Why the Music Business Can't Afford to Ignore the Middle East In 2019

Kevin Mazur/Getty Images for Billboard
French Montana performs onstage during Day 2 of Billboard Hot 100 Festival 2018 at Northwell Health at Jones Beach Theater on Aug. 19, 2018 in Wantagh, N.Y. 

When the IFPI released its 2018 Global Music Report in Apr. 2018, one region was completely absent from its pages: the Middle East.

The music industry has historically turned a blind eye on the Middle East and North Africa (MENA) because the vast majority of the region's consumers still listen to music for free -- either through legal ad-supported channels, or through physical or online piracy. By some reports, piracy still costs the wider MENA entertainment industry $500 million annually.

Yet, 2018 also marked the year major labels and streaming platforms invested more capital into the region than ever before. In Feb. 2018, Warner Music Group launched of Warner Music Middle East, a recorded-music subsidiary based in Lebanon that covers 17 MENA markets. French streaming service Deezer then officially expanded into MENA in October -- shortly after announcing an $185 million funding round from investors including Kingdom Holding Company, a conglomerate owned by Saudi Prince Alwaleed bin Talal. Less than a month later, Spotify announced its own MENA offering, which included a new “Arab hub” of localized playlists. Industry insiders expect another two to three music services to launch in the region over the next 18 to 24 months.

This flurry of activity is turning MENA into an unprecedented, fast-growing source of revenue and consumer data for artists and rights holders around the world.

“Five years ago, if I happened to have a hit in the Middle East that got played by every radio station in the country, it would’ve had zero impact on my revenue,” Spek, svp of creative and A&R at indie publisher Reservoir Media and founder of UAE-based publisher PopArabia, tells Billboard. “As for physical sales, either people would go buy a pirated CD, or the CD would be legal but there would be no mechanical royalties paid out on the sale, because the whole system was unregulated and opaque. Now, there’s a reality that artists and songwriters will get paid by the various digital services in the region -- and as a music publisher trying to invest in content, I now have something I can forecast. If I have a local Arab hit with 10 million streams, that gives me an indication of what I should be investing in for the next signing. Suddenly there’s an economy around music that there never was before.”

Ironically, Middle Eastern investors have actually been supporting some of the world’s biggest music and entertainment companies for years: Abu Dhabi Media Company has backed Vevo since 2009, while state-owned Qatar Holdings owns a stake in Universal Music Group’s parent company Vivendi.

Only recently has capital flowed in the other direction, from Western companies to MENA’s music economy. In particular, with the arrival of Spotify and Deezer, a population of over 444 million people now has access to a wide variety of legal options for music streaming.

This is an especially important opportunity for Spotify, whose shares on the New York Stock Exchange have been trading at all-time lows this week. As of Q3 2018, only 11 percent of Spotify’s total active users come from outside North America, Latin America and Europe -- a category that the company labels “Rest of World” in its earnings reports and includes Asia, Africa, Australia and the Middle East.

But Spotify and Deezer are not without their competition, from both local and international players. Apple Music and YouTube have both been active in MENA markets for several years, and Saudi Arabia has the highest per-capita watch time on YouTube of any country in the world. YouTube also opened a new space for creators in Dubai Studio City in Mar. 2018, and has been directly funding MENA-based channels for the past five years.

Meanwhile, local service Anghami is the market leader for pure-play music streaming, with over 70 million registered users. Rami Zeidan, vp of partnership at Anghami, tells Billboard that Anghami has a competitive advantage over international rivals because “we’re a music entertainment company, not just a music streaming app.” Aside from its audio-streaming interface, the service has recently rolled out social features like Anghami Story (modeled after Snapchat and Instagram Stories) and Video Expressions (similar to now-defunct Musical.ly), more utility-driven features like a sleep timer, unconventional ad formats such as “shakeable” ads and an original-content and artist-development program known as “Anghami Originals.” As a local company, Anghami is also currently ahead of Spotify and Deezer when it comes to high-quality localized content.

"Anghami’s only defensibility against its competition is being a first mover,” Fares Ghandour, partner at MENA-based venture capital firm Wamda Capital, tells Billboard. “It’s had a monopoly over local streaming for the past six years, but customer acquisition costs have been cheap because there was no one else to compete with them. Now that Deezer and Spotify are there, those costs will skyrocket. If Spotify is serious about the region, they should be earmarking up to $100 million over the next five years to grow their local user base and capture more market share."

The economics of building a streaming company in MENA countries is an entirely different beast from what the music industry is used to seeing in Western markets. Credit-card penetration in MENA populations is relatively low, with only 52 percent of men and 35 percent of women in the region having access to a bank account, according to the World Bank. This rate is so low that even fast-growing e-commerce startups in MENA are still mandated to offer a cash-on-delivery options for payment.

Yet among MENA’s un-banked population, 86 percent of men and 75 percent of women also own a mobile phone -- which the World Bank suggests could be “an avenue for expanding financial inclusion.”

In the context of music, high mobile penetration plus low financial inclusion means that the vast majority of music streaming transactions happen through telco bundles with mobile data plans. In this vein, Anghami is the current market leader, having partnered with over 20 telcos in the region. Apple Music announced a discounted bundle with local telco Etisalat in Jun. 2018, while Deezer and Spotify are still scouting potential partners.

While telcos can help lower customer acquisition costs for streaming partners by as much as 60 percent, it arguably imposes revenue strains on rights holders, since local telcos take a 30- to 50-percent cut of all third-party digital transactions, sources say.

In addition, conversion to paid subscriptions overall is still quite low in MENA markets, putting additional financial pressures on local platforms. Zeidan estimates that roughly 85 percent of MENA music-streaming consumers don’t pay for a subscription.

Anghami offers a paid tier, known as Anghami Plus, for $2.99 a month, but the vast majority of its users have free accounts. Sources say that Anghami’s ARPU averages out to just under $1, which has made some investors question the company’s estimated $100-million valuation.

For comparison, Spotify claimed in its latest earnings report that its global ARPU was €4.73 in Q3 2018. That figure has also decreased by nearly 30 percent since Q2 2016 (the earliest quarter for which Spotify has shared ARPU metrics), in part due to factors such as the rising popularity of shared Family Plans and the company’s ongoing international expansion into MENA and other majority-free music markets.

"It's very important to us that adoption of paid subscription is the driving factor behind these services," says Spek. "All the DSPs have flirted with initially giving away music for free to drive user acquisition, but there has to be a long-term strategy as to when they can drive those subscriber numbers up. That’s the only thing that will truly change the market for the better."

Because free streaming remains the norm in MENA, rights holders and streaming platforms are also closely scrutinizing local advertising infrastructure, and advocating for more digital- and mobile-based ad spend from local brands. “Revenue per 1,000 views is higher in the United States … due to how quickly advertisers are moving their dollars online,” Robert Kyncl, chief business officer at YouTube, said in July during an event at the YouTube Space in Dubai. “We have a team here in Dubai that has been working hard for the past five years to move it online.”

Notably, East Asian corporations like Tencent, Rakuten and Huawei are also pouring an increasing amount of investment capital into MENA tech and media, and have even considered acquiring local streaming services rather than launching their own offering from scratch, investor sources say. Anghami has not raised any additional funding since 2016; in the event the service fails to attract additional capital, “an acquisition by Tencent is by and large the most likely exit strategy that Anghami will pursue,” says Ghandour. “Unless Spotify really flunks in the region, in which case it would have no other choice but to acquire Anghami for a substantial price.”

Streaming services are also competing head-to-head on original or exclusive Arabic music content, and see themselves playing a critical role in strengthening MENA's relatively weak artist-development infrastructure, especially on the independent level.

Shortly before Deezer’s MENA launch, the French service announced an exclusive content deal with local label Rotana Records, which claims to own the region's most valuable catalog. While the deal may give Deezer a competitive content advantage, there remain many strategic holes. For one, despite the exclusivity of the deal, the majority of Rotana's back catalog is still available on Anghami. In addition, experts argue that the majority of Rotana’s value lies in its existing catalog of ‘60s and 70’s classics, rather than in its ability to discover and develop new talent.

Instead of signing back-catalog deals, other streaming platforms in MENA markets seem to be focusing their strategy on the next generation of local indie artists and managers. Spotify is currently hiring an artist & label marketing manager in Dubai, to ensure that “key artists, managers and labels see Spotify as the #1 partner for artist development and monetization.” Cecilia Qvist, global head of markets at Spotify, tells Billboard that the company is also “holding Artist, Label and Managers sessions across the region to educate local artists and the music community on the data and tools that Spotify shares with them, and how they can use it to build their careers and connect with their fans.”

Anghami is also aggressively positioning itself as a primary marketing and development resource for artists, including but not limited to its "Anghami Originals" program. In Dec. 2017, Anghami brought on partner Wassim "Sal" Slaiby, manager for The Weeknd and French Montana, to head up the company’s international partnerships, focusing on artist collaborations; French Montana then released a cover of Amr Diab’s 1995 hit “Nour El Ein,” featuring Lebanese artists Massari and Maya Diab, that was released exclusively on Anghami. The service also recently released an exclusive "Anghami Cypher" that brought together several hip-hop artists of Arab descent around the world -- including Syrian-American artist Omar Offendum, Algerian-Canadian singer and emcee Meryem Saci, Iraqi-Canadian rapper Narcy and Iraqi-British rapper Lowkey, in addition to several MENA-native rappers like Shiboba and Bu Kolthoum.

"We don’t necessarily want to be a label, but unless labels start producing more content to fill in the current gaps in the market, someone else will have to take their place," says Zeidan. "I believe Anghami will take on a more proactive role of feeding the market in this way. But we still have to foster relationships with every label on our platform, and to say, 'Let’s build this together.'"

One looming question, given MENA's fraught history with piracy, is whether the region's local royalty collection infrastructure is prepared for this influx of streaming activity (and vice versa). Back in 2011, iTunes had to delay its launch in the Middle East by one year because of the lack of a local music rights society, which effectively made it impossible for the company to figure out how to pay royalties to the proper rights holders.

Now, Western PROs like SACEM and PRS for Music are actively doing business in select MENA markets. But there is still no official collection society in the Persian Gulf, which reportedly costs artists and rights holders over $5.4 million annually in unpaid royalties.

“Over time, I’d like to see the market evolve whereby there is an actual licensing hub in the region,” says Spek. “There are over 200 collecting societies around the world, so if you are a DSP that wants to offer all global repertoire in a new market, it becomes difficult to have a simple path to getting licensed without doing umpteen deals, which of course makes market entry difficult. At the moment, every new service that comes into the Middle East has had to reinvent the wheel with respect to who will help ‘fly in’ the performing and mechanical rights. There’s got to be a more lasting solution that makes it simpler for these DSPs while still bringing value to rights holders.”

MENA governments are also developing new programs to nurture their local music economies. In Sep. 2017, the Saudi Arabian government announced plans to invest $2.7 billion into entertainment, as part of its Saudi Vision 2030 plan. UNESCO also launched a music development project this year in partnership with Morocco's Ministry of Culture, with plans to provide funding for local music education and artist residencies as well as “actions in favor of digital distribution.” There are also a handful of industry events emerging in the region such as the Palestine Music Expo, which reported a nearly 50 percent hit rate of getting featured local bands signed to international labels.

The MENA music industry may appear like a jigsaw puzzle of stakeholders -- local and international tech platforms, record labels and publishers, collecting societies, governments and the vast diaspora of artists of Arab descent -- all trying to figure out how to curb piracy, raise awareness of paid streaming, improve royalty payment systems and outline clearer paths to sustainability for the local music community. But a music industry serious about globalization can no longer dismiss the sheer amount of capital, talent and consumer demand flowing in and out of the region, and the wealth of opportunity it will create for all of these stakeholders in 2019.