NEW YORK -- With much fanfare, BMG and Universal Music recently announced the launch of Getmusic.com, an online music retailer that would compete with CDNow and Amazon.com in the online retail space, and purportedly offer a promotional alternative to MTV and Rolling Stone magazine in the media space. It was a classic case of two industry elephants playing catch up in an arena that is changing too much and too soon for their comfort. The basic assumption underlying their announcement is questionable. Accustomed to the luxury of free (or cheap) downloads on the Internet, consumers will treat music as a commodity. The source to profitability and growth does not lie in squeezing the last penny out of a music track. Rather, it lies in offering a bundle of value-added services to customers in the physical and digital worlds.

Over the past year, the music industry has been buffeted by a revolution in the way music is produced, distributed and eventually consumed. The chief 'aide and abettor 'of this revolution has been the Internet. The proliferation of MP3s, the changing habits of demanding and Internet-savvy consumers, and the breathtaking speed of developments in compression and storage technologies have left the big labels largely gasping for breath. New audio devices like the popular Rio MP3 player and the EMPEG car player are redefining the way music is consumed. With commonplace broadband access and further advances in portable storage just around the corner, the writing may be on the wall unless the big labels don't get their act together in a matter of months. A recent survey by the Recording Industry Association of America (RIAA) points to a significant drop-off in the proportion of purchases accounted for by 15 to 24 year-olds (32.2% in 1996 vs. 28% in 1998), mainly attributed to the free availability of MP3 tracks on the Internet. It should be taken as a dire warning of things to come.

Inspired by the likes of Public Enemy's Chuck D, the most outspoken supporter of online distribution (and a vocal critic of the big labels), a number of bands are gravitating towards audio formats like MP3, and creating and promoting new singles online. This has enabled even small bands to make their presence felt (and heard) in a competitive landscape. Some bands like Widespread Panic have complemented basic promotional activity with more sophisticated online marketing efforts, often aided by a loyal group of fans. This brand of viral marketing has also led to impressive turnouts at musical events later held by the same band in physical space.

It is very likely that small to medium sized bands could easily migrate to the online distribution format, in order to attract and gain an initial audience, and ultimately build their identity. Artists with a larger and mainstream following (like Madonna, or R.E.M, for example) are waiting in the wings to test the waters of online distribution under their own marketing umbrella. By initially promoting their music with free downloadable files, and distributing further content using a copy protected format, artists could thus create and expand their musical empires, without the intervention of pricey intermediaries. The arrival of a safe, secure standard for distribution would be vital to legitimizing their efforts and enabling them to earn recognition and financial rewards for their creative efforts. Most artists report that they "get screwed either way", irrespective of whether they stay independent or plug for the big labels. There might be some comfort in being the sole architect of one's own demise.

The emergence of a secure digital delivery standard is not a pipe dream: competing standards are already under development by the likes of IBM and Microsoft, with the blessing and support from major labels like Sony and EMI, and industry groups like the RIAA. However, this won't amount to much unless the big labels are prepared for a radical revamping of their current business models, or face extinction in a few years. The booming music industry that relies extensively on a physical distribution network, has to wake up to the connectivity and efficiencies offered by the Internet. In order to compete effectively in this radically altered landscape, the big players need to embrace a secure standard (or embrace an existing and popular standard like MP3), and enforce practical legislation. They need to support and promote technological solutions for copy protection and digital watermarking and get ready for the world of broadband. In addition, they need to use the Internet and digitally distributed music content to educate consumers, create and reinforce brand awareness and recognition, promote live music events, and establish online communities of interest. These connections can then be extended into the physical space through a creative use of new hybrid retailing technologies, and event management.

Meanwhile, the marketplace is ripe for a new breed of infomediary: one who can capitalize on the changing supply-demand dynamics of the music industry by harnessing the connectivity offered by the Internet, a basic passion for live and recorded music, and respect for artists and the customers whom they serve.

No prizes for guessing the music alliances of the future: Amazon.com and Rolling Stone? Or will it be CDNow and MP3.com? Only time will tell.

The views expressed in this article are those of the author and do not necessarily represent those of the Institute.