CES - Digital music industry challenged to follow fans' lead

Music industry executives say the industry needs to change if they want to keep up with a market increasingly controlled by consumers.

At the Consumer Electronics Show this year it's clear that consumers are making choices that are driving industry changes, and nowhere is that more evident than in the digital-music business.

Music industry and technology executives convened for the Billboard Digital Music Live conference Wednesday to talk about what those in the business need to do to meet the needs of music fans who appear to be running the show.

"2008 has to be the year we get real or the business as we know it goes away," said Fred Goldring, an entertainment attorney with Goldring Hertz & Lichtenstein LLP. He said that consumers will access music regardless of whether artists, labels, publishers and digital-music distributors approve of the means or receive money from the exchange.

Since Napster turned the music industry on its ear in 2000, the digital-music business has been rocked by dissent among artists, labels, publishers and the breed of technology companies distributing and selling music online that emerged in Napster's wake. All of these parties want to derive revenue from their contribution to the business, but have been arguing for years about how everyone should get paid.

As this drama unfolds behind the scenes, consumers continue to find ways to bypass DRM (digital rights management) and emerging revenue models to download and share music, making it not just impossible for the music industry to make money from traditional means, but also difficult to make money at all. In the meantime, artists have embarked on their own revolution, using social-networking sites and other online means to get their music directly in the hands of fans and finding other ways to derive revenue from their work.

An example of the latter is the controversial and much-publicized move by U.K. rock band Radiohead to sell its new album "In Rainbows" direct to consumers without going through its record label or Apple's iTunes Store. The album first went on sale in October on Radiohead's Web site, allowing users to choose their price for the record; a few weeks ago, Radiohead released the record to iTunes and other retail channels.

Scenarios like this will continue to happen, both among major-label artists and independent or unsigned artists. Whether they work is not the point; it's what the industry will do to work within these models and support them rather than continue to resist that will decide how the industry will fare in the future, said Terry McBride, CEO of Nettwerk Music Group. Nettwerk is a Canadian privately owned record label and artist management company.

"The corporate side of it has to shift," he said. "The corporate people have not allowed us to do what we know we have to do. This is about the consumer, about monetizing their behavior and giving them choice. For all of the people that believe in controlling the IP and how [the music] gets to consumers, the game is over. It was over seven or eight years ago, and soon your business will be over."

Goldring suggested the industry focus on business models built solely around the networks that allow users to download music and find ways for everyone involved to make money that way.

"We have to stop trying to keep our old business alive .. and figure out how to monetize the pipes [music files] are going through," he said.

Barney Wragg, head of digital, EMI Music Group, said that in a perfect world, scenarios like the ones McBride and Goldring propose would exist. However, the needs of different artists vary, and there are still concerns about the integrity of their work and how they will be compensated for it as new business models emerge.

"I have artists that don't want to be involved in certain business models," he said. "I have to balance those conflicts. ... There are a whole bunch of artists who are worried about how they're going to get paid, and what this is going to do about their representation or their art."

Allowing their music to be distributed through ad-supported online music services is a particularly hard sell for artists who worry that having their work be associated with advertising "devalues" it, Wragg added.

Subscription-based models such as Rhapsody that don't give users ownership of their music have struggled to take off. Wragg compared music fans' view of subscription models to the early days of e-mail, when people wanted files to be stored locally and were adverse to the concept of e-mail existing only on a remote server.

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