Argentine musicians are out to crush their oppressors–the major record labels–with online distribution.

He has no record deal but Lucas Tirigall Caste is arguably one of Argentina’s most popular musicians.

Since Tirigall Caste, under his stage name Lucas TC, posted his dance track on the Internet, eager fans have downloaded “Need for Speed” 1.8 million times from mp3.com, a leading online music site. He topped the site’s charts for four months, until a redesign saw his song filed away under “Argentina,” a category that receives little attention.

Such success is remarkable for someone who describes music as “just a hobby.” But that may yet change. Based on his Internet popularity, the German division of Universal Music Group–one of five major world labels along with EMI, Sony, BMG Entertainment and Warner Music Group–and several minor record companies have offered Lucas a record contract. Significantly, he turned down the offers and plans to launch his own digital record label, Clubasic. “The idea is to eliminate all the intermediaries,” he says.

That an unknown artist could distribute millions of copies of a song without the help of a major label, and then go on to spurn their offers, heralds a major revolution in the music business. Both Lucas and the wave he is riding owe their success to MP3, a new digital format that allows web surfers to e-mail, download and play dense, high-quality music files quickly and easily (see sidebar). The innovation has spawned thousands of sites on the Internet and scores of programs for locating, downloading and playing MP3 files.

Better than sex? After “sex,” “MP3” is the term most often entered at search engines by web users looking for sites, according to worried record execs. The action has led to claims that the Internet music market will move billions of dollars within the next five years and threaten the survival of the big labels.

For now, however, sales are a trickle, not a flood. More often than not, web surfers download their music free, often in breach of copyright–another threat to traditional record sales. Music companies are fighting a backguard action against piracy with attempts to come up with their own digital distribution system that they can control. MP3, however, has the support of the Internet masses and companies are already selling portable devices to play the music.

If anything, the potential for MP3s is greater in Latin America, where CDs, tapes and records arrive months after their U.S. release and with a heavy markup. Brazil, the largest market on the continent, is still wedded to local music. There, English-language music accounts for only a tenth of sales. But U.S. companies have a lock on the region’s two other main markets–Mexico and Argentina–with two-thirds of sales.

Clueless. For fans impatiently awaiting the next major release, so much the better if they can get it faster and cheaper across the Internet. “New York has marvelous things on the street. Here the only way to get it is through electronic commerce,” says Charly Alberti, formerly the drummer for Soda Stereo, one of Argentina’s most successful rock bands and a pioneer of music over the Web. “I don’t know a single Latino who doesn’t want to buy from abroad.” That may not be enough for MP3s to revolutionize the local industry in the short term says Alberti, but “within one or two years, you’re going to feel it.”

Meanwhile, the old music business has not even fully digested the impact of music videos on the traditional copyright payment structure. Small wonder that the industry majors have yet to brace themselves for the impending MP3 takeover. “They don’t give it much importance,” says Marcelo Mingrone, tracking manager at the local publishing division of EMI.

Peer Music, an independent U.S. music publisher with 30 worldwide branches, is one of the few exceptions. The company established a web presence last year with Digital Pressure, its online music business, allowing downloads of its artists’ music in return for a credit card payment. Jennifer Racca, Peer’s Argentine director, is today negotiating with local TV stations and independent music companies to add to that online repertoire. But she recognizes that her lead is not being followed by the majors: “They are very scared that they are going to stop making money. That immobilizes them.” Both Mingrone and Racca reckon there has been a lack of clear leadership from the Sociedad Argentina de Autores y Compositores de Musica (SADAIC), which is responsible for collecting and enforcing copyright payments.

SADAIC’s official stance is that the organization is “studying the latest developments.” But it has yet to work out how to charge royalties to local radio stations like Rock & Pop that are transmitting their shows live over the web. U.S. and European industry groups have set up Internet watchdogs, like London-based Market Tracking International, to monitor MP3s sold or downloaded and check for illegal copies. Its Argentine counterpart still focuses heavily on the third of the market owned by traditional piracy.

Rebel yell. MP3s have a significance that goes way beyond the debate over piracy. While formats for playing back recorded music have come and gone, illegal copying has been around for years. “It always happens:” Alberti says. “The thing is to relax and use it as an advantage:” Alberto Perez Rodriguez, head of systems at SADAIC, is confident the big companies will evolve to deal with the new environment, even evolving to become a hybrid between record companies and broadcasters. That puts the old guard on a collision course with the new digital entrepreneurs.

Since the break-up of his band two years ago, Alberti has launched his own business, Cybrel Digital Entertainment, a magazine and digital record company Lucas TC also plans his own digital record label with online credit card purchasing. But he will not abandon his current profession as a TV director, since he will also be producing videos for transmission over the web.

Alberti foresees a continued need for middlemen. As the popularity of the medium grows, groups looking to promote themselves on the web will need help from online specialists to attract the attention of a public swamped with possibilities for downloading music. That’s where Cybrel hopes to offer its services and has already signed up eight acts from Argentina and neighboring Chile.

Alberti’s pitch centers on his experience as a musician and mastery of the Internet rather than improved margins for musicians. Cybrel offers its artists the same 10-15% of revenues paid by traditional music companies but claims better distribution. In his world, the hated record companies will be dead. “The fat cats that don’t understand anything about music are going to disappear:” he says. “They’ll be coming to me and I will have the same power as BMG.”

QUANTUM LEAP

EVERY NEW STUDY SHOWING LATIN AMERIca’s rabid Internet growth is greedily snatched up by start-ups, telecom companies and financiers trying to justify their efforts in the great online land grab.

Nazca Saatchi & Saatchi first fueled the melee back in 1998 with a study that claimed the region’s Internet use was growing faster than anywhere in the world. Figures from the report became data de riguer for every business plan since the hatching of StarMedia.

Now Nazca’s back with new numbers. Though not as revolutionary as the first round, the study is less spotty in its sample and more complete in its findings. The ad agency predicts that wired Latins will triple to 35 million users by next year, with spending more than doubling to US$525 million.

Despite the big gains, penetration rates, shown here, tell the real story: There’s still a long way to go.

                        PER CAPITA INTERNET
                            PENETRATION

PUERTO RICO 1 IN 9
CHILE 1 IN 32
BRAZIL 1 IN 34
MEXICO 1 IN 36
URUGUAY 1 IN 44
ARGENTINA 1 IN 70
VENEZUELA 1 IN 95
COSTA RICA 1 IN 101
LATIN AMERICA 1 IN 52
Source: Nazca Saatchi & Saatchi.

BUILT FOR SPEED

LONG BEFORE MP3 SOUND FILES APPEARED, MUSIC WAS BEING recorded digitally, using the WAV format. This is the same way standard prerecorded CDs sold in stores are made. The problem is that a conventional music CD holds a colossal 650 megabytes of data, making it impractical to store much music on a computer’s hard drive, let alone spending hours and days trying to send it over the Internet.

MP3–short for MPEG-1, Audio Layer-3–provides one way of shrinking that data mass. The format was developed by the Moving Pictures Experts Group (MPEG) a body of industry experts that meets four times a year under the auspices of the International Standards Organization (ISO). By stripping away sound outside the audible range that humans can hear, songs transformed into MP3 format occupy a twelfth of the space of traditional WAV files.

While that means some loss of sound quality, MP3s have some advantages over conventional CDs. As well as making it easy to transfer and store music, MP3s eliminate the risk of a track skipping due to movement of the player. That has spawned a thriving industry in dedicated MP3 players, notably the Diamond Rio produced by Diamond Multimedia Systems. But the unit, which sells for around US$15O, is not yet widely available in Latin America.

The music industry’s main hope for salvation from the MP3 plague seems to be the development of a secure standard that will block unlimited copying of a music file.

The Recording Industry Association of America is working on its Secure Digital Music Initiative (SDMI) for launch next year, though squabbling has slowed that effort even as rival systems that perform the same task have come to market. These include RealAudio, developed by Real Networks, AT&T’S a2b format, and Liquid Tracks, promoted by Liquid Audio. Microsoft too, has developed its proprietary Media Player and is promoting its own Windows Media Audio (WMA) format that creates files even smaller than MP3. Each of these formats has its proponents, but until now, MP3 has won all online popularity contests.