AUSTIN, Texas –
The White Headphones Phenomenon

With one walk through campus, the phenomenon is clear – those little, white ear buds indicate that a growing number of students don’t leave home without their customized, digital libraries.

“Consumers love music more than ever,” said Hollywood Records vice president Abbey Konowitch, referring to the 300 million mark recently surpassed at Apple Computer’s online music store.

For the first time since Napster’s 1999 introduction, the International Federation of the Phonographic Industry released promising statistics about the growth of the digital music sales. this year. In 2004, legal websites quadrupled and paid-for downloads went up more than tenfold, with Apple Computer responsible for 90 percent of this market. But while Apple is the undisputed leader of both mp3 player and download sales, it is far from claiming a monopoly. IFPI reports that it took Apple nearly three years to hit the same number of downloads that peer-to-peer networks experience daily, and nearly 99 percent of all music files are still illegally obtained.

“Consumers have decided that music is free on the Internet, and we have to figure out a way to get them to pay for it,” Columbia Records president Steve Greenberg said.

Despite the fact that more than 100 million illegal downloads occured throughout the course of his South By Southwest interview, Shawn Fanning, creator of the original Napster software, said that lack of security and reliable information has made consumers unhappy with the P2P experience. On the other hand, Apple’s ease and consistency has made users “not feel like a sucker for paying for digital music.” Now 24 years old, Fanning says that emerging business models will ultimately shape the market.

“Apple is very far ahead, but the opportunity is still out there,” he said. His current project, Snocap, uses acoustic fingerprinting to precisely identify music files. His goal is to develop a comprehensive, centralized database of licensed content that will give listeners accurate information on all the content that’s available for their favorite artists.

Fanning described how the industry’s lack of cooperation and legal wrangling have stifled digital innovation and the chaos of releasing free content overshadowed other impacts of the digital format.

Jeffrey Brabec of the Chrysalis Music Group described how technology has gradually transitioned listeners from albums to singles, first disintegrating the linear format with CD players capable of skipping tracks, and later using the digital shuffle function to further dissolve the concept of a cohesive album. Brabec said the industry has been slow to respond to this transition in that it is still “album-oriented.”

Being branded

After several years out of the public spotlight, neo-soul diva Erykah Badu addressed SxSW with plans to change the industry’s interest in business over art. “I’m sick of seeing legendary artists die broke,” she said, announcing the launch of Control Freaq Records – a label “for the artist.”

Badu’s idea is nothing new. She is part of a growing population of artists who have rejected pressure from major record labels to use gimmicks and market themselves. Reflecting on her roots as “a young woman who just wanted to sing” Badu described a frenzied period throughout the late ’90s when she went multi-platinum, won four Grammys and learned tough business lesson. After taking time off to raise her daughter and help develop artistic communities in South Dallas ghettos, Badu spoke passionately about her commitment to share wisdom with other “kindred” artists.

Fellow keynote speaker Elvis Costello, who has spent 35 years at the center of mainstream music, has been a frequent label-hopper. In his SxSW interview, he called Warner Bros. Records “the best record label in the world” before it was “ruined” by corporate mergers in the early ’90s.

“(Currently) there are people who are passionate about the music (at labels). But they have to take their place in the queue. Corporate bosses do most of the damage to creative impulses,” he said, adding that these mergers caused many committed individuals to flee or lose their jobs.

For Jacob Slichter and his band, Semisonic, the choice was to either go with an Indie or “get on the radio and have a hit records.” In his new book, “So You Want to Be a Rock and Roll Star,” Slichter describes the darker side of major label deals with the pressure to “buy into your own hype.” Despite a platinum album and an arena tour, Semisonic ended up $2 million away from breaking even when a record executive he calls “Dr. Evil” pulled the plug, deciding that the band was “too old.”

There are currently several thousand record labels worldwide, six of which own 85 percent of the market and compose the Recording Industry Association of America, the group that has aggressively sued file sharers to combat the industry’s five-year sales slump. “It’s devastating how many people we’ve had to cut to keep up with Wall Street,” said David Ring, an executive at Universal Music, the world’s largest record label.

Costello described how artists struggle on independent labels, which are mostly “just trying to get to the level of the majors.” Indie lables not working towards major label status have begun developing coalitions that allow each to maintain its own identity and collectively gain some clout so that they can negotiate deals like the ones major labels have with emerging media. However label heads admitted that they could never match the undisclosed arrangement between Sony and iTunes.

Despite this disadvantage, Indie labels have been more receptive to the digital market than the majors, seeing publicity benefits even in the case of copyright infringement. A study by PEW and The Future of Music Coalition also found that individual artists vary in their opinions of the long-term benefits of digital downloading, with technologies such as Podcasting possibly able to cut labels out of the process by allowing anyone to deliver music and audio files directly to users.

While Indie labels make up a small percentage of the retail market, collectively they represent more of the online market than any major label. Michael Caplan, president of the Indie label Or Music, said that while major labels used to be known for a certain style of music and caliber of artist, now, only smaller labels can identify with a niche audience. He maintains that this approach supports long-term attachments with artists over hit singles.

SxSW Indie panelists closed by debating the digital market’s impact on Indie retailers. Because consumers no longer have to leave their homes to sample music in the headphones at a record store, “There has to be a place for people to go to discover exciting things,” Greenberg said. In this respect, Indie retailers have the advantage of “capturing a spirit” and offering more extensive libraries than mass merchants such as Target and Wal-Mart, which only carry about 4000 hit titles. Record store chains like Virgin and Tower Records have been caught somewhere in between – losing the price war with mass merchants and without “the depth of selection to cater to the music freaks.”

Turning dollars into sense

While digital piracy has been liked to the industry’s five-year sales slump, “Music consumption is way up – more music, more people, more ways,” Ring said, encouraging the industry to focus on exploring digital subscription services and alternative revenue streams such as satellite and Internet radio. Cell phone ring tones, the “fashion statement” of the industry, also represent a growing revenue source, as consumers are currently more likely to pay $2.99 for a ring tone than 99 cents for an entire song. Last year both ring tones and digital downloads proved to be an exceptionally hit-driven business, with a majority of Apple’s downloads coming from two albums and a majority of ring tone revenue coming from two songs. But while these mediums currently offer little payoff to the artist, (Outkast received $8,500 for last year’s No. 1 single, “Hey Ya”), Ring said that interested parties are developing important precedents for how much certain music formats are worth. “These little deals are bridging the new and old world,” he said.

Ring also named collaborations with video games, films and commercials as exciting trends, describing the infusion of music into various mediums as part of “a lifestyle, conceptual change. Virtually everything you buy has music in it,” he said. “It’s a pleasure to be a fan because there are so many different ways to consume.”

While the digital market is still being shaped by market services and awaits an imporant Supreme Court case scheduled to begin Tuesday, digital music listeners have grown exponentially in a mere five years. And according to label executives, 2004’s top-selling CD was a blank.