Selling CDs at $12 a pop is quickly becoming an untenable business model. Digital downloads, while significant and growing rapidly, don't make up for the CD's decline. Things have gotten so bad in the music industry that people have begun to wonder whether selling recorded music will even be a viable business model a decade from now or whether music will become nothing more than a promotional item used to sell concert tickets, band T-shirts, and copies of Guitar Hero.

The music industry recognizes that the times, they are a-changing, but even those open to generous blanket licensing schemes aren't interested in just giving the stuff away gratis. A new report called "Let's Sell Recorded Music!" highlights the possibilities—and the pitfalls—of creating legal services that can compete with free while still bringing in the cash.

Blanket licensing to the rescue



The report arises from a series of meetings that MusicTank hosted last fall in the UK. ISPs, record labels, collecting societies, and others came together not to talk about P2P enforcement or copyright education, but about how they could create compelling legal alternatives. The consensus? It's all about subscriptions.

Subscription services have largely failed to take off, in large part due to DRM, which means that no plan works well on the most popular player on the planet, the iPod. Listening only to streaming music on one's computer is nice, but free services like Pandora and Last.fm have kept subscriber numbers low at the big subscription sites.

But the music industry industry seems to believe that a more open subscription model will be the norm in the future. The details of how this will work, who will bill the end-user, the sorts of restrictions that will be applied—all this remains to be worked out, but the idea of a flat fee payment for access to (nearly) all recorded music has won the conceptual war. Ad-supported streaming and paid single downloads will continue to exist, but neither model seems able to change the behavior of music lovers who have grown up using P2P to discover new tunes.

The most radical of such schemes would see some kind of monthly payment made in exchange for total access to music. Those who pay could legally use any ISP and any P2P network to share music legally, with the money being split up among artists based on the popularity of their music.

Such a system provides little incentive for ISPs to get involved in offering music services, and many of the ISPs would like to do so as a way of distinguishing their service from that of rivals. Such services would add a bill directly to each month's Internet access charge—potentially a much easier sell to consumers than signing up for an entirely new billing service—but would only allow access to music through that particular ISP, which would likely roll out some sort of service of its own to provide the songs.

In the US, Warner Music is exploring a new system called Choruss that refines the idea a bit further, focusing first only on the university market.

Problems remain

These sorts of license schemes might save the major labels, but they aren't without problems of their own. For one thing, how will downloaders know what's covered by the license? This is especially true for a broad collective license that allows downloads from any service through any ISP. Unless the government makes the scheme mandatory, there will undoubtably be some small labels that abstain; sharing their music would still be illegal.

And what about the other content on P2P networks, like concert bootlegs, mashups, unreleased albums, studio outtakes, etc. Even with every label in the world on board, this material would be a licensing nightmare. Consumers might be told they can download "whatever they want," but P2P networks will still be full of material that the labels don't have the rights to license. And how does the collection authority divide up the cash to artists when a hot new mashup melds bits of twenty different tracks?

P2P networks may carry everything, but titles can be confusing, encoding can be bad, bit rate can be low. Artists and labels alike may cringe at encouraging users to download their work from sites that also offer cracked video games and porn, but an ISP-controlled system would be unlikely to carry the full range of material found on file-sharing sites.

Finally, there's the data problem; money can't be distributed fairly to artists without good metrics about who is listening to what. This can be partially solved by ISP gear that analyzes P2P transfers taking place across the network, but downloading music turns out to be a very bad proxy for knowing how often music is actually played. Most songs are downloaded as a sample, played once or twice, then deleted or rarely heard again. Distributing the cash fairly would require knowing how much people actually listen to specific tracks, which means software embedded in players or on users' machines. And how many consumers are going to be excited about this?

Not quite dead

Despite the problems facing the business, the MusicTank report remains bullish on extracting revenue directly from recorded music in the future.

"Indeed, the fact that despite all this, so many people do pay for downloads is heartening and suggests that by experimenting with different types of services and pricing structures and making more content available in a wider range of formats and quality—as iTunes has begun to do—the recordings business can guarantee itself a healthy future," it says.

A consultancy called Detica also offers hope for bringing music lovers out of the cold and into the warmth of legality. The company believes in a "10:80:10: principle in which "10 percent of all consumers will always opt for the legal, licensed option, and 10 percent will always prefer the unlicensed alternative. That leaves the vast majority up for grabs—if they can just be presented with a compelling alternative."

As for the artists themselves, more are indicating their own desire to stop suing fans. The issue is complicated by the fact that artists make revenue from touring and merchandise even when the music is free, but music labels often get no percentage of this money (except under the new "360" deals that many artists are being asked to sign now), but the artists are at last starting to organize.

Yesterday, the Featured Artists Coalition held its first meeting in London, and it demanded that artists have more control over their own works and how they are used. The group's leaders also asked labels to stop suing the fans, though they do want more money from companies that use music, such as YouTube and MySpace.