the fact that “Old Town Road,” which already inspired a piece of mine from three months ago, is currently at 18 weeks and counting on top of the Billboard Hot 100. Streaming has deservedly earned most of the credit for that success story, though it took a lot of pain for the music industry to find a comfort level with it. But what if I told you the Napster era could have been avoided had the music industry played its hand differently years prior—and that there’s pretty strong evidence of this fact from a precedent that was set halfway around the world? Today’s Tedium talks about Japan’s long history of record rental stores—and why the U.S. squashed a sustainable model before it even had a chance. — Ernie @ Tedium
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The unexpected secret to Japan’s long-running success with physical music
When outsiders talk about Japan’s music industry at the end of the first quintile of the 21st century, one notable fact frequently comes up: Not only does Tower Records survive in Japan well into 2019, but it thrives. (Case in point: It launched an all-vinyl store earlier this year.)
But the thing to keep in mind about Japan’s physical record industry is that it has stayed stronger for longer than its digital competition. According to data from the Recording Industry Association of Japan, the physical music industry is still nearly three times the size of the digital music space, with physical album sales totaling 157.6 billion yen ($1.48 billion USD) compared to 64.4 billion yen for digital music sales ($606 million USD). Music videos actually outsell digital music in Japan. Digital music is gaining on physical sales, however—rising digital sales helped the overall market increase, even as physical music sales fell by 10 percent in 2018.
There are lots of reasons for this, including the fact that CDs and vinyl records have remained fairly collectible in the Japanese market. But one of the less-discussed reasons for this on the world stage may be the fact that a rental market for albums still exists in Japan, and while it has lost influence in recent years, it remains much more active than similar rental offerings in the United States.
At the end of last year, there were 1,961 record rental shops in Japan according to the RIAJ’s annual yearbook, the first time that number has fallen below 2000 shops since 1984. At its peak in the late 1980s, there were more than 6,000.
As a point of comparison, the largest video rental store chain in the United States, Family Video, has 598 locations which are largely being held up by strong business model diversification. Blockbuster has just one location.
If the RIAJ’s American counterpart had to deal with a rental industry for 30-plus years, it would have had a conniption fit. And well, it kinda did. (More on that later.)
So how did the RIAJ find peace with the fact that the public was renting music?
The year that a group of Japanese college students came up with the concept of renting music, according to researcher Sumiko Asai. The model worked like this: The store would buy the record, then allow customers to rent it at 10 percent of the cost of the full album. As albums traditionally cost the equivalent of $30 USD in the Japanese market, this was a significant discount for consumers, especially given the fact that tape-copying was starting to pick up around this time.
The story of how Japan’s music industry learned to live with rental shops
The college students that came up with the idea of music rentals had dropped something of a bomb onto Japan’s music industry, and the impacts were immediate. Music fans like saving money, and lower prices allowed listeners to take chances on music they might have otherwise not bought.
The concept spread quickly throughout the country, with more than 1,000 record rental stores on the market by the end of 1981. In many ways, it was Japan’s version of Napster.
But unlike Napster, it largely didn’t spread past Japan’s borders. This was largely a result of quick work by industry groups such as the International Federation of Phonogram & Videogram Producers (IFPI), which kept close eye on attempts to bring the offering to other parts of the world.
In the early 1980s, the music industry had seen record rental shops as an extreme danger to their bottom line, especially internationally. According to Billboard, much of the threat had been isolated quickly in other parts of the world, including through lawsuits against record rental shops in a number of regions, including Scandinavia.
Outside of Japan’s borders, the rise of such stores effectively served as a warning shot to the global record industry about the risks of home taping. The British Phonographic Industry (BPI) cited Japan’s rental stores in an effort to get relief from the perceived risks. “The rental problem is closely associated with home copying and the BPI is in no doubt that rental business would not prosper could not copy records at home,” the group said in a 1982 “green paper,” according to Billboard.
But Japan’s rental stores, which were completely legal and unregulated in their early years, would prove impossible to stop. There were a variety of reasons for this, but the biggest one is that the field grew very quickly. In 1981, just a year after the first record rental store had opened, the RIAJ had claimed to Billboard that record sales had fallen by 10 percent, a number that rose as high as 60 percent at record stores next to an existing record-rental store.
However, the music organization ultimately couldn’t kill the record rental store because it had grown too powerful. Record rental stores had launched their own equivalent of the RIAJ, which meant that it had consolidated leverage of its own.
On top of this, RIAJ wasn’t the only establishment player to have a stake in the issue. During the 1980s, methods of home recording were becoming more advanced, which was obviously bad for any industry focused on recorded mediums. However, the manufacturers of electronics devices had much more clout in Japan, the home of the Walkman.
This triad of competing leverage led to a series of compromises that, while painful at the time, ultimately led to a stronger record industry in Japan.
In the mid-1980s, the Japanese government attempted to close the gaps in copyright law that allowed media rental industries to come to life in the first place. And with industry groups on every side able to get a word in on the issue, the resulting changes to the copyright law led to actual reasonable compromises that allowed everyone to live with the result, noted Sumiko Asai. Among the changes implemented in the Copyright Law of 1985:
Exclusive lending rights for record companies upon initial release, which allowed the record industry the ability to control the reach of rentals for the first year. In practice, as a result of compromises between the record industry and retailers, rental stores have only had to wait a couple of weeks to get access to the latest music.
Renumeration for record companies. The copyright law allowed record companies to ask for reasonable royalties from record rental stores, meaning that the industry was actually able to make money from the practice and giving it a financial incentive to allow its continued growth.
In the years after, there were a number of carve-outs to these rules that were designed to help ease the transition away from the model for the record industry, which the RIAJ accepted reluctantly. But by the mid-1990s, the music industry had come to embrace the model as fair and effective—especially compared to file sharing, which wasn’t mutually beneficial at all.
“There are almost no shops that illegally rent records,” the RIAJ states in an FAQ on its website. “The shops pay a use fee in accordance with their contracts and the system is working smoothly.”
Really, the only problem with the model has been the rest of the world.
“A lot of my friends are really into American heavy-metal groups, like Metallica and Guns N’Roses. You can’t buy CDs on a kid’s allowance. If I can’t rent albums and tape them anymore, it’s really bad news.”
— Makoto Fujimoto, a Japanese high school student circa 1992, explaining to the Washington Post how an effort to prevent the rental of new-release international records was cramping his style. While the RIAJ and its members had largely agreed to a deal that allowed new releases to appear in rental stores after a short exclusivity gap, the global industry wouldn’t play ball.
The RIAA got the federal government to kill music rentals in the U.S., then took aim at the Japanese market—and failed
While Japan’s music industry was making peace through regulatory compromise, music industry groups throughout the world were in the mood to do anything but.
When the Recording Industry Association of America got the slightest whiff that the model was coming to the United States, the organization went on the offensive, looking for solutions in Congress. And they got a big one: Congress quickly passed the Record Rental Amendment of 1984, which specifically created an exception for the first-sale doctrine for record rentals.
(Just to highlight how dramatically different legislation could have made things: The ban on record rental stores came at the same time as an attempt to ban video rentals, which failed in part because of widespread protests from video stores. One has to wonder what might have happened if the record rental chains were just a little bit stronger.)
Retailers that had embraced the rental model were sharply critical of the RIAA for lobbying to kill the model so quickly, before it even had a chance to succeed.
“We’re offering a service to people who want a chance to try new records without taking the risk of high prices,” noted Benjamin Chait, the creator of an Iowa rental store called That’s Rentertainment, in 1983 comments to the Iowa City Press-Citizen. “The record industry is pricing itself out of the market. We don’t advocate any illegal acts.”
(Chait eventually flipped his model to video rentals, which he saw success with for more than 30 years.)
Eventually, these tough actions led back to Japan, which had found its footing with record rentals, only for players in the U.S. and elsewhere to screw it up.
Basically, groups like the RIAA, along with the labels that they counted as members, took advantage of the letter of the law, and would not negotiate with the Japan Record Rental Commerce Trade Association on a grace period of less than a single year for new releases, compared to an informally negotiated 10 days for Japanese releases.
RIAA and other groups played hardball with JRRCTA, unwilling to concede any ground. In a December 1992 issue of Billboard, RIAA Vice President Neil Turkweitz took an uncompromising approach to negotiating with the industry, basically emphasizing that there was no room for negotiation. In fact, the RIAA wouldn’t come to the table to negotiate royalties for use beyond a single year at all unless JRRCTA gave up on legal efforts to decrease the one-year release window.
“There is no legal dispute between JRRCTA and RIAA members,” Turkewitz said. “While JRRCTA may be unhappy with how RIAA companies have exercised their legal rights, this private commercial unhappiness does not a dispute make.”
(Record rental shops just rented after the yearlong gap anyway. It wasn’t like the law was written to prevent such sales, anyway.)
But while global efforts to attempt to damage the market had an effect, leading to a gradual decline in the market as reported in Billboard in 1992, it could not entirely kill the model.
If anything, it led JRRCTA to strengthen its relationship with RIAJ, working with the group on a variety of ways to promote singles inside of rental stores. In a 1993 Billboard piece, a Toshiba-EMI executive noted that the approach highlighted the fact that the model was particularly attractive to teenagers, who couldn’t afford more expensive records at more traditional stores.
“They’re the main buyers of product by new or midranking artists, and so we can help promote these artists if the two sides cooperate,” the spokesperson said.
So while it took RIAJ and its members time to warm to the new normal, it gave them much more leverage later on, because rentals helped keep physical music sales robust, limit illegal downloads (because there was already an alternative), and gave the field some negotiating power against Spotify. Sure, it wasn’t the way they wanted to sell the records, but they still got paid for it—and that’s what matters most.
When renting a record to rip it is so cheap, why download it for more money?
It may not necessarily make the record industry feel better about the saga, but an inversion of this story can be seen with Nintendo, which successfully got video game rentals banned in Japan but failed to do the same in the U.S., with the only recourse the for NES-maker being the ability to sue for copyright over photocopied manuals. (This was the topic of a Gaming Historian episode from a few years ago.)
For decades, the U.S. music industry suffered from a failure to make room for music fans who didn’t have the money to match the level of passion they had for the product.
This created situations where, growing up, a lot of teenagers only got a chance to get into the singles on the radio, for example. But it also discouraged potentially important types of consumers for the music industry, such as the “grazer,” the person who digs around a record store with a willingness to listen to lots of different types of products. Since there was no way to live with the record without buying it, it made it difficult for a music fan to take chances on something new—unless you had literally hundreds or thousands of dollars to spend on new albums each year.
File-sharing was a necessary flip in that model. It opened things up person who has an interest in a wide variety of music but knew they could never afford access to all that music. It created a generation of people who have significantly more diverse tastes than their parents.
But the problem is, none of those people paid anything for access to those tunes on Napster or similar services. There was no greater focus on ensuring artists got paid. Everyone in the music industry was running around like they didn’t know what to do about this new threat.
But the truth is, the answer was literally laid out for them by the Japanese: Take a small portion of the royalties, and then put a strong focus on making physical releases collectible. That’s why they still have Tower Records and the U.S. doesn’t.
By going out of its way to kill rentals, the U.S. music industry missed an opportunity to set its own terms for an entire era of disruption.
And when that disruption finally came, it was as if they didn’t even realize the answer had already been in front of them for nearly 20 years.