Everywhere I turn it seems that there is a story about the demise or revolution of the music industry (depending on your perspective), sparked by two huge music-related stories that broke last week.

The first was the report that music sales were down 9.5% in 2007. The bright note from that report was that the sale of digital music tracks was up 45%, but even that huge leap didn’t help the industry overall. The second was the announcement that Sony BMG will be joining the other three major labels in offering DRM-free songs.

The music industry is scrambling to deal with the impact of the Internet on its traditional business models.

In this October 2007 post, Michael Arrington of TechCrunch sums up nicely the issues that are facing the music industry, and ReadWriteWeb echoes some of the same sentiments. Basically, sales of CDs and digital downloads are not going to make huge amounts of money for anyone going forward. Both argue that the real money will be made from ticket sales for live performances, merchandising, and special limited-edition physical copies of the music.

But there is money being made from digital downloads - it’s just not of the scale that the major record labels are used to. In 2007, there were 844.2 million digital tracks sold. Radiohead’s recent experiment, in which the band released an album online for free download and asked listeners to pay what they wanted, made them more money from the digital distribution then they made from the digital distribution of all the rest of their albums combined. If this seems strange, there is a simple reason - Radiohead was released from their contract with their record label, a contract that in the past excluded them from any royalties from the digital distribution of their music (remind anyone of the current writer’s strike?) Many signed bands and musicians are currently stuck in contracts like these, the relics of an era when digital distribution didn’t really matter.

Of course, there is still money being made in the music industry, but as fewer people are buying CDs (that are costly to produce and distribute) and as more people are downloading digital music (that is practically free to reproduce and distribute), less money is being made. And, the money is being spread among more musicians. The Long Tail is in full force in the music industry, allowing more people to make money as consumers spend their dollars on a wider variety of music and musicians.

So this puts the music industry in this strange position. The indie artists, who are making some money on their small but loyal audiences and the Long Tail, but often not enough money to live off of, would be psyched to get a record contract because the record companies have the marketing and distribution capabilities that they don’t have access to. The big (and already famous) bands, are trying to get out of their contracts in favor of the freedom that the indie artists enjoy. And the record companies are panicking. This is creating a weird, wild situation where everything is about to totally implode if change doesn’t happen quickly.

The really big question is: What online business model is going to work for the music industry going forward? Any successful model will have to support both the record labels and the artists who are producing music. And it will have to be one that consumers will spend their money on.

Here are my predictions:

1. The new model will be all about the audience.In the past, bands knew how many records or songs they sold, but not the name of the individual that bought them. Digital download and distribution, as well as social networking sites like MySpace, now let musicians know much more intimately who their audience is. By collecting the name of the individual who downloads their song (whether they pay for it or get the download for free), musicians will be able to have a much more personal relationship with their audience - and they will be able to re-market to them in the future. As musicians begin to realize that having the name of their fan is worth more money than the $0.70 they get from iTunes, they will either begin  offering all their songs for free, or Apple will have to adjust their business model and begin sharing data with the artists. Radiohead may have been the first major label to try offering free downloads, but many others are following suit. Trent Reznor (of Nine Inch Nails fame), just produced a Saul Williams album and released it online the same way that Radiohead did - and he has told everyone about the data that they collected. Reznor is bemoaning the fact that only 18.3% of the people who downloaded the album paid $5 for it. He thinks that this stinks (and it might) but he is neglecting the really exciting fact that 154,449 people downloaded Williams’ album! That is an audience of 154,449 if you at least collected an email address. That is a significant fan base - and in my opinion, it is going to be the primary model of the future.
2. Musicians will begin releasing songs more frequently, as well as more versions of each song. When digital downloads become the norm (and that day is close), there will be no need to stick with the CD format where musicians release all their fully produced songs in one giant lump. Instead, they’ll release things as they are done, there will be more live performance and acoustic versions of songs, and more interesting bits, more looks into the recording studios, more evidence that songwriters and musicians are humans and that every version that they play isn’t perfect. (UPDATE: Looks like Mark Cuban agrees with this prediction.)
3. Record labels will try to hold onto their business models. They will succeed only until current contracts run out, but they will eventually fail. They will do this not because they don’t see the writing on the wall, but because they can’t figure out how to change.
4. A new type of record label will emerge. The new label will serve more as a helper to the artist than an owner of the artist. This new label will assist with marketing, bookings, networking and the other promotional aspects of the music business. But instead of owning all the rights to the artist, musicians will PAY their labels for their help, and the musicians will retain their rights. The new labels that will be successful will be the ones that know how to do SEO, online marketing and social networking. These types of labels will become the norm. (And they probably wont’ be called record labels.) (UPDATE: Looks like CNET agrees with this prediction: “If we end up ridding the world of labels, we’ll only have to re-create them–in some other, probably more nimble form.”)
5. Apple will be one of the new “record labels.”
6. Many new online and digital services will rise and fall. In 2-3 years, we’ll be left with the winners. At least three of the winners will be companies that no one has even heard of yet.
7. There will be new ways to buy music. Walking through Target, no longer will you head to the music section to buy music. Instead, as you hear a song piped over the airways, or walk past a TV that is playing a music video and decide you like the song, you will be able to use your phone or mp3 player to purchase and and download the song instantly.
8. The stuff inside the CD case will still be valuable in digital format, but it will look completely different. People still buy CDs for the lyrics and the liner notes inside - as well as for the artwork and the experience of opening the case and looking through the packaging. This won’t change, there will always be a market (although a smaller one) for the special edition hardcopy CDs. And it won’t be long until someone comes up with a way to sell that stuff in digital format, as well. But although the digital information will be the same, it won’t look the same as the CDs of today. This will be a huge money-maker, much bigger than anyone expects.

UPDATE: This Music Lessons post by Seth Godin is an awesome add-on to this article. Go read it.

Photo by SqueakyMarmot

Web 2.0 is a term that has existed since 2004. The phrase is now widely used by anyone who works on or with the Internet, but Web 2.0 is one of those expressions that many business people outside the Internet industry only “sort-of” understand.

To understand Web 2.0, you first have to be familiar with Web 1.0. Web 1.0 is the Web as it existed up to and immediately after the Internet bubble burst in 2000. Web 1.0 followed the “broadcast model,” meaning that any content that existed on the Web was one-way - the content was written and published by the author (a company or an individual) for the reader. The best way of understanding the broadcast model is: “We talk, you listen.” There are still many sites that are Web 1.0, including most corporate and informational Web sites. Examples include Weather.com and GM.

Web 2.0 was born when the broadcast model started to change to a conversational model.

The hallmarks of Web 2.0 are conversations and user-generated content. Sites that provide technology platforms that allow users to interact and to contribute content are Web 2.0 sites. Examples include Facebook, MySpace, Flickr, YouTube and blogs - these sites provide the technology that lets users submit content and interact with each other in various ways, such as by submitting photos and videos, chatting or by commenting on on each others content.

Today, many Web 1.0 sites are moving toward Web 2.0 by launching Web 2.0 features. These sites publish content, but solicit a response from users to further enhance the conversation. For example, retail sites such as Walmart and Target now allow visitors to post reviews of products. Traditional publishing companies like the NY Times have opened up their articles for comments and have discussion areas to facilitate reader interactions.

The following are some of the most useful articles you can read to find out more about Web 2.0:

• What is Web 2.0- This article by Tim O’Reilly is often sourced as the definitive treatise on Web 2.0.
• Web 2.0 - This 2005 article was written by Paul Graham, and is a very good explanation of Web 2.0.
• What is Web 2.0- This 2006 documentary from TechCrunch features Editor Michael Arrington’s interviews with start-up CEOs about Web 2.0. (24 Minutes). The CEO’s definitions of Web 2.0 really illustrate why this term is so difficult to pin down and how everyone defines it a little differently (around minute 5).
• Web 2.0- The Wikipedia entry about Web 2.0.
• Web 1.0 vs. Web 2.0 - This post will help you understand the differences between 1.0 and 2.0.

I made it to the TechCrunch Meetup in Boston on Friday night, and it was a lot of fun. I appreciate the hospitality from the folks at TechCrunch (there was open bar for the duration of the event) as well as the sponsors. I managed to talk about half of the vendors who were there, as well as a lot of random folks who, like me, just wanted to network and see what was going on with start-ups in Boston. Personally, I got a lot more from the people who I talked to than from the exhibitors (and I think that they had better products and projects in the works). But here’s my take on the exhibitors that I chatted with:

Mzinga - B2B social networking, is how they explained it to me. What I don’t get about this service is that they launched at the event, but they already have 2.7 million registered users, according to TechCrunch. That’s a pretty solid user base for a newly launching product. Where did those users come from?

CoreBlox - The president & CEO did a very brief demo but had a hard time because his co-worker nearly spilled water on his laptop before someone else tripped on the wire and unplugged it, but my takeaway is that they are offering a free customer support tool that can be used by businesses. I didn’t get a good sense of the quality of the tool.

Cheyenne Mountain Entertainment - The people at this “booth” (I am not sure that it could be called a booth - cocktail table is more like it) were really knowledgeable and kind, especially since I don’t know much about online gaming, specifically MMORPGs (massive multiplayer online role playing games). The thing that really shocked me, though, was that this company is two years, $40 million dollars in, and has 100 employees and a solid management team (from the looks of its Web site), but it doesn’t yet have a live game. My conversation with them went like this:

Me: What’s your biggest game?

Them: Stargate Worlds.

Me: How many people are playing it?

Them: Oh, it’s not live yet.

Wow. $40 million in, they must be sweating it a bit.

NowHound.com - Live Webcast search is all I got from the demo before Erick Schonfeld (from TechCrunch) came over and the folks there spun around in a neat little circle to talk to him.  

A personal note, my favorite part of the event was that I managed to drag along my good friend Denise Dubie. Denise and I worked together years back, but I haven’t attended a work event with her in years. It was so fun for me to see what a celebrity she has become in the IT world (she is a senior editor at Network World). For example, we walked by the Perkett PR booth and a couple of her story headlines were flashing on their screen, and at one point, I noticed some other people ducking and whispering about her before they came over to introduce themselves and shake her hand.

One of the guys in that group was Ross Levanto from Schwartz Communications, who was chatting with us for awhile. Our conversation was interrupted by some announcements by TechCrunch’s Michael Arrington and Schonfeld. One of the things that they did during that set of announcements was draw a winner to play in an online game by Moola for a chance to win $5,000. Ross’ name was picked. He went, played and ended up winning the cash. He celebrates in the picture below (sorry for the bad photo, I was using my iPhone in a dark and crowded room):

I’m at Logan Airport in Boston, heading out on a weekend trip to visit my friends in Baltimore, and I just ran across the final issue of Business 2.0 and had to buy it. Reading the final issue of this magazine is going to be like saying good-bye to an old friend for me. I can’t say that I read every issue since the magazine launched almost a decade ago, but I was a subscriber for years, particularly during my time at executive editor of Publish magazine when I would read every issue from cover-to-cover and stick post-it notes to its pages when an article gave me inspiration for a story. (That happened often!) During those days, Business 2.0 and The Industry Standard were the print publications to beat. The boom was, well, booming and marketing dollars were flowing toward both of these publications – it was not uncommon for a single issue to have up to 600 pages. At the time, if even the shadow of Business 2.0 fell upon you, you were blessed. So we transitioned the audience of Publish magazine from “graphic designers” to “Internet communication professionals” to try to share a tiny bit of the space. The magazine continued to inspire media ventures through its years, including Michael Arrington’s, who writes, “The story style and content was a big inspiration for starting TechCrunch, even though we are a poor imitation and rarely do it justice.” I could not have put it better. I have a tremendous amount of respect for that publication and really fond memories of those days before I moved full time to the Internet. So long, Business 2.0. I’m sad to see you go.

(As an aside, I just visited the old Web site for The Industry Standard, and on that site there’s a note that says “Coming back…The Industry Standard”)