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Sometimes, even in the rollicking world of music, the dullest of words can speak volumes: in late August, Hong Kong’s chapter of the International Federation of the Phonographic Industry, the recording biz’s professional association for copyright protection, issued a statement that it had “duly received notice of withdrawal of memberships” from record labels EMI Group, Sony BMG Entertainment, Warner Music, and Universal Music. No explanation was given.

With that cryptic utterance, a new page in Hong Kong’s fast-changing music industry had been written – the world’s ‘big four’ record labels had chosen to exit an organisation that in 2007 calculated a 21 per cent drop in legitimate CD sales in Asia. While none of the four labels would comment on why they decided to leave the IFPI, the move suggests that they see no reason in championing copyright protection in the face of rampant music file-sharing and piracy.

September produced more startling news: EMI Group and Warner Music announced a plan in which Warner would assume responsibilities for marketing and distribution of EMI’s worldwide repertoire in Southeast Asia, including Hong Kong. Under the plan, ailing EMI agreed to sell its joint venture stakes with Hong Kong artist management and record company Gold Label.

These developments are further evidence that the industry is now in a tailspin, and that Hong Kong – already a tiny market for CD sales – is especially sensitive to the temperature changes in the music business climate. A cynic might be justified in arguing that it’s no longer a question of whether or not Hong Kong’s big label-led industry as we know it will survive, but a matter of when it will finally die.

Few in Hong Kong are more familiar with the impending, possibly apocalyptic challenges the industry faces than Hans Ebert, a music executive who witnessed (but was powerless to counter) the early days of the digital revolution, a movement that would eventually come to hobble the previously-bloated fat cats who have for so long dominated the promotion, distribution, and cash flow of music. The former executive director of EMI Southeast Asia was at Universal Music in Hong Kong in 1999, when Napster, the first file-sharing service to challenge the major labels’ market supremacy, came on the scene.

“The industry thought they could fight Napster. The music companies were caught flat-footed,” explains Ebert, who now runs We-Enhance, a multimedia and music-based entertainment company in Hong Kong. “Consumers are spoilt for choice. Fans don’t believe in record reviews. They wanna find this stuff out for themselves. They know they can get music without paying.”

Anders Nelsson, a Hong Kong-based consultant in entertainment and music, seconds Ebert’s assessment. Nelsson served as managing director of BMG (before Sony and BMG’s 2004 merger) when Napster came on the scene. He’s not surprised by the major labels’ predicament. “The majors are too fat and top-heavy to do what independent labels do. They have themselves to blame,” Nelsson says. “It’s similar to what’s happening in the financial industry. They single-mindedly go after profit. They say, ‘Big is beautiful and nothing else counts,’ but that’s not always true.”

Like Ebert and Nelsson, Wong Chi-chung is keenly aware of these developments. To stay viable, labels need to engage young people’s views of music consumption, says Wong, Hong Kong’s resident pop music expert. For the last 20 years, Wong has been a music critic, radio host, and singer. He is currently writing a PhD at the University of Hong Kong, examining the music industry and music culture in the age of digital reproduction (Wong also happens to be a Time Out columnist).

“It’s a hard truth that this [youngest] generation takes it for granted that music is free,” Wong says. “Only a small percentage thinks of purchasing. This really is the core issue that the music industry has to address, not just to fight illegal sites. The labels have to embrace the use of digital platforms to drive up the interest and passion of the youngsters. The old model is dying – not dead yet, but dying.”

Asia has taken to downloading music with particular alacrity. A quarter of youngsters who responded to a March 2007 survey by market research firm Synovate said they had illegally downloaded a song from the internet in the previous month. And 18 percent of respondents said they had used file-sharing programmes in the same time period.

Left with little choice, the labels are scrambling to adjust their strategies. Vincent Lee, a senior promotions executive at Warner Music in Hong Kong, says he understands the phenomenon. “Today, a fan can go onto MySpace.com and listen to an artist they wouldn’t have heard about years ago. It helps promote artists – but honestly, none of us thought it would be like this.”

Lee adds that Hongkongers’ ready embrace of digital technology means he has to focus on all the ways music might be offered. He sees mobile as a way of the future and says Warner is working closely with handset makers and subscribers to develop new offerings. “We’re trying to provide more options. The market speaks and we listen.”

Nevertheless, Warner – along with the other big labels – has so far offered little in the way of mobile music, except to take part in a half-cooked scheme from SmarTone-Vodafone called Music XS, which masquerades as a digital music download service but offers low-grade, DRM-crippled music rentals that are only accessible for as long as the user pays a subscription.

The financial toll that illegal downloads exact on conventional record sales is difficult to measure, but some facts paint a worrying picture for the major labels. Nora Wong, a marketing officer at Sony BMG’s Hong Kong office, cites Céline Dion as one of the company’s best-selling artists over the last ten years. While Dion went multi-platinum in Hong Kong on her latest album, selling at least 40,000 copies, she says downloads have taken their toll. “Céline used to sell ten times platinum; now she sells double platinum.” (As has already been proven, not even diva Dion can save the Titanic from sinking.)

Even those industry definitions are worth scrutiny. In 2006, for instance, the IFPI revised the meaning of ‘platinum’ from 50,000 sales down to 40,000. This year they dropped the threshold another 25 percent – from 40,000 to 30,000. Similarly, ‘gold’ albums, which once meant 25,000 units sold, found a new home at 20,000, before moving to the ghetto of 15,000 units. The new standards represent a paper-over-the-cracks attempt at keeping fan enthusiasm high for artists despite diminished sales figures.

Dee Chau, HMV’s general manager for marketing and e-commerce in Hong Kong, says everyone now accepts lower expectations as a harsh reality. “It’s a big difference from five or ten years ago,” says Chau, whose 14-year industry career includes stints with BMG and EMI. “If you’re achieving close to 20,000 units per year for an international artist, that’s a very successful release. Compared to ten years ago, we’re only at 15-20 percent of what we used to sell.” To widen its market presence, HMV is beefing up its product offerings, ranging from DVDs and other ‘visual’ merchandise to digital music services at its in-store kiosks.

Yet the in-store kiosks embody the type of wrong-headed approach to digital that misses the point of how people are consuming music today. Who wants to download music in a store and pay for it when the whole process can be more conveniently done at home for free?

Hong Kong’s market also faces a threat from the Mainland, where piracy thrives and filters across the border. Ricky Fung, CEO of IFPI Hong Kong says that, even as long ago as 1999, for instance, there were at least 800 shops in Hong Kong selling pirated CDs. But while China might be one of the major threats, it is also a big-time opportunity. Despite the piracy challenges, Fung says China could be tapped for untold legitimate profit. “For Hong Kong distributors, their access to China is one way to boost gains,” he says. “The market there is so big, even with piracy.”

To combat piracy and boost revenue, more industry executives than ever are turning to a ‘360 entertainment’ model. The idea is that artists go beyond conventional recording and tour as much as possible, promoting their concerts at every opportunity, and working all facets of merchandising campaigns.

It is a business model made famous by upstart companies such as Live Nation, the California-based concert promoter and now de facto label that in recent years has signed heavyweight artists such as Madonna and U2. Live Nation appeals to artists because artists retain creative control and copyright ownership.

Hong Kong companies employed the 360 model years before it became popular among the major labels (though companies here typically assume copyright controls), and few have done a more successful job than East Asia Music. Established in 2004 as a company within local media conglomerate eSun Holdings, East Asia Music has signed some of Hong Kong’s most sought-after talent, such as Andy Lau, Andy Hui, Denise Ho, Ivana Wong, Chet Lam, and at17.

East Asia Music CEO Tony Yapp says his company recorded “double digit” percentage growth in the last fiscal year, and he credits East Asia Music’s acceptance of the 360 model “since day one” as instrumental to its success. Yapp claims his company’s best-selling artists “are moving well over 100,000 [units] per year.” He concludes that, even in the face of file-sharing and piracy, “there is a group of people in the market willing to pay for albums”.

So amidst all the doom and gloom and prepared obituaries for the industry, perhaps there is hope yet. Certainly, if the future is digital, then Hong Kong would seem well equipped to adapt. Or at least, should be. It is baffling that in a city so wired up, in which so many consumers are online all the time, and where there is no dominant online music store (hello, iTunes?), none of the major labels have taken affirmative action in trying to save their own lives. It’s almost like they’re resigned to a future of dwindling profits, downsizing, and, perhaps, death.

The question remains: is that a good or a bad thing?