Say goodbye to the music industry
as we know it.

Record labels are under attack from all sides - file sharers and performers, even equipment manufacturers and good old-fashioned customers - and it's killing them.

In the first six months of 2002, CD sales fell 11 percent - on top of a 3 percent decline the year before. Sales of blank CDs jumped 40 percent last year, while the users of Kazaa, the biggest online file-trading service, tripled in number. Meanwhile, the labels' new legitimate online music services attracted fewer paying customers than the McDonald's in Times Square.

As recently as 10 years ago, the media conglomerates that own record labels regarded them as cash cows - smaller than Hollywood but more reliably profitable. Now all five major labels are either losing money or barely in the black, and the industry's decline is turning into a plunge. In the next year, whether together or separately, the labels will have to set about totally reinventing the way they do business, a horribly difficult task for any institution.

To leap the hurdles posed by digital technology, the industry must find a way to make money selling downloaded music on a per-track basis, allow in-store CD burning, slash recording costs with cheap software and hardware, and change artists' contracts to reflect the new economic reality. Doing any one of these will be next to impossible. Doing all of them would be one of the more amazing turnarounds in business history.

The record labels blame piracy for their woes. And they're right - in part. Log onto Kazaa at nearly any time of day and you’ll find more simultaneous users than Napster ever had in its heyday.

At least a hundred copies of every song on the Billboard Hot 100 are available for download. A few weeks ago, 13 out of 15 tracks on Mariah Carey's new CD, which wouldn't hit stores for another three weeks. And that's not even counting the discs sold on every street corner from the Bronx to Beijing.

The industry rightly believes that if it can make file-swapping more difficult, and legitimate pay for play services easier and less expensive, it can turn the kids on Kazaa into paying customers. Pursuing this two-pronged approach, the companies are spending millions on their own Internet services (pressplay from Universal and Sony; MusicNet from BMG, EMI, and Warner), on lawyers to chase away pirates and peer-to-peer networks, and on anti-piracy ads featuring the likes of Britney Spears.

But this won't be enough. To survive, the industry will need the active assistance of friends it doesn't have. The labels may be able to kill Kazaa, but they won't be able to stop even more decentralized networks like Gnutella without help from Internet service providers, cable operators, and telephone companies. All their efforts to get DVD-like protection for CDs ultimately depend on the goodwill of hardware manufacturers and Capitol Hill. The online subscription services will flounder without cooperation from performers, songwriters, and record stores. And the ability of Britney to change the hearts and minds of music fans depends on public sympathy.

Are the labels getting their just rewards?

Sympathy for the labels is in short supply. Rightly or wrongly, record companies are detested by politicians (for corrupting youth), by webcasters (for demanding royalties), and by their customers (for inflating prices). Musicians and songwriters are famous for loathing the labels, and many have resisted licensing their songs to MusicNet and pressplay. (Both are under investigation for possible antitrust violations.) Radio and MTV aren't in the industry's corner; the labels, through "independent promotion" programs, effectively have to pay them to broadcast music. And the electronics industry's attitude toward the labels is summed up by an Apple slogan: Rip. Mix. Burn. Which, a music executive once told me, translates into "Fuck you, record labels."

Even the music trade's corporate masters are torn. Until the 1980s, most labels were controlled by eccentric, sometimes thuggish entrepreneurs who had their whole lives bound up with selling albums. In the past two decades, every big label has been swept up into one of five major groups: Universal, Warner, Sony, BMG, and EMI, which together control about 75 percent of global recorded-music sales. Despite their dominance, though, the majors are merely duchies in large media empires with other, often conflicting, priorities.

Last year, the Big Five together sold about $20 billion worth of music. Meanwhile, Sony alone saw about $42 billion in electronics and computer sales. If Sony wants to sell MP3-capable cell phones - a big thing in Japan and potentially worldwide - how much attention will it pay to Sony Music's protests?

Similarly, AOL Time Warner is desperately trying to resuscitate AOL by selling high-speed Internet access. Yet one of the main uses for high-speed connections is downloading free music - something that Warner Music sees as a deadly threat. Bertelsmann, the German media titan that owns BMG Music, cared so little about its music division that the company invested millions of dollars in Napster, accepting along the way the outraged resignation of its two main music executives.

Worse, at a time when bold thinking is required, the industry, once the province of entrepreneurial risk-takers, is increasingly managed by bean counters focused on short-term survival. Too often, the response to problems is throwing lawyers and money at them, then ducking responsibility.

Why, when most industries are using technology to slash costs, is Michael Jackson running up $30 million in studio bills? Or, rather, why is Sony Music letting him? Career protection. By using the hottest producers and recording studios, executives can deflect failure ("We got the Neptunes, what else could we have done?") and allay their fears artists will blame them for a flop ("That track would've got some air, but the Suits wouldn't shell out $50,000 to clear the Zeppelin sample"). Because the costs are billed against the musicians, there's little incentive to save money.

The market itself will determine the most effective marketing

For years, the safest path to success in the music business has been to hunt the teen market. But by ignoring career artists at the expense of the latest trends, the labels have lost touch with wide swaths of society. The industry as we know it could vanish not so much because of technology but because few people over the age of 30 would care if it did.

If the industry collapsed, would artists and listeners be better or worse off? After a brutally difficult transition musicians and fans might on the whole benefit. The star-making machinery may crumble, but people will still pay for music, whether it's live, licensed, or digitally delivered (at a competitive price). Look at the bluegrass and gospel circuits, which provide long careers and middle-class lives to some of America's greatest performers. Look at the techno bands that are winning an audience by selling their music to advertisers. And look at artists like Phish, Prince, and Wonderlick, who are trying to use the Internet to deal directly with their fans and bypass the middleman.

To be sure, today's middleman does a lot of good, too. Fans taught by two generations of rock and roll to loathe the Suits don't appreciate the enormous contributions of producers and A&R executives (think Ahmet Ertegun or Russell Simmons). And the labels perform the invaluable function of backing young performers financially as they begin their careers. But in a post-label world, musicians might find other ways to get this help, from the American Idol model (building recognition as part of a corporate campaign) to the Broadway show model (getting ad hoc groups of small investors to provide funds). Eliminating the big-label overheads could cut the cost of making music, too, enlarging the pool of contenders and democratizing the process.