Why emerging markets are taking center stage in international digital-service rollouts

Toward the end of last year, Deezer and iTunes extended their footprints to include several countries that are often considered emerging markets. The growth of broadband Internet use around the world, providing access to a wealth of unauthorized recorded music, has made life difficult for new digital-service rollouts. But with the balance of economic power expected to shift away from the current leaders, is now the time for the emerging markets to start living up to their name?

Digital-music sales in most developed countries still do not fully compensate for the decline in physical-format sales. In fact, the majority of the world’s countries where digital is dominant are in Asia and are not considered developed. Rather than digital growth, the decimation of the physical-format sector by piracy is the main reason for Asian-country digital dominance. However, in a number of these countries, digital sales have shown promise, and therefore establishing a foothold at this early stage of development makes good business sense.

China and India are the standout “emerging markets,” with both already having bigger digital sectors than physical. Moreover, forecast economic growth in the two countries will result in a rapid rise in consumer spending power. According to the Organization for Economic Co-operation and Development (OECD), China’s economy is projected to surpass the euro-currency area in a year or so and the US soon after to become the largest economy in the world. India is forecast to surpass Japan in the next year or two and the euro area in about 20 years. The OECD has forecast that the combined GDP of China and India will be larger than the GDP of the entire OECD area (34 countries) before 2060. Currently, China and India combined are equal to about one-third of the combined GDP of the 34 OECD members.

But other countries in Asia are also showing promise. Aside from South Korea, which is arguably the digital leader in the region, Indonesia is one example of a market ripe for digital exploitation. Digital sales in Indonesia actually fell slightly in 2011, but that was largely because of the big dependency on ring tones, with mobile accounting for 84% of digital trade revenues in 2011, and the lack of any compelling download or subscription services.

Although Indonesia has a big imbalance of wealth, in the past 10 years personal wealth has risen sharply. According to a report by financial-services company Credit Suisse, Indonesia’s wealth level per adult was similar to that of India in 2000, but the figure for Indonesia is now more than double India’s. Credit Suisse also said that just 2% of the population in Indonesia had wealth above US$100,000. However, that share is close to 5 million people, equal to the population of Ireland and just behind the population of Denmark and Finland, all of which have thriving digital-music markets.

Testing the waters in sub-Saharan Africa
One part of the world that has always been a recorded-music-industry wasteland is sub-Saharan Africa. Piracy levels are high, and few reliable sales statistics are available. Establishing a digital presence in the region is especially difficult, because of the lack of formal channels for tracking down and licensing content. Moreover, the ethnic diversity found in each country adds complexity to building a local digital-music offering with mass-market appeal. Adding to the problems is the lack of record companies and well-established collection societies. Some countries seem beyond even the most optimistic digital-music retailer, but iTunes is now operating in several countries in the region, including Bahrain, Israel, Qatar and the UAE. All of these markets will be a good test for iTunes and downloads in general because of the high broadband-penetration levels, high income levels and the lack of any download competition.

Few are expecting any of these markets to suddenly burst into life, but the latest international rollouts give underserved consumers who want to buy digital music or subscribe to digital-music services the opportunity to do so.

Although not the ideal comparison, the growth of the digital-TV sector in sub-Saharan Africa is possibly one positive indicator of consumers’ willingness to pay for entertainment. According to research published by Music & Copyright publisher Informa Telecoms & Media late last year, the Middle East and Africa is undergoing significant political change, and the youthful demographic skew in many countries has lowered barriers to the acceptance of new technologies.

Monetizing subscription-led TV content has proved difficult for pay-TV providers, largely because of the wide availability of satellite-delivered free-to-air channels, exacerbated by the problem of generating steady revenue in a region with an abundance of piracy across most platforms. However, the TV industry overall is seeing a period of exceptional growth, drawn from an increase in the number of both TV households and viewers, and coupled with generally favorable economic conditions. Across the entire Middle East and Africa, Multichoice is the leading pay-TV operator. Turkish service Digiturk is the largest pay-TV operator in the Middle East and North Africa, ahead of D-Smart.

Although the TV and recorded-music industries have very different dynamics, there are some clear similarities. Understanding local market dynamics and setting realistic prices to tempt consumers away from free has seen pay-TV-subscription numbers rise, and there is no reason why digital-music services cannot do the same. Few of these emerging markets will take a place in the IFPI’s top 20 anytime soon, but given time they could start generating significant revenues, and rolling out international digital-music services in markets that have contributed little to record companies’ bottom lines just might be a better business decision than some had first thought.

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