According to the International Federation of the Phonographic Industry, digital music sales doubled to about $2 billion in 2006, reaching 10 percent of the music industry’s total sales. In another three years, by 2010, it’s expected to reach 25 percent. Digital technologies are empowering consumers who enjoy the unlimited shelf space of online stores and the diversifying of services and products: à la carte downloads, music videos and mobile mastertones. As Eric Nicoli, the chief executive officer of EMI Group, put it, “The digital revolution has caused a complete change to the culture, operations and attitude of music companies everywhere.”
Unfortunately, the digital revolution has also made possible new forms of piracy (illegal downloading) and facilitated easier and cheaper older forms of piracy (CD copying). The problem is endemic in the Middle East and is compounded by the fact that online music stores don’t do business in the region.
Worldwide, the industry is in a race with the pirates to win back consumers and stem its already considerable financial losses. Providing legitimate digital music services is one way to push back online piracy. “As our physical revenues continue to decline, we need to proactively continue to build digital growth and identify new digital opportunities that further extend the reach of our artists,” said Thomas Hesse, the president of Global Digital Business, a Sony BMG Music Entertainment company.
About 500 online services in more than 40 countries worldwide are now offering music tracks, which number has doubled to 4 million for 2006 alone; meanwhile, single track downloads have increased by 89 percent to 795 million. The demand for tracks to download onto portable music players is one of the main drivers of digital music consumption: mobile music sales totaled about $120 million in 2006, an increase of 43 percent on the previous year. Interest in music as a portable commodity can only increase as songs find their way onto mobile phones. Handset makers such as Nokia and Sony Ericsson are developing their music phones along similar lines to Apple’s dazzlingly popular iPhone, launched in late June.
New revenue streams and business models are emerging; for example, advertising-funded online product placements. According to a Zenith OptiMedia study, advertisers diverted budgets from conventional media to the Internet where advertising is forecast to overtake traditional radio advertising in 2009. Meanwhile, thousands of new albums have been marketed exclusively online. It appears that the way forward for the industry is to combine digital technology with its traditional skills of discovering and marketing music.

Changing tunes. But that’s easier said than done: the content online is huge, there are hundreds of digital music services, a dozen different business models and complex accounting systems. The odds of maintaining the edge in music discovery and marketing are daunting. The good news is that online music sales models like Apple’s iTunes are working.
However satisfying digital sales results may be, they cannot compensate for the decline in CD sales. Part of the problem is illegal file swapping. The proportion of users who source from legal download sites remains at a low 14 percent, whereas illegal peer-to-peer (P2P) transfers represent anywhere between 50 percent and 85 percent of the volume, depending on the country. An estimated 20 billion songs were illegally swapped or downloaded in 2005. Arabic music has its own illegal downloads provider – 6arab.com.
The rest of the decline is attributable to pirated CDs, a formidable problem amounting to $4.5 billion in 2006 thanks to the rapid growth of CD-R piracy (do it yourself). More than one in three music discs purchased around the world is an illegal copy and pirate CD sales outnumbered legitimate sales in more than 30 countries in 2006. Pirate CD figures are even worse in the Arab world, especially in countries such as Syria or Lebanon, where the trade in pirate CDs has stayed strong because Internet penetration is low and connections are slow. In Lebanon, perhaps three-quarters of music CDs traded are illegal copies.
“CDs are no longer a good investment,” said Karim Abi Yaghi, the founder of production company Artist House and the manager of singer Roula Saad. “They generate only 20 percent of our revenue. Now, 30-40 percent of income comes from ringtones.”

Test case. Lebanon, where piracy exceeds 50 percent, is a test case for whether music merchants can turn the market around by deploying new techniques for disseminating music or simply concentrate on earning revenue from non-music sources. “Last year, a song by Wael Kfoury was launched on purpose on cellphones, maybe on his [Kfoury’s] initiative,” said Charles Merhej, Abi Yaghi’s partner in Artist House. “That’s good promotion, as usually only the songs that go along with a video are played; other songs from the album don’t even get to be listened to. The same happened with Georges Wassouf, and it’s definitely done on purpose.”
Artists get airplay, but the business model is different to that of the past where broadcasters paid record labels. Now, radio stations charge an average of $15,000 for three songs to broadcast an artist’s songs. Another sign of the times is how record labels are getting the jump on the pirates by distributing free or heavily discounted copies of music to the fans, usually EPs or albums containing a handful of tracks. Indie labels don’t trouble themselves with production values: “Rotana [the Saudi distributor of Arabic music] has a low-quality edition – copied CDs, not pressed – to be distributed in Syria, for instance, where the piracy rate of the Arabic repertoire is 100 percent. That’s a way to enter the Syrian market,” said Abdallah al-Machnouk, the managing director of Incognito, the indie Lebanese music label, which established a branch in Syria in early 2007. “Rotana has been dumping with a low-price strategy; it’s been distributing CDs at 13,000 Lebanese pounds ($8.60),” he said.
Prerecorded music being no longer a cash cow, record labels are taking a stronger interest in the public management of the artists in their stable. Seven years ago, two-thirds of musicians’ income was generated through prerecorded music, the rest deriving from “side-activities” such as concerts and merchandizing. Today, thanks to piracy and P2P, those side activities are the whole enchilada: according to Pollstar magazine, concert-ticket sales in North America have increased from $1.7 billion in 2000 to $3.1 billion in 2006.

Take a tour. Curiously, Arab artists were among the first to grasp the changed nature of the music business. Crippling piracy and official indifference to its costs, coupled with being frozen out of the online music market long ago persuaded Arab artists of the virtues of live performances. Haifa Wehbe, for example, performs live an average of four times a month. She’s famous, and can command up to $150,000 for special events in Dubai. Less famous artists ask from $12,000 in Egypt up to $45,000 in Gulf countries. So lucrative are live performances in the Middle East, in fact, that record labels have adopted the “360° model,” as it is called in the US, a multiple-rights or all-rights contract that includes live performances and merchandising that they now routinely offer to aspirant artists.
“All our new artists are signed under management, which covers sponsorship, concerts, branding, etc. Mazzika takes a 35-50 percent commission for the work we do in putting them in public, marketing, etc. That’s also a way for us to cover the losses we suffer on physical sales,” said Ghady Charara, the general manager of Mazzika Entertainment in Lebanon. “It’s a minimum three-year contract to cover all the money we have invested. Of course, stars don’t agree [to it] but the newcomers don’t have any other solution,” he said.
Charara’s company manages about 30 artists without breaking a sweat, but the big labels are finding the work daunting. “We tried to share management with the artist,” said Joe Chrabiyeh, the general manager of EMI-Lebanon. “But it didn’t work. No record label can take over complete management.”
Rotana has signed about 150 artists on a flat-fee basis: a lump sum (about $20,000) is paid to the singer and Rotana keeps all sales revenues, whatever the amount. About ten new songs are released every week. “It’s not an artist or a production house that finds a market now, it’s a song,” said Charara.
That, of course, depends on how good the songs are. “Well-known artists won’t agree to share their live-generated revenues,” said Abi Yaghi, of Artist House. “More and more major artists, such as Assi el-Halani, Nancy Ajram, Ragheb Alameh or Haifa Wehbe didn’t renew their production contract and started working on their own, with the help of their manager.”
On their own. Haifa Wehbe, for example, started with Rotana five years ago and has successfully been on her own for more than two years. “Haifa was not satisfied with Rotana’s exclusive deal,” said Cynthia Mehanna, Wehbe’s manager. “Videos were only broadcast on Rotana’s channels, but not everybody watches Rotana; furthermore, she wasn’t happy with the money and the marketing strategy. Exclusivity doesn’t work, unless you consider it as a temporary tool to become famous: managers alone can’t launch an artist as they can’t count on CD sales due to piracy. Revenues are generated by live performances and you can get enough of these only when you’re already famous.”
During the last two years, Wehbe has produced two albums and four videos that are ready for broadcast after Ramadan. “We are receiving many offers but we are waiting for the one that will fit our requirements,” said Mehanna. The production company is expected to be in charge of all promotion and distribution and also pay Wehbe an initial lump sum, plus royalties. “We could distribute the album ourselves but it would be time-consuming and we don’t have the necessary human resources. Distribution companies could also do it but they can’t afford more than $100,000 or $150,000, which is not enough considering Haifa’s stature. We can afford to be very demanding,” says Mehanna.
The system is interesting in the way that it cuts the record label’s losses by sharing the production costs, while providing freedom, independence and bigger revenues to the artist. Same principles apply to video broadcast: Wehbe’s latest video has been sold to a TV station for exclusive broadcast for a month for a price that covered 70 percent of its production cost, before becoming available for other TV stations.

Promotional tool. Combined with the realization that live music is more lucrative than recorded music, CDs may become a simple promotional tool. “Some labels produce CDs just for publicity, even if they lose money; production for a good album, including two or three music videos, costs about $280,000,” said Abi Yaghi.
This is all the more true in countries where public image can sometime justify huge but not necessarily profitable investments. For instance, the establishment in Lebanon of EWE, a new production company owned by Egyptian financier Naguib Sawiri’s Orascom, has been expected for about ten months. “I’m quite certain that Sawiri’s venture will be pretty big and that he will go into both production and management,” said Abi Yaghi. “Still, there’s no need for a new company in the region; there are already too many singers on the market. So I believe Sawiri’s venture won’t be about profit, but about image.”
New trends show that artists may even spare themselves the trouble to work on an album. “It’s not profitable anymore, so singers sometimes work on just one song and a video, like Rabih Asmar, who distributed a song to radio stations and made lots of money later on concerts. Same with Melhem Barakat, who releases a song every year during a TV show and then performs on stage. Actually, many artists just produce one single after the other,” said Merhej, of Artist House.
According to al-Machnouk, of Incognito record label, “CDs are bound to become a calling card for commercial artists, a way to attract people to concerts. Many artists are now putting their music on websites such as MySpace. And if downloads become legal, people won’t buy CDs anymore. They’ll simply load their iPod. CDs will become luxury objects, something with an added value for true music lovers.”

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