With CD sales dismal and Internet music sites such as iTunes soaring in popularity, major record labels have been forced to rethink their traditional and once-profitable business plans as they scramble to hold on to a diminishing consumer base and straying A-list artists, all of whom are increasingly turning to new technology for their music fix.
Take Rapper Jay-Z, for example, who is soon to become the third major artist to leave a well-known record company, in his case Def Jam Records, in return for a multimillion dollar deal with concert promoter Live Nation, according to The New York Times.
And before him it was superstars Madonna and U2 who penned deals with Live Nation, which is trying to profit where music label staples have not: They reach fans' pocketbooks not by luring them into outdated record stores but by selling band merchandise, concert tickets and fan club memberships.
"The sweet spot that the record labels have inhabited for the last 50 years or so has dried up," said Aram Sinnreich, media professor at New York University. "Making records and distributing them has no business anymore."
Russ Crupnick, vice president and senior industry analyst of entertainment at NPD Group, which conducts market research on music industry sales, agreed and told ABCNEWS.com that the record companies are going to have to come up with a solution to their profit woes, and fast.
"[Record companies] have got to do more and more different things to make up for the loss CD revenue," Crupnick said. "A few years ago it was a really easy industry to understand -- you had radio and you sold CDs -- there was an order to the world."
"Now that order has broken down," he said.
What's a Record Company to Do?
With iTunes leading the pack over corporate giants Wal-Mart and Best Buy in music sales, according to NPD Group's research, record companies have already taken steps to correct the error of their ways -- broadening their scope and investing in projects that connect to online social networking sites such as MySpace.
Vivendi SA's Universal Music Group, Sony BMG Music Entertainment and Warner Music Group Corp. -- three of the largest recording studios -- have all signed on with News Corp's MySpace Music project, according to The Associated Press.
MySpace Music aims to turn musicians' pages into money-makers in ways similar to Live Nation's scheme: placing less importance on CD sales and more on revenue from concert tickets and band merchandise.
"The labels have to earn back trust from the bands," said Spin Magazine's Interactive Director Peter Gaston. "And they're finally making a pretty big move in this instance by getting involved digitally in a way that seems geared toward earning back some fans and having a quicker pathway to get to them."
When record companies first formed, Gaston said, producing an album and distributing it was hard for an artist to do independently -- something that has now become commonplace and has now further jeopardized record companies' role in the industry.
"Now making a record is inexpensive, and a band could do it on their own for very little money, and it's much easier for them to just sell their stuff online," Gaston said. "The record labels aren't needed for distribution anymore."
"Their primary functions have been undercut by the advancement of technology," he added.
"The labels could theoretically strike these all encompassing deals with their artists like Live Nation has, but it's the question of are the bands up for it?" Gaston said. "Is it not cool to be with a huge label?"
What Music Labels Have Going for Them: Connections
Digital music services such as iTunes and now MySpace Music may be challenging record company's traditional mechanisms, but it's still too early to call these labels obsolete, industry insiders say.
"Labels, at least for the foreseeable future, are still going to be the place to go when you want to develop talent," said NPD Group's Crupnick. "They still have the most experience and networks and the most capability to bring music to the public."
While Live Nation may be a great place to go for artists who want to promote a tour, their services won't do much good to an unknown artist.
"The reality is that it's very nice to talk about making your own record and putting it on MySpace, but it's going to be so, so rare to make money out of it," Crupnick said. "It's too early to see how this will all pan out."
One thing Crupnick is sure of, though, is that no matter what the record companies do to remain "cool" within the industry, best not to get too complicated.
"Because at the end of the day," he said, "99 percent of us just want a damn song."