Audio Firm Looks to Russia for Expansion : Music: Local maker of cassette duplicating equipment is tapping into emerging market. But problems, including piracy, stand in the way.

SUN VALLEY —  Jim Williams has sold high-speed audiocassette duplicating machines to record companies around the world, from China to Canada.

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In the process, the president of Gauss / Electro Sound has helped build the Sun Valley-based company into one of the world’s leading players in a very specialized and crucial part of the music business. His machines, which cost up to $125,000, are used to mass-produce copies of music cassettes, and they can turn out an entire cassette in as little as seven seconds.

These days, Williams, like many other U. S. businessmen, is eyeing the newly liberated Russian market for expansion. He believes Russia, where new music companies are springing up almost every week, is a bonanza waiting to happen.

“It’s a big potential market for us,” he said, pointing out that about 270 million music cassettes were sold there in 1994.

But like other Western businessmen, Williams still faces plenty of headaches in Russia. Setting up a meeting with a potential customer, for example, can take weeks of “cold calling” and the shadow of organized crime hangs over the music business. Most serious of all is the problem of piracy in a market virtually unchecked by regulatory controls.

“The biggest fear in this industry is piracy,” said Williams. In Russia, “it’s just running rampant.”

According to some estimates, 70% to 80% of the recordings sold in Russia are bootleg copies. Although Boris Yeltsin’s government has passed various laws to protect intellectual properties, enforcement of these laws is still spotty.

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Williams says most Russian audio-pirates use nothing more sophisticated than a cassette deck with a high-speed dubbing function--technological light-years away, in fact, from whatElectro Sound makes.

Gauss / Electro Sound is owned by Mark IV Industries Inc., a $1.7-billion conglomerate in Amherst, N.Y., whose main business is automotive and industrial products marketed under the brand names Dayco and Purolator. But Mark IV also has a sizable audio group. Bob Pabst, president of the audio group, says that Gauss / Electro Sound contributed less than 5% of the group’s 1995 $185 million in sales.

Mark IV acquired Gauss in 1987 and Electro Sound three years later. While Electro Sound covers the middle end of the duplication market, starting around $26,000 for a system, its sister company caters to the high end--music companies willing to pay top dollar for equipment that can manufacture hundreds of cassettes per shift without sacrificing sound fidelity.

In a typical duplication system, a digital master recording is stored in a “loop bin,” which can include up to one gigabyte of computer memory. The bin converts the data to analog format and transmits it to a blank tape on a high-speed, reel-to-reel recorder called a “slave.” Several slaves can be connected to a single bin.

According to Williams, Gauss / Electro Sound’s share of the world market is more than 50% and it counts such major record companies as PolyGram, EMI and Sony among its customers. About 85% of sales are exports and it is in emerging overseas markets like Russia that the company is looking for growth. “The niche we’re in is very specialized,” Williams explained. “We have to view it as a global market.”

Since the fall of Communism, several Western music companies have established operations in Eastern Europe. “At least with respect to Europe, only Eastern Europe has any significant potential for growth,” said Bob Farrow, president of Concept Design, a professional audio-equipment supplier in Graham, N.C. “Western Europe is saturated.” But Russia remains relatively untapped.

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Since the former Soviet Union opened up the economy, Williams has sold equipment to three of the leading music-duplicating companies in Russia. The contrast between business conditions now and before “perestroika,” he says, are like “night and day.”

That market is particularly attractive because it offers a vast potential music audience crying out for new material. Some 90% of cassettes produced in Russia feature only local music, said Williams, who has a drawer full of such recordings in his office.

In addition, much of the existing duplication equipment for music companies in Russia is out of date, a relic of the Soviet days when the recording industry was monopolized by the government.

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Williams, who is an engineer by training, first went prospecting in Russia in the early 1980s when it was part of the Soviet Union. The results were not encouraging. “With the political situation, the doors were pretty much closed tS. companies,” he recalled. “We tried our darndest to get through, but they would barely answer the knock at the door.” Even six years ago, “everything was still stymied. No one could make any decisions, you couldn’t meet anyone.”

But when Williams returned to Russia in 1993, he said, he was picked up at the Moscow airport by “two brash, entrepreneurial young men” driving a fairly new Mercedes and using cellular phones. His hosts--managers of a new firm called ZeKo--lodged him in an upscale hotel and showed him around town. Compared with the Soviet era, “it’s a night-and-day difference in the ability of people to do business there,” Williams said.

ZeKo became Williams’ first Russian customer, purchasing high-end Gauss systems. Since then, he has made deals with two other Moscow firms, Soyuz Duplicating and Elorg Corp. He estimates that about 135 record companies and tape duplicators are now operating in Russia.

But there are still major obstacles to doing business in Russia. A typical sales trip for Williams involves a lot of cold calling and struggling with translation problems. “Just trying to get through to the owner or president of the company is the difficult part,” he said. “I’ve sat around in the hotel for hours on end, thinking, ‘When in the world am I going to get something going here?’ ” On a two-week trip, most of the actual business discussions get compressed into the final two or three days.

Another concern is Russian organized crime. Protection rackets have become a lucrative source of income for gangsters and some of Williams’ potential customers are apparent victims. “I have first-hand stories of companies there who have to deal with it,” he said. “They admit they’ve dealt with it, but they really don’t want you to know what they’ve done.”

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Most vexingly, there is the piracy problem.

Piracy is not only a headache for would-be Russian music moguls but also for major Western record companies that might be considering mass-marketing their products in Russia, by setting up licensing operations there. The less secure Western firms feel, the less likely they will invest in expensive duplication equipment for the Russian market. “If Western music companies don’t feel safe, that they can go in there and allow product to be manufactured and distributed, they just won’t do it,” Williams said.

Manfred Bormann, a licensing executive at Warner Music Group in New York, said the company had been looking into the Russian market and had received inquiries from Russian firms interested in licensing Warner products. But he added, “Certainly, one of the major obstacles is we’re finding there’s not enough copyright protection.”

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Williams does see some signs of progress. For example, he noted, legitimate companies in Russia have formed their own trade group to combat piracy. “It’s got to be done from within. They’ve got to protect their own interests.”

Given the headaches, some might wonder why anyone would even bother to make such an effort. But for Williams, it’s all part of doing business. “You have to be willing to work around these obstacles,” he said. “If you merely took the path of least resistance all the time, you’re limiting your growth and your ability to market your products.”