Latin American Music Industry

Latin Music Industry Problems

The global music industry has suffered a three fold attack on its profitiabiithy in the recent years. From three separate sectors new technology has affected the abilty of the music industry to make a profit, and continue to support the artist which make the industry possible. If these three areas are not addressed in the political, and legal arena in the near futre, the health and well being of the entire industry, expecialy in developing regions such as Latin America could be doewn graded from satisfactory to critical. Without intervention, the industry could be force onto life support in the near futre, with its overall existence threatened.

These three factors have affected all areas of the Latin American and global music distribution businesss. The problem has become one of increasing importance in Latin America because the market was previously one of the fasted growing music markets in the world, but today has become one of the markets which is in the swiftest decline. The supply of the music is being flooded by pirated music. As the supply had gone up, the prices have fallen, leaving music distributors with an oversupplyu of product and falling demand in the market place. Further affecting demand is the availability of home digital recording equipment, and Peer to Peer file sharing on the internet.

According to Buckley (2000) While U.S. recording industry officials wring their hands over Napster, the worldwide black market for illicitly copied music is growing even faster, with sales of pirated music topping half a billion units last year and costing the music industry $5 billion in lost revenues. As of the turn of the 21st century, one in three CDs sold around the world last year were copies, churned out in pirate's hidden factories that can press up to 100,000 discs a day, according to the International Federation of Phonographic Industries. In Brazil, Latin America's music piracy leader, "40% of CDs and 99% of cassettes sold were illegal copies, a total value of $180 million, said IFPI. In Mexico, the 1999 pirate music market was worth $70 million, or 40% of all music sold, the agency reported." (Buckley, 2000) "For the first time in the format's history, CD sales are dropping globally... Worldwide sales of recorded music fell 6.5% last year, according to the London-based International Federation of the Phonographic Industries. That meant a drop in revenue of $1.7 billion, the worst in the annals of the industry. Sales in industrial countries like Japan, Germany and Canada took an average 9% hit, while those in developing nations such as Brazil and Poland -- drained by an epidemic of professionally pirated CDs -- fell as much as 28%." (Taylor, 2002)

These numbers are the proof of what an average consumer, and a few determined pirates can do with a minimal amount of technical knowledge. A small investment in computers and CD duplicators will create a duplicating studio, and produce home recorded copies of their favorite artists. The significant difference between this technology and the Cassette recorders of the late 20th century is that CD music is digital quality, and has a virtually unlimited shelf life. In the past, home cassette tape recorded were limited in the music quality they could produce. But digital recordings are studio quality, and do not decay with age. This technology puts the consumer in a level playing field with the music producer when it comes to creaqting personalized recordings.

Thirdly, the Peer to Peer file sharing technology, pioneered by Napster is making available at no charge digital libraries to internet users around the world. In the same way CD's can be purchased and recorded, individual songs can be downloaded and burned onto personal CD's. The result is an even further diminishing of the demand for new CD's in the marketplace. This final factor has worked to diminish demand of original music recordings around the globe. Music pirates still need distribution channels to sell their products, and can be limited geographically. But the internet-based music services have no geographic boundaries. Because their 'product' is free to the world, the demand for new music is negatively affected on a global scale.

According to Williams, (1997) Piracy of copyrighted materials around the world has resulted in trade losses of $14.6 billion in 1995. These figures are based on estimates from the International Intellectual Property Alliance (IIPA). The total includes losses incurred in 97 foreign countries; it does not include losses to piracy within the U.S.

We've long known that inadequate copyright protection and enforcement are a major trade barrier for U.S. creative industries," said Eric Smith, IIPA president. "These figures quantify the damage more extensively than ever before. These trade losses cut directly into growth of the U.S. economy and U.S. jobs." (Williams, 1997)

When the consumer can find digital quality recordings from their home computer, then the need for the music producers has all but been eliminated from the distribution channel. Once the first copies of the music recordings are in the marketplace, pirates can take and copy them at will, consumers can produce their own replacement copies, and internet users can upload and share files around the world.

The solutions to this thorny problem are more complicated in the Latin American marketplace where legal free enterprise does not have the kind of governmental support as it enjoys in the north American continent. The existence of illegal distribution channels for a wide variety of goods, and a cultural accpetnce of a given level of underground activity is an additional obstacle to the motivation, and ability of government to create a unified approach to addressing this problem. When the underground economy pays financial kickbacks to the government and law enforcement officers, the incentive to make changes in the system is significantly retarded.

This three pronged monster which is squeezing the life out of the recording industry will not be defeated with a single approach. The free enterprise marketplace is controlled by managing supply and demand, and these 3 factors have negatively influenced both supply and demand with multiple contact points. In order to effectively revitalize the music industry distribution and sales channels, a multi-faceted approach will need to be utilized as well.

Fighting music Piracy

The table at the left is an example of the downward spiral which affects the Latin music industry. The situation is mirrored in markets worldwide but is especially troubling in Latin America, where piracy levels are believed to top 50% in every country from Mexico to Argentina. These markets have traditionally been major talent suppliers at the regional and international levels. Moreover, with the U.S. -Latin market operating as a reflection of the Latin American market as a whole, it should come as no surprise that CD piracy has become a major problem stateside as well., and is negatively affecting sales in north American distribution channels. Propelled in part by illegal product imported from Mexico, many worry that the U.S. is going down the Mexican road. In this large central American country, piracy accounted for 68% of 2002 sales, or roughly 99 million units, making it one of the top five pirate markets in the world. (cobo, 2003)

As late as 2000, recorded products mid-year stats of 47 countries released by the International Federation of the Phonographic Industry (IFPI)-the organization representing the international recording industry-music sales in Latin America grew by 3% both in value and units, driven by sales in Brazil and Mexico.

Mexico's 10% growth, coupled with Brazil's astonishing 29% increase in units sold compensated for Argentina, which, was in the midst of a general economic recession. According to Cobo (2000), although sales of singles and cassettes were negligible, sales of CDs in the region jumped by 11%.

The numbers are remarkable, given the current tremendous political and economical instability of many other Latin countries and the fact that 50% of the Latin market, in units, is in the hands of pirates, according to Gabriel Abaroa, president of IFPI Latin America. "Latin America is the region with the highest percentage of seizures in the world. If 50% of the market is in the hands of pirates, it means we have 50% of the market to recuperate." (Cobo, 2000)

Piracy has soared inLatin American countries, costing record companies close to U.S.$2 billion in lost sales, says the International Federation of the Phonographic Industry (IFPI). Brazil, once the sixth largest market for music in the world, has dropped to twelfth place, selling 60% less than five years ago, the group says. Additionally, ninety-five percent of music sold in Peru is on bootlegged discs. Major international record companies have already shut down operations in the region due to huge profit declines. "BMG doesn't have operations in Peru anymore. EMI doesn't either. Sony, Warner and Universal are in dire straits," says Raul Vazquez, regional director in Latin America for the IFPI. (Guevera, 2002)

In general, Eastern Europe and Latin America hold the records in this area. The IFPI also reports that first estimates point to alarming growth in pirate CD-Rs They estimate one in five CDs world-wide is a pirate copy. (Cobo, 2003)

CDs by popular U.S. And Brazilian artists sell for $2 apiece on the streets of this gritty frontier city, but not all the buyers know the illegal bargains might be helping to finance international terrorism. But diplomats from several countries said Ali Khalil Merhi, an alleged "bigfoot" in Paraguay's criminal underworld, sold pirated CDs in neighboring Brazil to raise money for al-Moqawama (Resistance), an extremist arm of the militant Islamic group Hezbollah (the Party of God) in southern Lebanon.

Merhi, 32, who has a police record for assault and piracy, was arrested on Feb. 25, 2000 and charged with selling millions of dollars worth of illegally copied music and software. He fled Paraguay in June 2000 after Esteban Aquino, a prosecutor in Paraguay's Secretariat for Prevention and Investigation of Terrorism, recommended that the investigation of him be expanded to include his alleged ties to terrorist organizations.

The prosecutor said Merhi had access codes to restricted web sites that promote international terrorism, and when they raided his apartment, police found software he allegedly was distributing to raise money for al-Moqawama. The software features film footage of terrorist attacks and interviews with suicide bombers before they died, said Aquino. It also provides a bank account number in Cheiah, Lebanon, where money could be sent to support al-Moqawama. In a certified translation of the software CD's Arabic contents, provided to Knight Ridder by Aquino, a radical leader exhorts listeners to strike at the United States and Israel. (hall, 2001)

In order to address this threat to free enterprise, and to global freedom, the government officials in latin American countries must decide on which side of the issue they wish to make their stand. With increasing amount of north American time, energy and military resources dedicated to fighting a global terrorism threat, the latin American countries can ill afford to be seen as supporting terrorists, and financing terrorism. However, the governments in these countries have not demonstrated the political will to make a stand in this area. Unfortunately it may take a global incident which can be traced directly to terrorists in Latin Americe before the countries will be willing to change their 'look the other way' policy on the basis of pirated music alone.

Offsetting the power of consumers to burn personal CD's

Music duplication is a world wide problem, and as such companies which make and distribute the music, and the recording equipment are at work on solutions which will prevent the copyng process. This presents one of the most positive approached to the issue.

According to Chmeilewski (2003) Macrovision's corporation is producing a softward package called Cactus Data Shield which allows consumers to play CDs in their PC, transfer copy-protected versions of the song-files to their computer's hard drive and listen to the tracks without needing to first insert the disc in the CD-ROM drive, but prevents the duplication of the tracks on the CD. Microsoft is also entering into the development of intrinsic solutions with the introduction of its Windows Media Data Session Toolkit, which it plans to give away to the recording labels. The software giant's approach to the problem may be the most effective. Dave Fester, manager of the Windows Digital Media Division, said the music new media session CDs contain two tracks of music _ one that's in standard CD format, known as "redbook audio;" and a second, encrypted data session that plays when the disc is inserted into a computer. The redbook audio portion of the disc is copy-protected with encryption software, which allows the disc to play in the home stereo, the CD player in the car and a portable Walkman, but is hidden from the PC. The second set of tracks are in compressed Windows Media Audio file that's wrapped in a copyright protection management software, which controls whether a song can be transferred to the computer desktop or copied.