Mexico's music business meltdown

Pirates armed with CD burners and cheap discs are bringing the industry to its knees. The U.S. could be next.

By Jack Brown
June 9, 2003 11:30PM (UTC)
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If hell had a special section reserved for recording industry executives, it would probably look a lot like Tepito.

The Mexico City neighborhood is a mile and a half of exuberant, unabashed intellectual-property piracy: thousands of people eddying through a labyrinth of street stalls, buying CDs, movies and software at a tiny fraction of the legal price.


It's also the center of a nationwide piracy business that the Recording Industry Association of America and other groups say probably took almost a billion dollars from the music, film and software industries last year -- a business that is almost single-handedly killing Mexico's music industry, crushing legitimate record sales, and sending potential stars fleeing from the country.

Stumble long enough through Tepito's maze of poorly erected street stalls and taco stands, and you might come upon Discos Medellin, a modest little shop where Guillermo Lopez quixotically sells original, nonpirated music for about nine dollars a CD. Lopez, a connoisseur of salsa, has been running the shop for 13 years and has seen sales fall from an average of maybe 60 discs a day a few years ago to about 15 a day now.

"There are days when I don't sell any at all -- people are looking for the cheap stuff," he says, gesturing at the vendor on the street outside, who sells some of the same discs for less than a dollar. "There are still people who buy originals, but ..."


A block away from Discos Medellin, Israel Serrano, a teenager wearing an obviously fake Mossimo shirt, is doing the real business of Tepito. Under a dirty yellow tarp, he and his friend Carlos have stacked up about 2,500 CDs -- a mix of Latin pop, traditional Mexican music and the latest American hits -- which their boss manufactures with a couple of towers of CD burners and some Chinese blanks for maybe 25 cents each. They sell several hundred a day for 80 cents a disc.

Taking a break on an empty crate in the back of the music stand, he says he doesn't really think too much about how the piracy business works or whom it affects. Sounding a little like an American file-trader, he says he just likes selling and listening to music.

He picks up a disc from the vibrating pile next to the stereo, which, as in every stall in the entire neighborhood, is turned all the way up to the chest-walloping maximum. "It's like this disc -- I don't even know how they do this," he shouts, holding up a freshly minted copy of BMG artist Rocio Durcal's latest recording effort, "Carmelito." "It hasn't even been released yet."


Piracy is how people in Tepito make a living, Serrano says. He points at the stall across the street, which sells shots of rum and brandy. "That's pirated." In other words, the Bacardi bottles are refilled with cheap, watered-down alcohol. His arm shifts over to the stand to the right, which sells Hilfiger pants. "That's pirated." He settles back on the crate. "It's all fuckin' pirated here, man."

Mexico's culture of contempt for copyright mirrors the attitudes of younger music consumers in the United States, and it may presage a dark future for American entertainment companies. The distribution models -- file sharing and CD burning in the United States, illegal factories and street sales in Mexico -- are different, but squint your eyes just right and the street markets of Mexico start looking more like Kazaa. In both countries, new technology, aided by out-of-date laws and poor enforcement, is threatening an industry that needs to find a new business plan fast.


In the United States, record sales have indisputably started falling, a development that the RIAA blames on music piracy among younger customers (although a sharp economic slump has no doubt contributed as well). There has been some screaming, and a lot of legal maneuvering, but no one seems to be expecting the American market for music to shrink by 50 percent, as it is on track to do in Mexico.

Maybe they should, though.

Right now, it's probably a little bit easier for a big-city Mexican to walk around the corner and buy a pirate CD than it is for an average American to fire up the Dell and download the disc. But the growing adoption of broadband Internet is probably going to eliminate any piracy gap pretty soon. And with consumers in neither country particularly concerned about whether what they are doing is wrong, a Mexican scenario for the American record industry looks increasingly possible.


Israel Serrano's little stall and the tens of thousands of others like it around the country are the reason that Discos Medellin is in trouble and more than half of the record shops in the country have gone out of business in the last couple of years.

And that is a cause for concern, according to Neil Turkewitz, the RIAA's executive vice president for international affairs. Even if Mexico somehow solves its growing piracy problem, he says, "the infrastructure for legal distribution has just disappeared."

It has disappeared because the demand for legal music seems to be falling at a staggering rate. Mexico is the third-biggest market in the world for pirated music. Almost 70 percent of the music sold in Mexico is copied (most of it in Tepito), and that figure has been climbing pretty steadily for five years. In May the office of the U.S. Trade Representative added Mexico to its list of flagrant intellectual-property violators.


Recent music sales figures in Mexico would make an American record executive cringe. According to Amprofon, the organization that represents the big international record companies in Mexico -- like a local RIAA -- CD sales fell about 16 percent in 2001, and almost 18 percent in 2002. Internal estimates for this year paint an even uglier picture -- the market is expected to shrink by almost a third in the first half of 2003.

Those are apocalyptic numbers. And they've got people in the record industry here speaking in apocalyptic tones.

"It might be last call here," says Juan Pedro Davalos, that governmental affairs chief of Amprofon. "We're living the end of an era in the Mexican music industry."

The end has already come for nearly a third of the people who worked in the Mexican music business. Recording studios are closing, labels are vanishing, and staffing is being slashed to the bone.


Record executive Peter Honerlague used to run an independent label called Para Musica. Sitting in his office in Mexico City, he reflects on what killed his old business.

"About three years ago, the piracy started to really explode -- personally, my sales went down 70 percent in the space of one year," he says. The business folded with predictable speed after a plunge like that, and Honerlague opened a joint venture with Sony, selling some of his own Mexican artists like Tatiana and a lot of foreign-catalog discs like Santana.

Honerlague blames the cheap consumer CD burner for killing his last business and wreaking havoc on the recording industry. But relatively weak copyright laws and inadequate enforcement have also contributed to what he believes will be a long-lasting change in how the music industry does business in Mexico.

"I think the industry is in a metamorphosis," he says. "We have to lower prices, we have to produce cheaper, we have to substantially reduce our promotional budgets."


Cutting prices is one lesson American recording companies might learn from Mexico. Honerlague says record companies here sell the cheaper local music -- banda, ranchero, salsa -- popular with lower-class Mexicans for half what they used to. In the United States, music sales peaked and then began to slump three years ago; in a seeming paradox, however, music labels have been raising prices.

The man in charge of Mexico's anti-piracy fight on the street is federal prosecutor Hector Avila, whose office is only a couple of blocks from Tepito. On the wall by his desk, he's got a DEA map of heroin and cocaine routes -- red, green and blue arrows branching out from South America and Southeast Asia to converge on the United States and Europe. The drug map seems a little out of place until he starts talking.

Avila sounds exactly like an American official talking about fighting the drug war. "What we've been trying to fight for a while is not so much the sales on the street," he says. "The problem is really in how the stuff gets in. The problem starts at the border."

"What we need to do first is fight the introduction of the raw materials and the big factories." Those raw materials include 400 million blank CDs Mexican officials say were brought in from China by way of the United States last year. The factories that produce two-thirds of the illegal music, most of the movies, and a lot of the software are hidden in anonymous warehouses and buildings a few blocks to the west in Tepito. Illegal copying is growing rapidly in the smaller cities of Guadalajara and Monterrey, however.


So why do street vendors get away with selling their pirated product right under the noses of cops?

It turns out that Mexican law defines copyright theft a little differently from other kinds of theft. Basically, unless the owner of the copyright makes a specific complaint about a specific vendor, the police can't do anything about it.

Which makes copyright enforcement an expensive business for the companies involved.

Still, "they're here practically every day," Avila says. "Their lawyers basically work here with us."

According to music industry studies, more than 50,000 people make their living in Mexico selling pirated music alone. That's a lot of individual complaints to make, and a lot of arrests.

Even when they do arrest a street vendor, Avila says, judges usually don't take street-level copyright crimes seriously, and they almost invariably let vendors go.

For the police, going into Tepito to look for illegal CD factories is a hairy business. It's best done in the middle of the night with a very large, well-armed force, shutting down streets and setting up an armed perimeter for a block around the place to be searched. Last year, Avila says, his team got overconfident, started to feel like "superheroes," so they went in with only 25 men in the middle of the day. An angry mob of local residents attacked them. "They were breaking out the windows of the trucks. They were going to lynch us," he says. "We only escaped because we drove out backwards."

With the impending collapse of the music industry staring them in the face, Mexican legislators in April enacted a new law extending copyrights, and the federal government has begun to take anti-piracy enforcement much more seriously.

Although Mexican officials tout the new copyright law as an improvement, the American industry opposed it, and U.S. officials say it has serious drawbacks.

"The big concerns are that it violates the NAFTA contract provisions," says one U.S. official. "It does not implement Mexico's obligations under NAFTA. We don't think it should be signed in the form that it's in now."

U.S. officials say that among other problems, the new copyright law requires violators to pay less than half the retail value of the stolen works, forces authors to collect through a "collecting society," and still does not give copyright holders completely exclusive rights over their works.

Another law under consideration would make it possible to charge big-time pirates under organized-crime statutes, an idea that record companies, U.S. officials and Mexican police all applaud.

The stakes are huge in Mexico's fight. American enthusiasts of free-for-all copying have often argued that a relaxed attitude toward copyright in the information age may hurt established artists but may encourage or help newer acts. If anything, the Mexican experience is the opposite. Mexican record company executives say widespread piracy has forced them to stop developing new talent and focus on their stable of recognized artists to make a profit.

Artists who want to become Spanish-language music stars have always seen the enormous Mexican market as a first, necessary conquest, but executives like Honerlague say piracy is pushing the artists out -- to more reliable markets like the United States. Meanwhile many local and international companies are retrenching, trying to squeeze what profits they can out of already established acts, instead of risking big money on creating new ones.

"Artists don't appear by miracle," he says. "There's a whole apparatus of promotion, of marketing, behind them. We can't risk as much as before. Now we have to be much more selective with what we record."

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In May, as part of showing that the federal government is taking the piracy problem seriously, the government placed Tepito under siege -- deploying hundreds of police, customs officials and investigators at eight checkpoints on all the major roads into the neighborhood, where they randomly check vehicles -- from big cargo trucks to taxis as they head for the vast open-air markets.

It's big and showy, and maybe it will work. But if it doesn't, the days of big new Mexican stars may be over.

"Apart from the economic questions, there's something the authorities are just starting to get, which is the damage to the musical culture of Mexico," says Amprofon's Davalos. "Now there isn't creation of new talents, new figures of music. The Mexican musical tradition is being lost."

If Mexico's experience with piracy is any guide, the U.S. recording industry is in for some big changes. Mexico's response has been two sided: Push as hard as possible to take out the big mafias that control the manufacturing of illegal CDs, but at the same time, slash investments in new artists, reduce staff and pay, and thereby stop charging music fans so much for a CD.

So far, the American recording industry has mostly followed the first, get-tough, half of this prescription -- pushing as hard as possible to take out the Napsters and the Kazaas that control the distribution of pirated music -- but they haven't really followed up with the other, get-cheap, half.

If they do, it's going to be hard times for American rock stars.

Jack Brown

Jack Brown is a freelance writer who lives in Mexico City.

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Copyright Intellectual Property Latin America Mexico