Ever since peer-2-peer networks hit the scene, music industry executives have been scrambling for new ways to monetize on their gigantic catalogs of music. "People just don’t need to buy music anymore" says an avid music listener. I then asked myself what’s the point? You can already listen to any song you like without even downloading it.

The fate of the four major record labels (Universal Music Group, Sony BMG, Warner Music, and EMI) seems dismal in the wake of falling revenues primarily due to illegal downloading. In the past it was common for people to shell out up to $20 per week on their music and now the record labels are lucky to collect a monthly fee of $5 per person for access to their entire library. The $5 per month figure comes from the new “all you can eat” music site, MOG. MOG has agreements with all four major record labels to provide over 7 million songs for a $5 per month subscription fee. The catch is that you can’t download the songs. The music stays on MOG's servers (the cloud) and is only available for users to stream. Don’t get me wrong - they give you the option to buy the music too, it’s just not included in the subscription price. MOG is a beautifully designed site with a very easy-to-use music player - but will it be enough? The site tracks and remembers what users like and streams music and artist info accordingly, much like the site Pandora which has been extraordinarily successful in the online radio business and is expecting revenues of up to $100M in 2010.

A similar site called Spotify is rushing to take market share away from MOG. The thing about Spotify is that you have access to their entire library for FREE. Spotify also offers a subscription similar to MOG with higher quality music streaming, no ads, and extra-added features. Despite raising over $70M, Spotify is having a lot of trouble convincing the music industry that its model will be equitable. Spotify is currently only available in Finland, France, Norway, Spain, Sweden, and the UK. The latest battle is about whether Spotify's system is properly compensating artists. Recent gossip about Lady Gaga only earning $167 for one million song plays (via Spotify) is not likely to help the young start-up gain industry support. If this is the direction compensation is going for artists then Spotify might as well give the artists food stamps.

Spotify's ad-supported revenue-model and its unfair system of paying out artist royalties are the main factors keeping it from its US release. Edgar Bronfman Jr, Warner Music’s chairman, said that the company would “not license any more free music services” because they generated insufficient revenues. It seems that the major record labels have a clear prerogative to ensure that MOG is a success as their $5 per month subscription service is more attractive than settling for a business model that is dependent on ad revenue. The major labels view the ad model as an exploitation of their catalogs and if the music industry lets Spotify launch in the US, MOG will be unable to compete. Think about it - if users can access the same catalog that MOG offers without being charged, the record industry will have lost another partnership and to an unjust ad-dependent rival. The record industry knows this and the only way that Spotify will be allowed to launch in the US is if they negotiate an agreement which forces Spotify to charge users a nominal subscription so that it does not threaten MOG's success.

My thoughts: Music is inevitably going to be legally offered for free. The subscription model is just the tip of the iceberg as far as the monetization of recorded music and so many great companies are popping up everyday that are offering more and more music for free. Recorded music is unfortunately not a dependable revenue source anymore - it’s becoming more of a marketing expense. The industry may be able to sucker a small percentage of people to pay a subscription fee but even this naive market segment will wake up as people become savvier at consuming entertainment for free. This is a broken model and record labels need to begin to realize this. They will never be as profitable as they once were. Their revenue streams have narrowed and unless they embrace open-media they will die a slow death. Radical changes need to take place. As more online businesses seek to offer music on their sites record companies will morph into licensing firms and they will need to come up with fair, open-market statutory licensing rates instead of charging companies gargantuan up-front fees and forcing unfair revenue-share agreements. This would spark an incredible amount of innovation which, in turn, would open up a whole new world of revenue possibilities. The record companies are making the barriers to entry too high and it stunts the creativity and entrepreneurship that is needed to turn this industry around.

Live music is the future. Artists will still need to record their music but the business of selling recorded music will never be as strong a revenue source as it once was. The days when artists would live in studios and decide never to tour again are over. This will breed a new type of entertainer. Showmanship is becoming a more valuable commodity in this fast-changing industry. The music labels will not be able to salvage their dwindling $10B per year business model forever and they must spend their time and money wisely if they wish to come out of this musical revolution alive.