When I'm not furiously writing PHP here at SEOmoz, I built and now maintain the online music store TuneShout.com.  It's a pretty small operation right now, but basically we let artists sign up themselves to give away and/or sell their music on our site, while we collect a small royalty.  The site also has a large social component where artists' and users' actions on the site - reviewing, commenting, downloading, etc - helps to determine who makes it on our popular artist section, affectionately called "The Stage."

I've been blogging pretty regularly on TuneShout, mostly in the realm of how the internet is changing music sales and how people discover music.  If the recent news is any indication, CD sales and the so-called "old model" of music marketing, sales, & distribution is on its way out.  Nobody is going to be buying CDs any more, and the record companies don't seem to notice.  They've been fighting tooth and nail with lawsuits and legislation to hold on to the old revenue model.  Fortunately, its days are numbered.

Music must no longer be valued as a limited commodity.  When a record company makes 100,000 CDs, that's all there is.  But with the internet, music can be spread and shared an infinite amount of times.  It can be as simple as a friend emailing a friend a song, and as large as a piracy group leaking the new Metallica album to the internet a whole month before its scheduled release date.  The possibilities are unlimited.  And when you have an unlimited commodity, you can't really expect to charge much - if anything - for it.  Thanks to the internet and technology, people are always going to find a way to get their music for next to nothing.  So any revenue model where you make money off the sale of music is going to be dead very soon.

One of the main music "futurists" in the world is Gerd Leonhard.  He equates this death of the old business model and the rise of the new music economy to the rise in the bottled water market.  Why would anyone pay for bottled water when they can get it for free just about anywhere?  Because with bottled water there is guaranteed quality, added value (you get a bottle), a brand experience, and, as Gerd Points out, "it's special."  But it does prove one thing: consumers are willing to pay for added value on a free commodity.  Thus, in the music industry you should make the music itself cost next to nothing.  But also offer enhanced extras like concert recordings, deals on concert tickets, interviews, etc, for additional fees.  People will pay for it, like bottled water, if the baseline product is freely available.

As Gerd says:

[...] it is the concept of music that is as 'freely' (but NOT for free!) available and as omni-present as water or electricity, with everyone paying and everyone using, and with ubiquitous coverage, accessed via a large number of entry-points (Net, Cable, Wireless, Satellite...), using many different devices, and in many different shapes and incarnations. It is a system where all users, and / or their service providers (!), happily make small, 'feels-like free' payments to be able to access a large pool of music, without restraints, all-you-can-eat, anytime, anywhere. A system where the works of any creator and rights holder can easily be found and discovered, used and compensated for, simply by virtue of BEING IN THE POOL, and in the essence, proportionally to the actual use of their works. Sounds an awful lot like  Cable TV or Radio... right?

With scarcity of music (limited CD production), only about 25% of potential consumers make purchases.  But with music as the baseline freely available commodity, 95% of potential consumers will make a purchase.  And the sum of those 95%, while individual purchases may be at a lower dollar amount, are worth a lot more than the purchases of the 25%.  Gone are the monolithic hits and artists who sell 10 million+ albums.  Internet consumers are looking for choice and ease of use.  They're looking to find that one niche area of media where they can call home.  It's the classic long tail phenomenon.

With online music, as well as every other online media, the real value and money making opportunity lies not in the sale of the media itself, but rather access to the media.  95% of the people will pay for that.  You can then upsell those consumers on varying degrees of added value.  And anyone who can sell consumers access and then help them sort through and discover their next favorite musician or film star will be well ahead of the new media revolution.