The Record Labels' Digital Future

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In November, Engadget founder Peter Rojas launched an online record label/music blog called RCRD LBL, along with label Downtown Records. Signed bands make songs available for free download or streaming on the site and are paid with a portion of ad revenues. "I am not interested in thinking of music as something that is bought or sold," said Rojas during a music panel at this year's South By Southwest Digital Festival.

Slide, a photo- and video-sharing service with more than 144 million users worldwide who use the site each month via Facebook, MySpace (NWS), and other social networks, launched an ad-supported music service two years ago. As labels have become more interested, the service has expanded from allowing users to incorporate licensed music into photo slide shows, with ads, to debuting artists' videos and songs on its "funwall" social networking application. "After the first six months, the labels started getting it and paying attention," says Tony Pham, who manages Slide's community and artist relations.

The Subscription Model

Another model that the major labels are pursuing is all-you-can-eat subscriptions. The model is attractive because it provides a steady, predictable revenue stream. Although it has yet to take off, Rhapsody, the leading subscription site, has been pushing the model for years. "The labels have always been very positive on subscriptions," says Neil Smith, Rhapsody's vice-president for marketing. "The lightbulb has not completely gone on [with consumers] but we are working on it."

The record labels are experimenting online in part because they have to. CD sales declined more than 18% in 2007 from the prior year, according to data from Nielsen SoundScan. Even with sales of digital albums and the like online, overall album sales fell nearly 10% last year. The record labels recognize that they need new revenue streams to succeed. "We are going to have very well developed business models on ad-sponsored discovery, pay-as-you go, à la carte purchases, and paying for access to a catalog of music," says Warner's Nash.

There's a future beyond Web 2.0, too. Nash thinks it may be on wireless phones: "3.0 may be that everything gets mobilized."

Holahan is a writer for BusinessWeek.com in New York .