Apple's Brazil-made iPhone S and iTunes to drive a new growth story

Confirming the importance of Latin America as a key element to Apple [AAPL] and its future growth strategy, this week's launch of iTunes services in Brazil and 15 additional Latin American countries is significant and timed precisely to match the introduction of 'Made in Brazil' iPhones on Friday (December 16).

The importance of music

Brazil matters a lot. The world's ninth largest music market music sales there totaled $210.6 million in 2010. Piracy is prevalent. The IFPI describes Brazil as one of the markets "with the highest number of users accessing unlicensed services."  45 per cent of Brazilian Internet users download music illegally in a single month.

This could be an iTunes opportunity. In summary: a la carte downloads in Brazil have not yet hit prime time, despite digital music sales climbing an impressive 43 percent in 2010 (IFPI).  That's because just 14 percent of these digital sales were in the form of full track downloads, the majority (60 percent) were via streaming.

Apple's adventures in Brazil's digital music scene will pitch the firm up against local player, Sonora, (a subsidiary of Telefonica), which has 400,000 paid music streaming service subscribers and offers an iPhone app.

[ABOVE: One of Brazil's biggest single releases in 2010 came from local duo, Zezé Di Camargo and Luciano.]

Som Livre, the kingmaker

Brazil's music market is driven by local content. IFPI figures confirm domestic repertoire accounts for 59 percent of music sales (some claim this figure could be as high as 75 percent). Apple's iTunes Brazil team should work extra hard to ensure a broad offering of locally-produced music content.

This is why Apple's iTunes Brazil launch PR focuses on local repertoire: "The iTunes Store in Brazil features local artists including Ivete Sangalo, Marisa Monte and the digital debut of Roberto Carlos' catalog, available to purchase and download along with a wide range of international artists...".

Local label Som Livre will be the iTunes kingmaker. With a catalog comprised mainly of local content, that label has a larger market share (19.1%) than Warner (6.8%) or EMI (11.1%). Sony holds 29.8 percent and Universal 25.5 percent.

In other words, in Brazil, Som Livre can be seen as the third-biggest major accounting for a huge slice of those local artists which comprise the major slice of Brazil's music industry.

The iTunes, iPhone, iPad ecosystem

Apple's move into the cloud with iCloud and into Brazil with iTunes (and iTunes Match, which is also available) will be hugely significant.

-- On the one hand, plans to manufacture Apple products in Brazil will enable the company to offer its products there are prices more in tune with what the local market can support -- because products produced in the country will not carry Brazil's punitive 36 percent import tax levy).

-- On the other hand, the future of the digital music market in Latin America has long been thought to depend on what takes place in Brazil, which is expected to become the testing ground for future mobile, a la carte and cloud/streaming music services. Whichever services emerge dominant in Brazil will end up becoming dominant across the region, or so the logic goes.

The prize is big. With a population of 201.1 million and 14.5 million broadband lines, Brazil's a digitally-enabled nation. One-third (75.9 million) people are online in the country, which has 8 million smartphone subscribers, many of whom already using an iPhone.

As I previously reported: "As an average, 41 percent of the respondents use their phones to access the Internet. The percentage rises to 83 percent among smartphone owners. The most active users are iPhone owners; they go online more often, share more content and buy more products from e-commerce merchants." (Source: TheNextWeb)

Means of production

Apple and Foxconn's plan to begin iDevice production in Brazil are moving forward at a much slower pace than expected.

Foxconn's facilities in Jundiai, Sao Paulo, are already manufacturing iPhones, which will ship in Brazil on December 16.

Everything isn't quite rosy. Negotiations between Foxconn and Brazil have been difficult and the deal to manufacture iPads there has at times almost fallen through. According to the Brazilian Science and Technology Minister, Aloizio Mercadante, Foxconn doesn't have a set date to start manufacturing iPads in Brazil.

"The Brazilian part, including the business model and conditions, is still in negotiation," said Mercadante yesterday."The first manufacturing module requires a very large investment on the order of $4 billion -- local participation has been the biggest challenge."

Production of the iPhone 4S in the country should enable Apple to compete on smartphone price while attracting consumers with the sweet offer of music, movies, TV and other media via iTunes.

To clarify the chilling effect of Brazil's protectionist import duties on devices manufactured outside the country, an iPad 2 costs $887 in Brazil, but just $499 in the USA) while Apple TV will cost you the equivalent of $217 in Brazil, rather than the 99-bucks you'll spend on the device in the US. Manufacturing Apple devices in the country is necessary to achieve optimal sales performance.

Will the iPad production delays cause Apple to miss the tablet train?

"Several companies with manufacturing facilities in Brazil have already begun production of tablet computers, including Motorola, Samsung and Toshiba Corp. affiliate Semp Toshiba, Positivo," a report explains.

It must be clear that Brazil and Latin America have been selected as strategically important emerging markets to Apple under Tim Cook. During the most recent financial call, he observed:

"We're also placing additional focus on some other areas that have shown great promise over this fiscal year such as Brazil. Brazil was up 118% year-over-year and went over the $900 million mark."

With the launch of iTunes and local production of the iPhone 4S, you should expect Brazil to be recognized as a litmus test for Apple's performance in new markets in the months and years ahead.

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