Why the Record Industry Works Now
The recording industry works by signing artists, subsidizing the production, distribution and promotion of their music and taking a cut of media sales. We can argue the ethics (or lack thereof) of the industry, but in the main this system benefits both consumers and artists.
Most up-and-coming artists simply lack the resources to promote their work on any kind of wide scale. In the media rich environment we live in, gaining public consciousness is a tough (and expensive) nut to crack. This is doubly the case if the artist's work doesn't have mainstream appeal.
Consumers benefit because there simply isn't enough time in the world to listen to all the music out there, and even if you could it wouldn't be a very rewarding experience when perhaps 90% of even recorded and distributed music is crap.
Unfortunately for record labels, this state of affairs all depends on a slippery premise: That media itself has intrinsic value*, apart from the content it contains.
When something has intrinsic value*, it is a simple process to assign a price to it:
Price = V * K, where V is the intrinsic value* of the product and K is some factor > 1.
Distributors and retailers can then pump up K to account for incidental costs (like pre-paid royalties, advertising, etc.) and a healthy (some say too healthy) profit margin for themselves. (K is currently around 10 or so, which is quite high, but because recorded music has a high subjective value and the recording industry isn't exactly in a free market, they get away with it.)
This makes sense to consumers who already buy commodities like food or computers that are priced in just this way. It also makes sense in the market since if a company puts K too high, a competitor is sure to come along that prices more aggressively.**
So what happens when V = 0? And when anyone with a home PC is able to create a perfect digital copy and distribute it via the web, V is very very close to zero.
The answer is the recording industry has received its death warrant.
Labels could shift to a fixed pricing scheme (a la iTunes, Napster) but such systems will always have to compete in the market against P2P sharing systems that charge nothing (really, they just subscribe to V*K, they're only free because V = 0).
DRM solutions, regardless of whether they ethically retain consumer rights, are inherently flawed, since no such system can prevent the consumer from eventually subverting it (if need be with a second computer and a microphone).
The RIAA's current tactic of suing individual file sharers can never be effective since the cost of identifying and suing every file sharer is prohibitive. And they would surely have to sue just about every single file sharer on the planet to stop P2P networks.
* - All forms of store bought media (CDs, records, etc.) have intrinsic value. It is the individual cost of procuring, pressing, packaging and distributing each piece of media. Even if artists wanted nothing for their work, they'd still need to charge some nominal sum in order to pay for the media itself.
** - It's worth commenting here on the recording industry's consistent use of price fixing and other monopolistic tactics to force out competitors. The FTC's statement regarding the recently settled price fixing case against a few major distributors is available here.
I think the only possible answer is that the price of music must drop dramatically. There still exists an equilibrium point where the intrinsic value of a music download service (large catalog, availability, download speed, recording quality) can pump V back up enough to make a pay-to-play service competitive against a free P2P network in the free market. But 99 cents per track ain't it, at least not in this consumers view, especially when the recording industry is only passing on a few of my cents to the artist. Lower prices = lower margins = no room for the recording industry.
iTunes and Napster already offer independent labels the ability to directly sell their music, but artists are still forced to go through an intermediary service (CDBaby.com being a popular one), pay for their own production in a studio and have few options to promote or set the price for their tracks.
I think music services will begin to adopt a more direct, middleman free, approach to listing independent artists and perhaps directly consolidate some of the production and promotional services under one roof. This would allow an artist to be truly label free, if they so choose, and why wouldn't an artist choose?
Independent labels will still exist, but these labels will be able to compete much more fairly in an open market, instead of being forced to scrabble over the RIAA's leavings. Combined with the cheap and effective promotional power of the internet, this will hopefully lead to many smaller ethical labels that put more of my dollars into artists' pockets.
Originally posted on my brand spankin' new blog. Link is in my profile.