Welcome to phase two of the online music revolution, where Napster's legit song downloads cost 99 cents, and (some) portable MP3 players work with both secure and open files. After all of the suing, the convening, and the bellyaching, it seemed like we'd never get here. However, "here" is a very different place than where I thought we'd be by now.

According to Internet optimists such as myself, online distribution was supposed to enable a closer connection between artists and fans, allow fans to do more with their music, and increase music sales by lowering prices to reflect the increased efficiency of Internet distribution. Not to downplay the significant fact that there are now five or so authorized online distributors (with iTunes Music Store clearly in the lead), but we, the fans, are still being underserved in all three areas.

I recently attended the sort of panel discussion that is usually held at music conferences and the like (this time, courtesy of the Commonwealth Club of California), featuring the predictable array of music and technology types: David Sutphen, vice president of government relations and legislative council for the RIAA; Elizabeth Brooks, senior VP of business development at BuyMusic and former Napster VP of marketing; Glenn Otis Brown, professor of law at Stanford University; Joe Kraus, founder of DigitalConsumer.org and Excite.com; Miguel Depedro (a.k.a. Kid606), musician and founder of Tigerbeat6 Records; and the moderator, Chris Anderson, editor in chief of Wired magazine.

Here we go again
This panel, like many before it, turned into a battle between the RIAA guy and everyone else. The other panelists weren't united against the RIAA on a single issue, but at one point or another, each stood in direct opposition to him. That's because--as much as the labels have been dragged kicking and screaming into authorizing a few online distribution services--they still lack the gumption to offer their own compelling vision for the future of digital music. It's hard to swing to the next vine when you won't let go of the last.

Even iTunes Music Store, the most successful of the new online services, loses money with each download, according to Apple. Out of each 99-cent sale, the labels get about 65 cents, and the credit card companies get about 4 cents, leaving Apple with about 30 cents per song sold. Evidently, this doesn't cover Apple's bandwidth, encoding, development, and operation costs, while artists likely net only a few pennies per song. This system is big step forward, as there used to be no legal way to purchase music downloads from a catalog of this size and quality. But you'd have to be a fool to call it an optimal price structure for online music distribution. Since they are responsible for the pricing, only the labels have the power to make iTunes Music Store and similar services work better for everyone.

Higher volumes of wider catalogs at lower prices, now!
Record companies have largely responded to the current CD sales slump by shrinking their artist rosters and doubling down on the core selection of superstars that make the most money. In addition, due to licensing complexities, label laziness, and (in some cases) the artists' own preferences, lots of stuff that should be legitimately available digitally cannot be (although it can usually be downloaded from Kazaa or Soulseek).

Panelist Depedro made an excellent point: Selection is one of the main allures of file-sharing networks such as Kazaa, which dwarf "legitimate" online and offline record stores in terms of variety. Consumers appreciate a wider choice of music and will seek it out (although no matter where they "get" their music, songs on the Billboard 100 tend to reign supreme). Shouldn't the labels use the digital format to expand--rather than contract--the range of commercially available music?

An audience member wondered why the labels didn't try lowering the price of music downloads, in anticipation of the higher sales volume that could increase or maintain profit levels. The RIAA rep said that UMG's (Universal Music Group's) experiment with lower CD prices was an example of taking this approach--but he was dodging the heart of question, which asked why digital downloads weren't cheaper. Downloads cost much less to manufacture and distribute than CDs, and the labels restrict how consumers can use them to a greater degree than they do with CDs, so shouldn't they be significantly cheaper? The labels still don't understand that increased access to music could produce healthier sales figures.

Can deaf dogs hear new tricks?
When the talk was over, I approached the panelists and told the RIAA guy that I had an answer to a question he had posed early in the discussion, asking anyone in the audience to name one industry that had succeeded in competing with a free version of its product. I trotted out the old example of bottled water, noting that it continues to sell at record rates, despite the fact that tap water is essentially free.

Sutphen told me that tap water wasn't exactly free. After I countered that Kazaa and other file-sharing services are also not exactly free (the user has to pay for the electricity, the computer, and the Internet connection), he appeared to lose interest in the discussion and launched into an awkward diatribe about how Kazaa provides access to child pornography and should be shut down. Talk about a change in direction--but I shouldn't have been surprised. This attitude is typical of an industry that prefers to function inside a bubble. That bubble burst a few years ago, and the music and tech industries have become inextricably linked.

Let's hope that eventually the RIAA will notice that and start listening to other panelists and other viewpoints. Maybe then they'd consider licensing content in such a way that legitimate online music services such as Apple iTunes Music Store can turn a profit--and potentially save the music industry from itself.