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Columbia Reborn with New CEO Hirose

Original Confidence, 02.23.04

Three years have already passed since Nippon Columbia, Ripplewood and Hitachi announced the plan to revive Columbia in May 2001. During that period, Jack Matsumura (Katsumi Matsumura) took office as CEO and Representative Director of the new Columbia and Masao Nakajima was appointed COO and Director in May 2002. However, Matsumura unexpectedly died in August 2002. Strauss Zelnick subsequently became CEO and Chairman, and Masao Nakajima was tapped to become COO and President (Executive Officer). On January 1, 2004, the company appointed Sadahiko Hirose as CEO. What are Columbia's intentions in appointing Hirose, who has long been involved in the computer and game industries and who has no experience in music entertainment? What changes will the appointment of Hirose bring to the business plans of Columbia as it goes through the process of recovery?

--- Mr. Hirose, who was formerly CEO and President of @NetHome, became the CEO of Columbia as of January 1. In Japan, it is rare to appoint someone inexperienced in the music industry as CEO of a record company. Can you start with the reasons why Columbia decided to appoint Mr. Hirose as CEO?

Zelnick: I Joined Columbia as chairman in October 2001, and at that time, we appointed Mr. Jack Matsumura as CEO and president. Sadly, Mr. Matsumura passed away a year and a half ago. I had to become CEO, at least until things settled down at our company. Fortunately, we soon moved into the black, and we started thinking of selecting a new CEO around the middle of last year.

When we thought about who would be a desirable CEO, we thought that a Japanese national who is adept in business administration and who can manage daily business activities in Japan would be required. We also felt that we needed someone with an entrepreneurial spirit, who has deep understanding and experience in digital distribution services.

Even though Mr. Hirose is not experienced in the music industry, he has operated a video game company. The most important factor was that he is experienced in digital distribution. He thoroughly understands the creative processes in digital distribution and the digital media. These are the reasons why we decided to appoint him as Columbia's CEO.

--- Mr. Hirose, how did you feel about the offer when you first heard it?

Hirose: To tell you the truth, I have stepped into a completely different business field each time I have changed my job. I started out with IBM in a computer business. Then I was engaged in publishing with a venture business named ASCII, then in the video game business with Sega. Until very recently, I was running a broadband Internet business. So there are only a few business areas I haven't yet experienced. (Laughter) When I was offered the position in the music industry, which was new to me, I said to myself, "Boy, I'm lucky." (Laughter) I was glad to accept the offer.

--- Why do you want to experience different areas of business?

Hirose: By working in diverse areas, I can broaden my views and experience. In terms of business management, I feel that I might find common rules by experiencing different areas of business. And I believe these common rules will be the rules for winners. My life's work is to find these rules.

--- How did you imagine the music industry?

Hirose: I was pretty confident that the music industry is not in decline. If you look at the sales of CDs by major labels, the figures are actually negative. But there are also indie labels. In addition, the sales of DVDs have grown 120% each year. What's more, demand for ring tones and songs for mobile phones is definitely growing. It is said that sales of music media peaked in 1998 at around 600 billion yen. Today, the sales are around 420-430 billion yen. But if you add the sales by indie labels and the sales of 250 billion yen for DVDs and still further the sales for ring tones and songs, the total might even exceed 700 billion yen. The market for "music" is obviously expanding. Those engaged in the music industry believe that sales have declined, but seen from a different perspective, they have grown. Therefore, I was sure that many opportunities remain.

--- Can you tell us further why did you decide to join Columbia, which is in the middle of reform?

Hirose: I thought a bit about it. The most important reason for my decision to join Columbia is because the company possesses an enormous volume of so-called catalogued works in the music industry. This large catalogue will be very significant in the coming age of digital distribution. The versatility of the stock of songs in our possession will be a decisive factor enabling us to lead the industry in the age of digital distribution. Through digital distribution, those who do not usually go to record and CD shops might start listening to music using personal computers. No matter how hard one tries, it is only possible to publish 400 to 500 new songs each year, at most. On the other hand, Columbia possesses a catalogue of more than a hundred thousand songs. The potential of this valuable asset seemed very attractive to me.

--- How will the appointment of Mr. Hirose as CEO impact the business of Columbia Music Entertainment?

Zelnick: The music business has a history of about 100 years. The market has expanded significantly each time a new technology has been created. Similarly, when the digital distribution business starts in earnest, the music market will further expand in scale.

The technology of digital distribution is likely to bring about the greatest changes in the music industry, for the next decade or two. In this regard, we also felt the need to initiate the digital distribution business. And the need was not only for initiating, but also for leading the industry in the business. There are signs in the United States that digital distribution will become a major movement, but I don't think Japan has reached that stage yet. However, we want to secure the leading position by the time digital distribution business does become a significant business, and we needed someone who can control everything properly.

--- Specifically, what sort of digital distribution business do you have in mind? Zelnick: I think Japan will have a similar experience to that of the United States. In the U.S., Apple Computer has had success with its iTunes Music Store download service. In Japan, too, downloading services will become popular.

Hirose: The technological aspects of digital distribution are already in place, but it will be necessary to organize a system to protect copyrights and other proprietary rights in a way suitable to the new business of digital distribution. To do that, the understanding of artists will be indispensable. The most time-consuming task will be with artists, and I want to start work on winning the understanding of artists right away. If we can clear this hurdle, it will be possible to distribute good music.

--- The ideas being formed in the United States and Japan regarding the protection of digital copyrights in relation to music distribution seem different. How do you think the situation will turn out in Japan?

Hirose: The Internet has expanded beyond national borders, and in the world of Internet, it is hard to see local standards being established. On the other hand, things get more complicated if there are two or more standards in one region. Ultimately, I think global standards will come into place. Today, active studies and discussions are underway for systems to protect copyrights. Before long, discussions will be held internationally and a scheme for global standards will emerge.

--- Digital distribution services for music are not yet popular in Japan. What do you think are the reasons for this?

Hirose: Service providers might be enthusiastic about the distribution services, but we the proprietors of copyrights for master recordings have concerns. In other words, there is a gap between the "totally strange" digital technologies and the conventional approach to the music business that we have conducted. As such, efforts are needed to fully understand the situation. Now that I have joined Columbia, I have shifted my position from the distributor's side to the provider's side of original recordings. I hope that our company will serve as a case study in the establishment of a system of digital copyright and distribution, from the provider's side of master recordings.

--- In Japan, businesses that involve mobile phones have been active, such as ring tones and song services.

Hirose: I think users have found mobile phones to be the most easily accessible medium for digital distribution.

The third-generation mobile phones will enable full distribution of songs. The number of third-generation mobile phone users is likely to exceed that of the broadband Internet by far. This means that mobile phones have a greater future as a channel for music distribution. As can be seen, the medium used for full-scale music distribution in Japan might differ from that in the United States.

From now on, we will be using mobile phones to promote new songs. We started presenting 10 songs by Hitoto-Yoh in "kokodake-ongaku," a ring tone site on au mobile phones operated by music.co.jp, on January 26. We have already started services for ring tones, but it is the first occasion in which one artist presents a great number of songs at once. We also plan to start a ring movie service on February 18, featuring the Japanese ballad singer Kazusa Wakayama. Our plan is to steadily increase the number of artists featured in ring tone and movie services. We think it will be a powerful tool for promotion.

--- Am I correct that you intend to use music distribution to mobile phones for promotion as part of the packaging business?

Hirose: Yes, for the time being. That's because we don't fully know the functions of third-generation mobile phones yet. I believe that all functions will be ready by the second half of the year, and we will make a judgment after discerning all the technological aspects.

Another approach that's relatively easy for us to imagine is to use TVs, all of which will be digitized by 2011 in Japan. TVs watched by the roughly 120 million people that live in Japan in more than 10 million households are all going to be digitized. This means that we'll be able to distribute music for downloading by digitized TVs. By then, TVs will be able to serve that function well. When I think of the way people will enjoy music in around 2015, that's the picture I get in my mind.

Zelnick: Although this is not yet finalized, we hope to start a legal and highly profitable digital distribution service within three to five years.

--- What is your concept of packaging at that time?

Zelnick: We don't know what specific form it will take at the time, but the present form won't go unchanged. In any case, there will be users who will want a jacket or other form of packaging, so packages will not be eliminated.

--- DVDs have gathered a great deal of attention as a new type of packaging.

Zelnick: We regard DVDs as a very important market with potential for growth. Our artists are planning to produce DVDs with high added value. We will be publishing a DVD by X Japan in the near future, and that will be followed by many others.

Hirose: As Mr. Zelnick indicated, a great number of CDs paired with DVDs are likely to be launched on the market. We have created promotional videos for each new song we publish, and many of them are of excellent quality, so we want use them for purposes other than just playing them on monitoring screens in CD shops. If these videos are edited and packaged with a CD, a new high added-value business will emerge. Record and CD shops also want these new, high added-value products. DVDs are fully protected by copyright, so they are safer products. In addition, there's a possibility of secondary use of these images, by distributing them via the Internet.

--- Two years ago, Columbia announced a business recovery plan that mainly features cultural reforms. How has that plan progressed so far?

Hirose: Fortunately, artist development went well last year. The most outstanding example is Hitoto-Yoh, who won the Japan Record Award for debutants and other awards last year. She has toured the country for concerts this year. She is a symbol of the success of our strategies to advance into J-Pop. With regard to Japanese ballads, Kiyoshi Hikawa is the best selling artist. Ninety percent of all sales from Japanese ballad albums are his songs. The third genre, Western music, is not one of our strong points, but we have tied up with V2 Records and now artists like Underworld that are especially popular among young people have joined our line-up. We are now evaluating artists in each genre, and we find that the line-up of artists under our label has become quite versatile. Columbia used to be associated solely with Japanese ballads, but now we have J-Pop artists and those of Western music with us. After I joined Columbia, I was surprised at the wide variety of artists under our label. Changing the corporate color, or cultural reform, has progressed very well.

--- Selective investments in core businesses and downsizing of personnel might also be topics to be considered.

Hirose: Actually, I was lucky that all downsizing had been completed by the time I joined Columbia. We have all the necessary people in place for our music business, and all we need to do is to fully drive the line-up of artists. With regard to the current state of the CD business, artists we discovered last year or the year before are now ready to blossom. This leads not only to actual sales and profits, but also to the next step of getting the digital distribution business smoothly underway, by effectively using the profits we earn.

--- How are the roles actually allocated among Messrs Zelnick, Hirose and Nakajima?

Hirose: Mr. Zelnick has great expertise in the U.S. music industry, and he will function as the expert for the global development of the Internet music business.

Even though we have a wide array of artists under our labels, we still have issues to address regarding our artist roster. We have a full line-up of Japanese ballad singers, but we still need to develop more artists in other genres. Mr. Nakajima is in charge of all tasks involving the discovery and training of artists, as well as production. And I am responsible for mobilizing the mechanisms in place, or for establishing mechanisms that are cutting-edge among the record labels of Japan regarding the digital distribution business.

--- Looking overseas, there seems to be a powerful process of reorganization taking place, as exemplified by the merger of SME and BMG. How do you foresee the coming changes in the music business?

Zelnick: There is no doubt the business will become more efficient. As can be seen by the merger between SME and BMG, the tendency toward reorganization will become more intense in declining markets. Japan is the second largest market in the world, so it is likely to continue changing. I don't think the music business itself will decline forever. Wonderful artists might emerge in the near future, and the digital distribution business will start in earnest. These two factors, when combined, will surely create an updraft.