A Johnny One-Note Market

The acquisition of the Tzlil chain of music stores by Helicon is setting off alarm bells.

The music recording company, Helicon, announced recently that it had acquired full control of the Tzlil music stores, purchasing the shares in the chain from its founder, Yaron Blueweiss. Prior to the deal, Helicon had held a 75 percent stake in Tzlil; the recording company has now completed a move making it the sole owner of the chain. Tzlil is not traded on the stock exchange and its owners are refusing to divulge the value of the deal. Nevertheless, according to estimates, reported by the economic news Web site, The Marker, the shares were purchased at a price of some $13 million.

The wrapping up of the deal starkly illustrates the new character of the music industry in Israel: Recording companies, which are music publishers and content-based enterprises, are purchasing music chain stores and entering the retail market. Israel has three main recording companies: Hed Artzi Music, Helicon and NMC. Hed Artzi Music is a part of the Hed Artzi group that bought the Top 10 chain of stores in 1996; and then, two years later, acquired Tower Records, incorporating all of the stores owned by the group into the chain. Today, Tower Records has 42 branches, constituting some 40 percent of the music stores in Israel.

Helicon became a partner in Tzlil in 1998. The chain numbers 14 stores, primarily in the Sharon region of the country.

Meanwhile, NMC, which commands a rich Israeli portfolio (including, among others, the albums of Yehuda Poliker, Arik Einstein, Shalom Hanoch, Knesi'at Ha'sehel and many more), is yet to enter the retail market; although a number of the owners of the company have invested in the Super Zeus chain.

This combination of music stores and recording companies is creating a very problematic situation in the market and is reducing the purchasing options of the consumers. As is the case in the fields of books, coffee and clothing, the chains are being maintained at the expense of the independent stores. The result: The variety of available music has been thinned out and the specialist stores are closing (for example, Piccadilly and Gong, which shut down in the past few years). But this is not the only problem: The recording companies are supposed to view the music stores as customers, for all intents and purposes; and when a publisher, which is also a supplier, owns its own stores, it has a tough time making demands that would improve its position as a publisher.

The heads of the recording companies themselves say that the acquisition of the music stores is certainly no proof of the strength of the market. Nevertheless, they say, the recording companies lost a lot of money in the past, when stores closed down and the merchandise remained unused. In several cases, the companies acquired failing music stores, choosing to preempt a situation of lost debts and repossessed stock that would gather dust in their warehouses. In this manner at least, say the recording company chiefs, they control the management of the stores and receive ongoing reports on their performances, thereby allowing them to prevent future troubles.

"Prior to 1996, the music market was stable and strong," says Micky Tunis, the CEO of the Hed Artzi group. "There were hardly any pirated CDs; the albums were good; the political situation was different; and there was much optimism. But in that same year, the market began to lose ground; problems of piracy started cropping up; and it took us a while to locate the problem. We noticed that music stores were starting to fall behind on payments, but didn't yet realize how serious the situation was.

"And then, the stores started to close down; and the inventory was returned to us. We were owed money; and we realized that when the stores were turning a profit, they were keeping the money; but when they were losing, the loss was ours. This is an intolerable situation. Left with no alternative, we went into the retail market."

Ever since Hed Artzi purchased Tower Records, the large, unwieldy chain has caused heavy losses to the group. "We believe that things will turn out well in the end, and with the right amount of patience, we will create a good chain," Tunis says. "The support of the board of directors for maintaining the chain is very strong. Moreover, we received offers to take on additional partners, and we didn't want to."

But when the market recovers, won't the joining of forces be prejudiced against the consumer?

According to Tunis, the consumers have nothing to worry about. "Each store wants to carry strong brands and albums that sell well," he says.

But here's a reminder: Some 18 months ago, NMC and Helicon had a falling out with Hed Artzi's Tower Records, and the chain stopped selling the albums of the two recording companies almost completely. The dispute harmed both sides, but primarily the consumers and artists.

Despite this, Helicon also believes that the recording companies' takeover of additional fields of the market is to their benefit. "The idea is that if we have more control over the chain of music-making, we will do better," says Itzik Alsheich, co-CEO alongside Roni Brown.

As mentioned, Helicon (a private company that is not traded on the stock exchange, unlike NMC and Hed Artzi) owns the Tzlil chain; it also owns the ABCD disc manufacturing plant, a production company (Gravity) and a subsidiary, Helicon Kna'an, which is responsible for the personal management of Rami Kleinstein, Rita, Ivri Lider and others.

"The less exposed I am to outside subcontractors, the smaller the risks I face," Alsheich says. "When we had the chance to purchase the shares from the Tzlil chain, we took it, because starting to build a chain from scratch is a complicated operation. When recording companies own stores, they preserve the strength of the market. But I don't want the Tzlil stores to call the tune for Helicon. That isn't good for the consumers and the stores, and adversely affects the variety."

Ze'ev Schlik, the CEO of NMC, on the other hand, says his company "specializes in what [it does] best - good Israeli production and representation for international companies. We hope to aid the stores with various commercial activities that help them to keep going."

All the sides agree that the Israeli music market is dynamic; and this, too, has its ramifications: If the security and economic situation were to improve, the music market would recover rapidly; but if the situation continues to deteriorate, the recording companies might have to sell off the chains because of their inability to maintain them.