Latin American Music Industry: Piracy, Digital Delivery & Future

Introduction: A Disrupted Industry

A recent television commercial for Honda motor cars concluded its dialogue of features and benefits with three words from the product spokesperson: "This changed everything," uttered in astonished disbelief upon discovering that the new products and services represented a breakthrough in the product line. The same astonished statement must be applied to the music industry in the wake of Napster's success, home digital recording equipment, and the Internet's ability to distribute music globally with the click of a mouse button — technological developments that together have empowered a new digital music distribution platform.

The music industry can no longer operate in a "business as usual" frame of mind. It must not only adapt but significantly create a new distribution system that includes the ability to regulate and profit from internet music distribution. Otherwise, the financial conditions of the industry could collapse, leaving artists and producers outside the revenue stream needed to repay them for the time and energy they invest in producing and distributing new music.

This research considers three different aspects of the technology and political marketplace that have negatively affected Latin American music sales. The first is the problem of widespread music piracy. The Latin American music market has seen a significant influx of pirated music and bootleg recordings of commercial artists. Pirated music is absorbing close to 50% of music sales in some countries. In addition to the financial losses felt throughout the recording industry, the presence of inexpensive pirated music is also changing consumer expectations. When consumers can pick up a CD for $2 to $3 on a street corner and receive the same quality recordings found on store shelves, a market-driven resistance to traveling to traditional retailers and paying five times as much for the same product is growing. The sociological complications of this phenomenon make change in the traditional marketplace distribution system even more urgent.

The second disruptive force is the Internet and the recent success of peer-to-peer (P2P) file-sharing systems such as Napster. The ability of end consumers to download music and create customized playlists is changing the marketplace through two sociological processes. The recording industry has traditionally produced records by bundling an artist's popular, heavily promoted songs together with those that receive less radio and media attention. As a result, consumers often purchased recorded products for just one or two popular songs. P2P systems allow the listener to become more selective and pursue only those recordings he or she enjoys. Without the necessity of purchasing entire albums, consumers are becoming more resistant to paying full prices for one or two favorite songs alongside a CD of filler material. The issue is not the quality of the music, but rather the ability to choose by individual song rather than by artist — a development that is creating a far more segmented marketplace.

Finally, home digital recording equipment makes it possible for consumers to copy CDs purchased in stores for friends and acquaintances. This reduces repeat sales that companies would otherwise experience. Home production eliminates the need for friends to purchase commercial or pirated copies of music when someone can burn them a copy at little or no charge.

The resulting changed marketplace has affected every aspect of the traditional business model for music distribution. Pirated music has flooded the supply. Home digital equipment has reduced commercial retail demand. And P2P internet distribution systems have realigned the expectations of the purchasing public, who are now able to pursue individual songs rather than complete CD collections.

The Future of Latin American Popular Music

Over recent decades, a growing number of publications in cultural studies — including the field of ethnomusicology — have grappled with various challenges that the postmodern world poses to cultural analysis. The postmodern perspective has rejected the expectation of unity of thought, design, and purpose at a cultural level. From a marketing perspective, reaching audiences is now a matter of identifying marketplace segments and their individual desires rather than identifying mass trends. In order to create a profitable enterprise, a company or industry must take one of the following approaches:

One option is to identify and market to a wide number of people with individual tastes, delivering a small number of products to each segment. A second approach is to identify larger clusters of similar trends and create products that bridge gaps while remaining attractive to members of each group. A third option is to identify a wide assortment of product preferences across a broader population, thereby expanding the customer base and market penetration. This third option is one the music industry should consider as it seeks to reenergize the marketplace.

Today's social and cultural fragmentation, alienation, dislocation, and disruption are results of often radical transformations in cultural expectations — transformations brought about by the collapse of Western colonial empires and the subsequent development of new forms of imperialism. For a period, the capitalism that replaced colonial and imperialist approaches to society was still built on an economy-of-scale model, delivering a limited diversity of products to a wide number of people.

However, in the music industry, the creation of the internet and the capability to deliver individual songs digitally and globally has changed that perspective as well. The creation of a global economy and improved communication systems has facilitated the worldwide dissemination of mass culture. Specifically, trends in Latin America are now becoming part of the Latino population's experience in Central and North America. Hence, the market for Latin American music and the path toward improving the profitability of the Latin American music industry should also consider North American markets as part of the potential customer base.

The recent U.S. census identified that the Latino population had overtaken the African American population as the largest minority group in the United States. This large demographic, with its purchasing power based in American currency, is a strong positive contributor to the Latin American recording industry. Therefore, any discussion of improving the Latin American music industry must include discussion of the North American communities that will be purchasing the music.

In the 1990s, it became evident that despite political and economic global unification, "culture" was more diverse and complex than ever before. Rather than blending local differences into a homogeneous global culture — as George Orwell's 1984 pessimistically predicted — culture clashes released unexpected energies, unleashed creativity, and provided opportunities for counterposing diverse alternatives. The "global village" is not a village but an urban complex of global diversity, including all the ethnic neighborhoods contained within a city, as stated by Don Ihde (1993).

Confronted with the new realities of postmodern culture, recording companies need to re-examine and reconceptualize their role in social and cultural life. Recent works in cultural studies show a "commitment to understanding the social experience of culture, the way in which culture is lived, and the use of culture as a structure for the articulation of experience" (McRobbie, 1997). As Lawrence Grossberg (1997) argues, it is important to look more closely at how identity as attached to a place or homeland is constructed, and how notions of belonging, identity, and experience are linked together. We must ask: How do individuals and groups place themselves in the world culturally? How does culture speak to the social realities they find themselves in? How do cultural activities help them create new social worlds and social relations?

A close look at the micro level of individual experience also helps us rethink the outdated notion of identity as given, coherent, and stable. According to Sarup (1996), rather than being an inherent quality of a person, identity now often arises through interaction with others, with institutions, and with practices. Thus a shared musical experience can find success through its identification with a common interest held by a number of individuals. Music can also be seen — and needs to be understood — as a vehicle or "place" in and of itself, capable of giving groups of individuals a common experience to bind them together where nothing previously existed. According to Simonett (2000), when we inquire into identity, we must "focus on the performative and preformative aspects of identity, the process of identity-construction through identification and affiliation, the sense of belonging, and the meanings of home, place, roots, and tradition. Because music is intimately intertwined with all these topics, it provides a privileged site from which to examine the politics of identity."

For example, in a June 27, 1999, New York Times article titled "A Country Now Ready to Listen," journalist Peter Watrous described Latin American nations as "places that only a few years ago saw the world through virtually pre-Columbian eyes." He then hypothesized that "Americans [are] longing for music more rooted in a certain place and produced more honestly" — hinting at the latent Anglo attraction to the "primitivistic Other" that also permeates the narrative of Jennifer Lopez's video for "Waiting for Tonight," whose action takes place in a jungle setting, as well as Ricky Martin's performance at the February 2000 Grammy Awards, during which, surrounded by "African tribal drummers," he danced and sang from within a ring of fire. These two performances gave viewers a new experience of the Latin beat — a mixture of pride in Latin heritage alongside the image of North American success. By blending the two, these recordings reached beyond the physical boundaries of each country and joined together the best elements of each. The resulting Latino-flavored, Americanized performance gave North Americans a new musical experience and gave Latinos an attachment to their home culture.

According to Cepeda (2000), the popular media recognizes that part of Ricky Martin's — and Jennifer Lopez's, Marc Anthony's, and Christina Aguilera's — appeal to mainstream audiences is their appearance of "whiteness."

With the power of electronic data gathering, Latin American recording artists and labels can now begin to address the combined desires, preferences, and cultural affinities that North, Central, and South American countries share. By approaching the market with an understanding of the postmodern social order, artists can identify the cultural segments they wish to communicate with. Recording labels can also expect to find financial reward for committing time and resources to artists who appeal to smaller segments. If a delivery system is developed to bring music to consumers one song at a time, record labels and artists can find a wider market for their songs even while serving a smaller segment of the population.

In order to reconstruct the Latin American recording industry, the combined efforts of recording labels and governments will be required. Recording labels need to develop a new model for content delivery, and governments will have to address the problem of music piracy. Since the problem facing the industry exists on both the supply and demand sides of the economic equation, the solution must address both sides as well. The pirates flooding the supply with bootleg CDs must be reined in, and the music industry must develop a delivery and music-storage system that serves as a profitable replacement for free peer-to-peer file-sharing services.

Digital Delivery and New Business Models

The future of the recording industry must change significantly from the model it has used for the past three decades. Since the introduction of popular music formats, records, cassettes, and CDs have been mass-produced and delivered to the marketplace in the same manner as any other consumer product. Economy-of-scale production methods made it possible for products to be shipped via traditional delivery channels to retailers. The retail outlet was the only delivery channel established to reach the widest majority of the marketplace. This is no longer an accurate description of the marketplace.

According to Anderman (2003), ignoring this problem will likely be more costly than developing a new business model to take advantage of it. The music industry is currently in free fall, and the very foundation on which the business is structured — selling music to stores — is eroding globally at an astonishing pace. Sales of recorded music fell approximately 16% over a recent two-year period. By contrast, since 2001, blank CD sales have overtaken pre-recorded CD sales with no signs of giving up ground. In 2002, sales of blank CDs jumped another 40%.

Evidence of the need for change is widely evident. Best Buy shuttered 160 of its Musicland shops in the space of a year, HMV closed its flagship New York City store in 2002, both of Tower Records' Back Bay locations shut down, and Wherehouse Entertainment filed for bankruptcy in 2002. Label losses continued to accumulate: Sony's music group lost $132 million during the first six months of its 2002 fiscal year, EMI cut 1,800 positions worldwide, and the Warner Music Group reduced its staff by 1,000 over the prior two years. Each of the five major record companies seriously slashed its artist rosters (Anderman, 2003). In order for music producers to escape a complete implosion, they must develop a significant reinvention of their music delivery channels via internet-based digital file storage.

In North America, Napster was deemed an illegal infringement of copyright law, and subsequently became a fee-based subscription service. Sony, Apple, and other recording and computer hardware companies have also launched subscription-based file-sharing services.

In April 2003, Apple Computer launched iTunes, a service that allowed Macintosh users to browse a catalog of over 200,000 songs and download them for 99 cents each. The advantage of iTunes over free peer-to-peer services was the guarantee of virus-free files and assurance that the company operated within the legal framework of copyright law. Apple held licenses with all the major record labels and individual licenses with over 200 independent artists (apple.com). The model proved its viability: in addition to Apple, Seattle-based RealNetworks and Santa Clara-based Roxio were competing for share in this emerging market (Garland, 2003). These file-sharing systems recognized that the technologies which created high-quality music were now changing the way music is delivered, stored, and enjoyed. Technology is directly impacting the delivery of music through four key trends:

First, the price of digital storage continues to fall, and nanotechnology will make storage costs negligible in the coming decades. Second, devices capable of high-speed wireless internet are becoming available to consumers across all income levels. Not long ago, cell phones were so expensive that only businesses could afford them; now they are given away for free and owned across all socioeconomic classes. Third, digital recording equipment is increasing in sophistication while dropping in price, allowing professional-level recording at low cost — the Roland Corporation, for example, produces a hard-disk recorder for $2,000 that gives musicians clear sound and professional editing power, whereas twenty years ago, equivalent equipment cost ten times as much. Fourth, consumers are exhibiting growing comfort with electronic funds transfer, making a wireless, direct-to-consumer or subscription model both feasible and widespread (adapted from Garland, 2003).

Given these changes and the rate at which new technology is entering the marketplace, companies must develop an internet-based, individual-song delivery system if they are to survive and recapture the momentum and profits of the 1990s. When record labels dealt in physical products, it was economically unfeasible to manufacture records or CDs with only one or two songs per unit — manufacturing costs exceeded what the company could charge. In today's marketplace, however, the product is a digital file with no reproduction or distribution costs. Individual consumers already have the equipment to place files on CDs or digital devices to enjoy the music. So when the record label replicates that process, it is spending time and money performing services the consumer can now do independently. The future business model will be a direct delivery system of digital files through a subscription-based music service. Latin American record labels need to follow the model of iTunes or Napster's fee-based service — operated by BMG — and offer products directly to the consumer.

When the internet retail boom matured around 2000 and 2001, considerable debate arose over whether the internet would replace brick-and-mortar retail stores. After the internet bubble burst in 2001, both sides realized their argument had been a false choice. The business model that emerged was one of "bricks and clicks" — retail outlets needed to be internet-enabled in order to serve both aspects of the shifting marketplace, while internet-based companies needed reliable customer service to establish trust with consumers. The businesses that suffered were those that failed to invest in internet-based product delivery, or that failed to provide customers with the personalized service they expected.

There are three business models currently being tested for online subscription-based music delivery. The first is a per-track purchase: Napster, for example, charges $0.99 for each downloaded song. The second model is a per-block-of-songs approach, which is essentially the same as a per-song fee but allows for simple price adjustments on larger blocks of songs and the ability to charge a larger upfront fee, thereby reducing the number of individual transactions — savings that can be significant over the life of a subscriber. The third method is to offer unlimited downloads for a flat monthly fee. Just as cell phone companies charge a flat monthly fee for a given number of minutes — profiting when subscribers do not use their full allotment — subscribers paying a flat fee for unlimited downloads are likely to have short periods of high activity but remain relatively inactive during most of their subscription. Moreover, when consumers are offered "unlimited" access over a period of time, they tend to perceive greater value than in a per-track model.

In the same way, the Latin American music industry will not likely eliminate the problem of pirated hard-copy disks entirely. But it can regain marketplace relevance by offering digital, fee-based music services targeting customers with individual songs for individual tastes. Such sites could be operated under the regulation and approval of national governments and recording companies. By creating an approved, regulated delivery system, record labels would reach consumers directly with the products they want — while also creating the regulatory framework needed to pursue unauthorized internet sites.

Conclusion

The Latin American music industry faces disruption on both the supply and demand sides of the economic equation. Pirated music has flooded the supply, home digital equipment has reduced commercial retail demand, and P2P internet distribution has realigned consumer expectations in ways that favor individual song selection over full-album purchases. Addressing these challenges requires a coordinated response from governments willing to enforce anti-piracy laws, and from recording labels willing to embrace subscription-based, direct-to-consumer digital delivery models. The growing Latino population in North America represents a significant and underserved market opportunity. By combining rigorous anti-piracy enforcement with innovative digital delivery, and by drawing on the rich, culturally diverse traditions of Latin American music to serve a postmodern, segmented marketplace, the industry can begin to rebuild its financial foundation and ensure that artists and producers are appropriately compensated for their creative investment.