Worldwide, digital revenue grew 9% in 2012. But in Latin America, that growth was explosive--up 83% in Brazil and 36% in Mexico. Now with Deezer and Rdio already in Latin America, Spotify launching in April and Muve expected to make its move soon, the land grab for the Latin-American streaming market is on. Here's whyBarely two years ago, Giovanna Prado, 19, and Ana Emilia Prado, 13, routinely downloaded their music through any of Mexico's many illegal download sites.
"Truth be told, it was free, and I saw nothing wrong with that," Giovanna admits.
Today, however, the sisters get their music legally from iTunes Mexico, downloading an average of 20 tracks per month--English and Spanish pop and EDM--and spending about $23 in the process.
"I'm a dance teacher now, and I have to have my music," Giovanna says. "But it's all in iTunes now, and I don't have to carry CDs around anymore."
That iTunes is affordable and practical may seem less than revelatory in the United States. But in Mexico and throughout Latin America, it's the beginning of a revolution. The region reported music revenue of $495 million in 2011--up 9% from the year before and far outpacing the 3% world drop--and is once again poised to be the fastest-growing region of 2012. The positive performance can be attributed to an explosion of growth in digital revenue, with a large portion of that coming from iTunes, which opened up shop in most of Latin America in late 2011. Now, streaming is a new frontier. The region's two top telecoms--America Mobil and Telefonica--already offer streaming services, of which Telefonica in Brazil has been the most successful.
But that growth is expected to accelerate this year. As services arriving from abroad vie for market share, it will be the digital equivalent of a land grab. Deezer and Rdio have both been in the market since last fall, Spotify will launch in Mexico in mid-April, and Muve is expected to enter Latin America soon.
"ITunes has been an important revenue generator, but the truth is all digital services grew last year," says Alejandro Duque, VP of digital and business development at Universal Music Latin America. "Even ringback tones grew. Revenue from YouTube and Vevo grew."
That's part of an industry-wide trend. According to IFPI's recently published Digital Music Report, global recorded-music revenue grew by 0.3% in 2012, and digital revenue led the way with a 9% boost.
But Latin America is expected to outpace that growth. Brazil-the leading Latin music market and the eighth-largest worldwide market for recorded music in 2011, according to IFPI-saw an 83% growth in its digital market revenue, which is more or less evenly divided among Internet downloads, mobile downloads, streaming subscription services and ad-supported video streaming.
In Mexico, Latin America's second-largest market, the overall industry had an 8.4% revenue increase in 2012 over 2011, while digital revenue grew by 35.5%, with 46% of that revenue coming from single track sales.
And in Argentina--which together with Brazil and Mexico make up 80% of all music revenue in the region--the digital growth was 57%, while physical album sales also went up, by 11%.
Those numbers are only the tip of the iceberg. As Internet penetration grows and the cost of devices drops, consumers are switching to smartphones, a changeover made even easier by the availability of mobile prepaid plans. All this is expected to drive explosive digital and mobile growth in Latin America, and companies are accelerating their entry into the region to be prepared for that explosion.
"Mexico hasn't detonated yet, but we're on our way and we know it's going to happen," says Gilda Gonzalez Carmona, director of Amprofon, Mexico's association of record producers, noting that the number of high-speed Internet subscribers in Mexico rose from 32 million in 2011 to 44 million in 2012.
Similarly, in Brazil the number of users went from 67 million in 2008 to 88 million in 2012, according to Internet World Stats.
"Not having a presence in a market like Brazil is a waste," adds Paulo Rosa, president of Brazil's association of record producers (ABPD). "Not only is it the biggest market in Latin America, it's also a market where low-income segments are starting to consume and want to consume music via their computers or their phones, whether or not they're smartphones. There's a huge contingent of people that are coming into the market who didn't participate like they do today."
Long Time Coming
The growth of digital music revenue in Latin America has been a source of discussion and frustration for years, particularly in the early 2000s, when music sales plummeted in the region without any major legal digital alternatives to offset the drop. While many local music services opened up shop, few of them took off in a significant fashion, hampered by rights and publishing issues as well as the lack of broadband access. Instead, up until 2010 and 2011, Latin America's digital market was dominated by mobile sales--including preloaded cellphones--mainly because there weren't any viable, easy legal options to purchase music online.
That changed with the arrival of iTunes in Mexico in the fall of 2009 and its subsequent launch in all of Latin America by December 2011.
In Mexico, the results were immediate. In 2010, there were nearly 13 million tracks sold online, according to Amprofon0--a 116.3% increase over 2009--with most of those numbers coming from iTunes. In 2011, that number leapt to 135 million tracks and is expected to soar even higher when final numbers are tabulated for 2012.
In Brazil, the impact of iTunes, which made up the majority of online sales, was only felt last year, with the download market growing by 909%. Although the exact number of downloaded tracks wasn't available, the total income generated by the sale of individual songs was 23.7 million reals ($12 million). That amount, Rosa says, "is almost the same as the income generated by the sale of complete albums on the Internet."
Beyond iTunes' arrival, Duque says, the increase in smartphone penetration, and with it, mobile data plans, were a key ingredient for a population that is very tied to its mobile devices and accesses the Internet primarily through their phones.
"We'll have to see how the consuming habits of subscribers evolve, but in my opinion, they will be very tied to the mobile market," he says.
Ironically, Brazil experienced increases in all of its digital revenue streams last year except for subscription services, which fell by 18.6%. Still, Rosa says, "with the new international services in place, this shortfall will be recouped and the music streaming market supported by subscription is expected to grow substantially."
The Land Of Opportunity
Music companies see Brazil as a land of opportunity. The country takes great pride in its rich musical heritage, which runs the gambit from bossa nova pioneer Joao Gilberto to worldwide metal favorite Sepultura. With a population of 197 million, Brazil was the eighth-largest recorded-music market in 2011, according to IFPI.
That ranking is all the more impressive given Brazil's reputation for piracy. The country has been a mainstay of the International Intellectual Property Alliance's Special 301 Report of most problematic countries for copyright violations, although it was upgraded to "watch list" from "priority watch list" in 2006. The 2012 report describes "offshore pirate repositories," peer-to-peer connections and Internet service providers "who look the other way as their facilities are systematically utilized for infringement."
Despite the handicaps, Brazil's digital growth highlights a market that is ripe for the picking, particularly when it comes to music subscriptions and mobile phone downloads, which had a 91.8% rise in revenue from 2011 to 2012, according to ABPD.
In addition, subscription services are now being sold to smartphone users and through local mobile carriers. They're convenient because smartphones don't require a broadband connection at home--residential fixed-line penetration is only 22% in Brazil, according to a 2012 Groupe Speciale Mobile Assn. report. Billing is simplified through integration with a mobile carrier. And, according to the GSMA report, smartphone sales will rise from 12.6 million units in 2012 to 33 million in 2017.
The first international subscription service to enter Brazil was Rdio last November. The country was a sensible first entry point in South America, CEO Drew Larner says. The company already had connections to Brazil through its investor group and through Skype; Rdio co-founders Niklas ZennstrÃ¶m and Janus Friis founded Skype prior to launching Rdio and brought over many of the same executives.
Rdio partnered with mobile carrier Oi, the largest telecommunications company in Brazil and one of the largest in Latin America.
The Oi partnership gives Rdio an in-store marketing presence in brick-and-mortar Oi stores in the country, plus the ability to market the service with promotions and vouchers for extended periods of free listening time and other offers that entice people to use the service. And, perhaps most important, the monthly subscription fee is included in a customer's Oi bill. "But the goal is ultimately to do a hard bundle, and we're working on that," Larner says.
Offering a "hard bundle" would effectively open up the market. A bundle that merges the costs of the music and mobile services would allow Rdio to address the majority of the Brazilian market that uses prepaid plans for mobile service and doesn't have a credit card.
"A $10, all-you-can-eat equivalent in Brazil may be something somebody doesn't want to pay for, but that doesn't mean they won't pay for something that's a fraction of that but is a circumscribed amount of content," Larner says. He offers the example of a less expensive service that functions like the normal service but has a limited catalog to correspond with its lower price. "There are different ways to slice it. For emerging markets that's something we need to look at and we are looking at."
An on-demand music subscription service can offer only what its label partners allow. Larner says Rdio is having those discussions and that labels are open to creative solutions that address needs of individual markets. "This is stuff they'll be amenable to--I know they will be because we're having discussions about it. It's a learning process for everybody. Everyone's trying different things, seeing what works, and the labels are certainly flexible about trying new models and trying new offerings."
In Brazil, Rdio users get a free unlimited trial for 14 days and no-cost, ad-free Web access for up to six months. Paid versions cost 8.99 reals ($4.58) per month for Web and 14.90 reals ($7.59) per month for Web and mobile access. Monthly family plans cost 22.90 reals ($11.67) for two people and 29.90 reals ($15.24) for three.
Rdio doesn't disclose its number of subscribers in Brazil, but Larner says the country is Rdio's third-largest market in absolute users and its fastest-growing one in terms of momentum. Part of Rdio's ability to find new users in Brazil has come through social media. Larner says Rdio users in Brazil are four times as likely as users in other countries to come to the service through Facebook. More momentum could be on the way: Just last week Rdio launched a free version of its Web-based service in the country, a strategy that has helped the premium service in other markets.
Deezer is taking a path similar to Rdio's. The company launched in all of Latin America last fall--becoming the first subscription service to cover the entire region (and it still is). Venezuela and Brazil, where Deezer's Latin operations are headquartered, came in last, opening Jan. 18.
Deezer's Mathieu Le Roux, the CEO who oversees the entire Latin region, says that in Brazil, the service launched with a free six-month trial and had 100,000 new users by the first week, breaking all previous Deezer records in any new country.
Le Roux attributes those numbers in part to Deezer's connection with Facebook. According to Socialbakers, a provider of social media analytics, Brazil has the second-highest number of Facebook users in the world--66.5 million--after the United States. (Mexico is No. 5 with 40 million.) "And a Brazilian will share three times more per day than an American. So we're talking about a very social country," he adds.
Deezer currently doesn't operate with a mobile provider in Brazil, but it's in conversations to do so. However, the company has partnered with mobile provider Tigo--which has operations in Latin America, Southeast Asia and Africa--in seven other Latin-American countries, including Colombia, where it allows users to download music as part of their phone plan.
Perhaps as important, in an effort to really target users in each country, Deezer has an editorial staff of 10 people who specialize in different regions and who are working daily with labels on offerings and promotions that are available both to mobile users and on Deezer's stand-alone website.
But the focus is mobile. "We intend to have telco deals in every country that we can," Le Roux says. "We want to provide music for everyone. And telcos can reach 90% of the population."
Deezer's musical offering comes for smartphones and through offers designed for people who already have plans with Tigo. However, Le Roux says, "80% of mobile users [in Latin America] use prepaid mobiles. So the big chunk of the population we need to address is the prepaid consumer."
A Working Model
The fact that Muve Music and its U.S. carrier, Cricket, are targeting prepaid consumers made it a hit with U.S. Hispanics. In the States, one-third of Cricket's customers are Hispanic, and that demographic defined the service, Muve senior VP Jeffrey Toig says.
"From the very beginning, the idea for Muve was how to build an amazing digital music service and experience for this segment, a large component of which is Hispanic...It had to be built for the mobile phone because for many of the customers Cricket serves, the phone--not the computer--is the center of their lives."
According to Toig, 15%-20% of all music that's listened to on Muve in the United States is Latin, a huge percentage compared with any other digital or mobile service in the country. The success lies in targeting a Latin consumer who quite often doesn't have a credit card, or a computer, or a smartphone, and who prepays for mobile phone usage.
That's also the case in Latin America, Universal's Duque says, where the market is predominantly mobile and prepaid, and where credit card penetration isn't as high.
"You have to take that into consideration to have mass consumption," Duque says.
Sources say Muve plans to enter Latin America soon, as does Spotify, which is slated to launch in Mexico in mid-April.
The new kid on the block right now is Sony. The company made its first foray into Latin America when it launched Music Unlimited in Mexico, the service's 18th market, on March 6. The on-demand subscription service first launched in Europe in late 2010 and is the only subscription service available in Japan. Users can access their music collections on Android and iOS devices as well as Sony hardware like PlayStation 3 gaming consoles, Blu-ray players and Bravia-connected TV sets.
Sony tailored Music Unlimited for the Mexican market by adding four channels: Mexicana, reggaeton, rock and pop. "Localization is key for any of the [product launches] we do around the world," Sony Entertainment Network executive VP/COO Shawn Layden says.
Pricing and payment aren't fit to the local market, however. Pricing for Mexico is slightly less than in the United States and is in dollars: $4.49 for its access level and $8.99 for premium versus U.S. pricing of $4.99 access and $9.99 premium. In addition, customers must pay with an international credit card, as is still the case with iTunes in several Latin markets.
These restrictions, however, should ease in time, as the market matures and grows.
"I can't tell you that the digital market has saved us, but that we've worked to get to this place," says Universal Music Latin Entertainment president Victor Gonzalez, who's seen iTunes sales in Mexico grow by more than 80% year to year since its launch. "It's a great result, but it's taken a lot of work to get to this point."
The most important factor, he says, is that "we have consumers who are changing their music-consuming habits. There's a generation that understands it can purchase with a prepaid card, it can download music legally, and that's great news for a country like Mexico that's growing at a fast clip. It gives us hope for other services--be it subscription services or ad revenue-supported services--who will see the potential and launch here and have results."
"We're very excited about the streaming services because we've seen how they work, mainly in Europe, and we feel there's tremendous potential," says Gabriela Martinez, senior VP of marketing at Warner Music Latin America. "We're going to do everything we can to make them a success, and seeing such important players enter the market is a super-positive symptom that indicates we're on the right path."