Mid East business faces the music

On the first floor of Deira City Centre, the largest shopping mall in the UAE, lies the biggest music store in the Middle East. Sprawling over 2,000 square meters and offering 100,000 titles, this Virgin Megastore is a favorite hangout for Dubai teens, who spend hours sampling the latest releases of their favorite stars.

On a normal day, the store is crowded. On September 26th, it was packed to capacity. Teenaged girls and boys, many carrying autograph books, jostled with each other to get as close as possible to a makeshift dais - and to one of the biggest stars in Arab music: Nawal Zoghby. The Lebanese singer had traveled to Dubai to launch her latest album. And her fans just could not get enough of their idol. For most of them, it was their first personal contact with any pop star, big or small.

In any market around the world, such in-store promotions usually work very well. So you might think that they are a fairly regular event in the Middle East as well. Not so, says Hassen Daher, managing director of Virgin Middle East. "We are starting to push the record companies to do more local promotions. Some are investing in this, with us, to help us to expand our market. But other companies are yet to understand the importance of promotion," he insists. "There is a need to educate them, and that's what we are doing. But, just as important, the more market share we have, the more we can force them to start thinking in a marketing way."

It is not only by educating local record companies about the importance of promoting their albums that Virgin is trying to change the market. Virgin has tried to bring in its Western ideas and strategies in the Middle East, a market that is still highly fragmented. A large percentage of music is still sold in the corner shops or department stores, and the concept of specialized, modern and well-equipped music stores is yet to catch on.

This is exactly what Daher hopes to change. He expects to have six Virgin outlets in the Gulf by the end of 2003, with most of them measuring over 2,500 square meters, similar to those in Europe and the United States. "Everything from the entry of the store and its layout and equipment, right down to the lighting and cash registers, everything is exactly as it is in France," says Daher, who goes on to forecast the death of the small music store as Virgin and its arch-rival, Tower Records, take over the market.

Despite Daher's optimism and his armory of international brands and experience, the Middle East market has proved to be far more challenging than what the Western players expected as they herded into the region over last few years. Today, the world's music majors seem lost. As with many other sectors in the region, Western music companies find themselves confronted with an entirely new marketplace with unique challenges.

Back in 1995, when it opened an office in Dubai, British EMI became the first global music player to establish a local presence in the Middle East. EMI is one of the biggest record companies in the world - like Sony, Warner and other heavyweights, EMI signs up artists, records their music and then distributes it throughout the world. The record companies make their money by getting a fat chunk of global sales, which they share with the retailers like Virgin and, ordinarily, with the artists themselves.

EMI decided to set up offices in the region following the implementation of a then new anti-piracy law in the UAE that provided for stringent actions against pirates. New laws and the opening up of the local economies were clear signs that the Middle East market was now attractive enough for the global giants to take a serious look. And EMI was hoping that it would have the first-mover advantage. It was soon followed by other players, including Universal and Sony Music.

However, nearly seven years on, EMI and its global rivals are still struggling to cope with the market's conditions and problems. Almost all the aspects of the market that seemed to be an attraction or advantage are slowly turning out to be headaches or disadvantages for the global players.
For distributors, the first problem is size.

As a whole, the Middle East market is a healthy 300 million, but at the operational level the distributors find the market to be highly fragmented and often too small. With the exception of a handful countries like Egypt, Algeria and Saudi Arabia, almost all the markets in the region are well below 5 million, making it more complicated for the distributors to serve all the individual markets.

The first challenge for the music companies was that it is a market dominated by cassettes, rather than CDs. There is very little margin in cassettes for the record companies since a cassette is very expensive to produce, unlike the CDs which are far less expensive to copy and cost almost nothing to produce.
As there is very little margin in cassettes, the companies were naturally keen to convert the market to CDs, like in the West today.

However, after several years, their success has been limited in the Western music category and dismal for Arabic music. For instance, last year 3 million copies of Western music albums were sold in the Gulf. Of these, barely half were CDs. In the Arabic music category, CDs accounted for less than 25 percent of the 8.5 million copies sold.

Says Adrian Cheesely, managing director of EMI Recorded Music Middle East, "When we came to this market the compact disc was still a relatively small market. It is still quite slow in Arabic music. It is now growing since Virgin and other stores have come to town, helping the market. But a lot of the Arabic producers still focus purely on cassettes."

Another problem in the market is censorship. Gulf governments are wary of letting the latest hits from the West into the market, largely due to concerns over the video images and sometimes even the language used in the songs. So most music companies spend a considerable amount of time and a lot of money pre-censoring their own tapes.

Censorship is no longer limited to Western music. With Arab pop stars like Nawal Zoghby adopting the brash and daring styles of Western stars, the censors in the Gulf have a new segment to closely monitor. And this just adds to the overhead.

For each market, the importer, who is often the distributor, has to pay over $30 for each album. And since the market is so small that the average import volume is between five and 10 albums, it means an additional cost of $3-6 per album, almost doubling the cost of the disc. The retailers are hard-pressed to pass on this additional cost to the consumers, whom they are trying to convert to CDs. The retailers say this charge is unfair since it is applied only to tapes sold legally in their stores, while those selling pirated pieces get away without any additional charge.

Moreover, says Daher of Virgin, people are now using the Internet to order their CDs from abroad. "Nowadays, people very often order their CDs from sites like Amazon.com. These CDs are delivered rapidly and without any additional charges. They don't pay anything, no censorship, nobody stops them, nobody even inspects them."

Though Virgin has often gone to see regional governments to complain about the unfair market conditions, its pleas have had little impact. That is why Virgin's Daher was happy with the arrival of a global competitor like Tower Records. "Now, we can perhaps approach the government together and put pressure on them. Maybe, together, we can pull it off."

Tower's arrival could be a boon in disguise for Virgin in another way as well. The two could get together and place their orders for CDs - together. "If we place our orders together, the volumes will go up and this should reduce the add-on per CD," says Nader R. Al Nasser, chairman of Tower Records Middle East.
But for the moment, high prices are biting the international retailers hard.

Censorship severely impacts the popularity of an album, and also leads to delays before release in the region. But this does not prevent Internet-savvy customers from ordering their CDs on the Web. So, while many CDs are yet to hit the local retail stores, some consumers have not only bought their CDs on the Web but also lent them to their friends to make copies. Daher of Virgin says in a small and fractured market, these actions hit the retail trade hard.

Moreover, this delay is exactly what the pirates are looking for. Piracy remains one of the biggest headaches for the players in the music industry, whether Western or local, distributor or retail reseller. The problem is especially serious in some countries like Syria, Egypt, Kuwait and Lebanon, where more than half of the music sold is pirated. But it is not restricted to these countries.

According to some estimates nearly 50 percent of all tapes and CDs sold in the Middle East are pirated, causing sizable losses to the players involved. In fact, so rampant is piracy that most Arab artists prefer a lump sum fee for their albums since their royalties get eaten up by sales of pirated CDs.

The pop stars themselves have had the most to gain from the entry of the big labels in the region. The market evolved rapidly and soon Western concepts like fan clubs and site promotions were becoming a common phenomenon in the region as well. This helped expand the market for the artists, who suddenly catapulted from being one-country stars to region-wide celebrities.

But big players like EMI and Universal did not bring in only their expertise and know-how in promoting albums. They also brought with them their global distribution network and huge promotional budgets. An Arab star now has the possibility to sell not just within the Middle East, but also in countries as distant as Chile and Australia, besides serving large expat Arab markets in Europe and the United States. Explains Cheesely of EMI, "We have three main offices covering the whole of Middle East and parts of Africa and from here we are also distributing, getting EMI to release our Arabic repertoire throughout the world. Thus, we distribute in the US market from here, also throughout Europe and Southeast Asia. This has led to some unusual phenomena. For instance, we have had Arabic artists selling very well in Malaysia, Chile, Argentina, Tanzania. Hip Arabic compilations are now doing very well in Western markets."

Cheesely says that there are two kinds of buyers of Arabic music in overseas markets. First, there is the Arab expat, but there are also people in markets like Chile or Malaysia where it has become trendy to buy Arabic music. But he adds that this market is still underdeveloped since people buy tapes without knowing what they are getting.

"These people buy compilations out of interest but don't understand a word of Arabic. They buy the album blindfolded. We still face a long way to go to get an educated market. But we feel there will be an Arabic market. The other thing that's happening is that we are working quite well in the Western markets because of remixes of old Arabic songs and that's a trend that could work really well," he says.

While the global giants may be keen to build their own Arabic repertoire, the going has not been easy. Most of the big names in Arab music are currently signed up with various local companies, like Egypt's Funoon, whose repertoire includes Amr Diab, the biggest Arab star, whose albums sell an average of 300,000, a huge figure for the market. This left the biggies with little option but to go for joint ventures with the local companies so that they could get a share of the market.

Another strategy has been to buy the global rights for the artists, excluding the Arab world. This was what Universal has done. It bought the worldwide, except Middle East, rights for One Thousand and One Nights, a compilation by Saïd Mrad, a Lebanese DJ. The deal has been a great hit since the album has sold over 50,000 units in France alone. It is now on rotation eight times per day on a leading radio station in Paris, and the album may cross the 100,000 figure in France before the end of the year.

The entry of Western companies has also changed the way business is being done in the region. Until recently, almost all the deals in the region included a fixed lump sum for the artist. While this protected the artists from the risks of an album bombing, it also deprived them of any share in the bounty if the album proved a hit. Increasingly, artists are now opting for a royalty-based system where they benefit from sales.

This small change, affecting just a few musicians in a fractured market, may sound like no big deal. But it's part of a larger shift: instead of settling for easy money, Arab musicians are taking risks and investing in their own success. Now that's something to sing about.