Seeking a cure for the
music business blues

The plight of the music industry has played out like a 1970s disaster film, the kind where the principal characters declare that nothing on earth could threaten their state-of-the-art luxury liner or superstructure.

Crash! Cut to people gasping for air or scrambling for a seat on the lifeboat. That's where the record labels are now--scrounging for technologies and business models that can keep them afloat.

To their credit, the four largest music labels have experimented with a range of ideas. They have finally opened up to the idea of selling MP3s--compressed audio files of songs that can be downloaded from an online source and then stored and played back on a digital music player. They also are dabbling in ad-supported music and have talked about launching a jointly owned subscription service.

Meanwhile, piracy continues to flourish. CD sales continue to tumble. Some top artists, including Radiohead and Nine Inch Nails, began distributing their own music last year, Paul McCartney quit EMI, and Madonna jumped to a concert promotion firm, Live Nation, and an alternative business model.

Half of all music sold in the U.S. is expected to be digital in 2011 and sales of downloaded music will surpass CD sales in 2012, according to a recent Forrester Research report titled "The End of the Music Industry as We Know It." Digital music sales will grow at a compound annual growth rate of 23 percent over the next five years, reaching $4.8 billion in revenue by 2012, Forrester says. However, digital music sales will fail to make up for an ongoing decline in CD sales, which, by 2012, will be reduced to $3.8 billion, according to the report.

So the music industry has its work cut out for it. This is how we see the next year shaping up in the digital music scene.

Apple gives in on price flexibility
The labels are serious about this one. They want to set their own prices for songs sold via iTunes, and Apple Chief Executive Steve Jobs won't let them.

But the labels now have Amazon as leverage. Offering 79-cent MP3s that can load on to any digital music player, Amazon has an attractive offer. Especially when one considers Apple sells songs for 99 cents and most of its music can be played only on Apple players.

"I think Amazon will need a year to bulk up in terms of market share," said Chris Castle, a former executive at Sony Music. "They already got the brand and they got the skill set and, at 79 cents, what would you rather pay? Right now, Amazon has no place to go but up."

But watch what happens if Amazon does snatch a hefty chunk of market share or Apple bows to the labels' wishes on price. You think maybe Amazon's prices go up? Bet on it.

But don't worry too much, said Susan Kevorkian, an analyst with market research firm IDC. She argues that tiered pricing won't hurt Apple's business model or consumers.

Ad-supported downloads disappear
Perhaps not forever--but certainly 2008 will mark the end of some of the current high-profile and mainstream ad-supported downloand services. (We're not counting the Ruckus Network service among the likely victims because it caters only to college students.) The music labels have shown that when it comes to ad-supported music, they feel more comfortable locking up songs in continuous-play data streams and in downloads intended specifically for PCs rather than offering downloads (even if wrapped in Digital Rights Management antipiracy software) for portable devices.

While social networks like Imeem and LastFM.com, which allow users to listen for free only on their PCs, have secured streaming deals with all the top labels, SpiralFrog, an ad-supported download service, has signed only one deal for downloads, with Universal Music Group. New York-based SpiralFrog is borrowing money to keep operations going, which prompts concerns about where the company will get the millions it needs to pay the large advances the other three labels require.

And then there is the Qtrax debacle. Last month, the company told the world that it would offer free downloads from all four major labels. Days later, the start-up was embarrassed when music executives publicly told them: "Whom do you have deals with? Not us."

It comes down to this: the labels would rather partner with services that possess established audiences and don't offer downloadable music for portable devices. That mind-set, according to Kevorkian, has got to change.

"The labels are still PC-centric," IDC's Kevorkian said. "To stay relevant, they are going to have to allow fans to get their music wherever they want it."

And given the susceptibility of the ad market to uncertainties in the U.S. economy, even streaming free music to PCs may not be something the labels embrace tomorrow, noted Castle, the former Sony Music executive.

"Your ability to succeed or fail depends on the advertising market," Castle said. "For one thing, you have to depend on sales staffs to get a CPM (cost-per-thousand ad viewers). What about a market downturn? We've been through one of these bubble busts already (in 2000), so why hang your hat on advertising? The tech companies said advertising was going to save us and it didn't."

The author of the Forrester report, James McQuivey, recommends that music industry executives steer clear of music subscriptions and ad-supported music content, which, he says, should be left to radio.

Death to DRM
Yes, the hated Digital Rights Management copy-protection schemes will cease to be an issue after 2008. It's not jet science. Customers--the paying kind--want to play music on multiple devices and DRM prevents that.

The labels are catching on to the fact that people who pirate music don't need downloads to circulate music. They rip CDs for that. So why not go ahead and please the people actually plunking down money for music?

Kevorkian doesn't agree that DRM will completely vanish this year but said the labels will open up their music considerably. "We see it changing dramatically," she said.

Social networks will replace artist-and-repertoire, marketing departments
Who needs to send an A&R agent to cruise clubs for talent? The record companies can save on salaries and bar tabs by installing a talent scout in front of a computer, where he or she can monitor opinions and listen to up-and-coming bands at Imeem, Facebook, and MySpace.

Private-equity firm Terra Firma, the company that acquired record company EMI in May, considered slicing $58 million from its A&R and marketing budget. Some of the savings would have come from requiring scouts to rely more heavily on sites such as MySpace to find talent. The company would also use social-networking sites to promote acts.

Social networks are like massive laboratories for the labels. Music executives can monitor the preferences of a huge audience in real time at little cost and with relatively little trouble. They can learn which acts are generating buzz, track people's reactions to a band, and test promotions.

"The music industry is starting to address the music-oriented social networks," Kevorkian said. "They can take some of the burden off marketing departments at times of staff cuts. At the same time, the networks can help them retain relationships with consumers."

Bands will collaborate to distribute their music online
Marquee acts, without the backing of music labels, will join forces to distribute their music on the Web. One major inspiration for musicians to combine resources, share costs, and exercise more control over the delivery of their work is British supergroup Radiohead's online promotion of its album In Rainbows.

Radiohead fired up the music industry imagination in October by using the Internet and an offer of free music to help distribute the album. Then, Trent Reznor, front man for the group Nine Inch Nails, and singer Saul Williams followed up with a similar approach for Williams' latest recording, The Inevitable Rise and Liberation of Niggy Tardust.

Whether the promotions proved to be financially sound investments is still being debated, but at this point it appears that Radiohead (which has a huge fan base) and Williams (a relative unknown) at the very least were able to manage Web sites, reach large audiences, and promote music without the help of a label.

In an interview with CNET News.com, Reznor said that overseeing the online distribution of Williams' music was a lot for one man to do on his own. Reznor managed every aspect of the project. But the experiment suggested a variation on Reznor's strategy that might exact much less wear and tear on the participants. Why couldn't, say, five established bands forge a co-op for which they'd hire a small team of Web designers, marketers, promoters, and e-commerce experts to worry about online distribution?

These managers could fulfill the chores traditionally handled by the labels. A principal difference would be that the musicians get to pocket the profits. Sure, there's all kind of problems that come with managing an organization. So a band considering joining such a co-op would have to figure out which they would rather have: the headaches that go with running a company or the ones that go with signing with a label.

Hot digital-music discussions now on CNET

Hot audio-software discussions now on CNET

More on digital music from CNET.com

• South by Southwest music and interactive festival
• Download.com Music: Free MP3 of the day
• MP3 Insider podcast
• Free online course: Digital music made easy
• Free online course: Digital music in the home
• Create and share iTunes playlists
• Take your digital music on the road
• Move an iTunes library from PC to Mac
• Manage multiple Zunes with playlists
• How to split long audio tracks
• Crave: MP3 players for the Long Tail
• Roundup: MP3 players for file hoarders
• Roundup: Best MP3 players for kids
• Roundup: MP3 players that shaped 2007
• Roundup: Worst MP3 players of 2007
• Roundup: Headphones for $50 or less
• Video: Slacker Portable Player