Online music dream is real

Residents of the Emirates received their first official word last week that the iTunes Music Store, the biggest global music retailer, might be on its way to local markets. While Apple officials were coy, saying any such talk was premature, the Telecommunications Regulatory Authority (TRA) said it was negotiating digital copyrights for content associated with the popular service. Regardless of how far along the talks are, the news got attention. Karim Sabbagh, a partner with Booz and Company, says it is a prime example of how far the regional digital media industry has come and how far it has the potential to go. Indeed, it would be remarkable if the iTunes Music Store were to open here anytime soon. Apple has taken a cautious approach to emerging markets to this point and has not even managed to roll out the service in every European country due to EU trade restrictions. Japan, Australia and New Zealand are the only countries outside of North America and Europe to have the store. More than 6 billion songs have been downloaded from the site since 2003. Still, the idea seems somehow less far-fetched looking back at the past 18 months of digital music development in the UAE. During that time the country has become the regional base of two major digital music stores, while its domestic telecommunications companies have also taken a piece of that action. The first store was GETMO Arabia, a joint venture launched in June last year between the Abu Dhabi Media Company, which owns and publishes The National, and what was then called Arvato Middle East Sales, a subsidiary of the German media giant Bertelsmann. Bertelsmann has since sold the company to Mondia, a Dubai company, and it has been renamed Arvato Mobile Middle East. That effort was followed up six months later when Nokia, the largest global seller of handsets, opened its first Nokia Music Store in the Middle East in the UAE. Together, the efforts cemented the nation's place as the regional leader of online music. Those ventures showed it is possible to secure regional rights from record labels to sell music legally online in the region, a task the TRA claims it is now working on with Apple. But a little more than a year in, the issue of whether it is possible to make money from such rights in the region remains open. The challenges that have kept music labels out of selling their digital products in the region - piracy, low broadband penetration, limited payment options and phone companies demanding a large share of transaction fees - are still evident, even if factors such as broadband penetration are rapidly improving. The question is whether the opportunities presented by a music-hungry population of which fully half is under the age of 25 are worth the risks. For Nokia, they were. The Finnish company opened its second music store in the Middle East and Africa region in the UAE in December last year and is pleased with it so far. The first store was opened in South Africa. "We're happy with the results," says Jake Larsen, Nokia's head of music for the region. "It's given us a good foothold in the region." The company does not release separate music sales figures. Nokia is the only online music store to bring the four major record labels and the Arabic-music powerhouse Rotana to regional listeners, as well as more than 2,000 independent labels. It did so largely because the global reach of its store and penetration of Nokia mobile devices gave it leverage with labels that few companies could match. With more than a billion mobile phones in the market, many of them built to play music, Nokia claims to be the largest seller of mobile music devices in the world. That has helped it reach global licensing deals such as the agreements it has with Sony, Universal, EMI and Warner Brothers. However, even when the pressure of a global pact was not pulling Nokia towards the Middle East and Africa, the opportunities to finally make money out of the region often were, Mr Larsen says. "The Middle East and Africa is very interesting territory because, in terms of physical [distribution], there wasn't a very organised market," he says. "So the labels are particularly interested in these areas because they can now monetise them, which they couldn't do before. "The whole of Africa was just a vacuum with no organised physical sales. All of it was piracy, so the idea of being able to move into this region and actually make money at it is exceptionally appealing to labels." Mr Larsen would not disclose details about the agreements Nokia makes with music labels except to say the labels and music publishers get paid for each song sold through the store. Just how much the labels get paid remains a sticking point for online stores without Nokia's leverage. GETMO Arabia has not been able to attract the full slate of major labels or Rotana, making do with Sony, Universal and an array of Indian labels and Arabic labels such as Melody Entertainment and Mazzika. The amount that some major international labels want up front for licences, on top of taking as much as 70 per cent of each transaction, is prohibitive given the realities of the Middle East market, says Scott Weeman, the general manager of GETMO Arabia. "The problem with the international labels is their sizeable advances, which put people off taking serious risks, especially in this region where you need to be entrepreneurial and flexible," he says. "It's a big barrier to entry." Arabic music labels tend to be easier to deal with as they sell rights for the recorded track and the songwriter's publishing credit at one time. While international music has to be cleared by both the record label and the music publisher, there is no payment system in place because almost no Middle East country has a performing rights organisation to collect royalties. Even without songwriting royalties, the deals driven by record labels leaves online sellers little room for manoeuvre. "If you want to give away 70 per cent of your revenues, you can get a licence," Mr Weeman says. "That makes the business quite difficult when you've got 30 per cent to play with." Despite that difficulty, the main sticking point for a retailer such as iTunes is not securing rights. Issues such as rights theft and infrastructure play a big part. "I have my doubts about publishing and licensing being an issue," he says. "It's whether iTunes sees it as a region that make sense to them, looking at piracy, looking at payment methods.