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Douglas Merrill, the new president of EMI's digital unit

(Credit: Google)

Douglas Merrill is everything one would expect from a former Google exec.

The new chief of EMI's digital unit is a Googler down to his soul, which means he's extremely bright, a techie, and dead set against suing fans for file sharing.

"I'm passionate about data," Merrill said during a phone interview Wednesday with CNET News.com. "For example, there's a set of data that shows that file sharing is actually good for artists. Not bad for artists. So maybe we shouldn't be stopping it all the time. I don't know...I am generally speaking (against suing fans). Obviously, there is piracy that is quite destructive but again I think the data shows that in some cases file sharing might be okay. What we need to do is understand when is it good, when it is not good...Suing fans doesn't feel like a winning strategy."

I just got off the phone with Merrill, Google's former Chief Information Officer who was named president of music label EMI's digital group Wednesday. He impresses me as a good-natured guy who is going to rock the boat at the label...maybe the entire industry.

This is good news for EMI, the smallest of the four top major labels. The hiring of Merrill, who has no background in music sales, represents an acknowledgment of how important digital distribution and technology is to the future of music.

What are his credentials to run the digital arm of a major record company? He doesn't have much outside of sharing a few song files back in his youth (gasp!) and a deep love of music. He said very early in the interview that he doesn't have all the answers yet on how to cure the music industry's woes. ("I don't know where my desk is," he added.)

But he's all about applying what he learned from Google about the Internet, digital distribution, and innovation. Expect to see experiments with varying business and distribution models from now on at EMI.

"You must do experiments and follow the data," Merrill said. "That's often hard because we all have intuitions. The problem is our intuitions aren't always right and Google has shown that over and over again. We've had internal discussions about 'Oh I believe the site should work this way.' We go into the experiment and we're wrong. And you have to be willing to say 'I thought it was X, I was wrong. It was really Y. That has to be OK. You have to be OK failing because most of the things we try won't work. That's why it's called an experiment. Those things are very deep in my soul."

More specifically, Merrill said he would see whether a Google ad model will work for music. But he's willing to try music subscriptions and even an ISP fee. Certainly, what came across about what strategies Merrill intends to use is that he's not married to any one idea.

"I think there is going to be a lot of different models," Merrill said. "Those are two (subscriptions and ISP fees) you can imagine. I'm not sure that either one of those will be the most dominant model. But they are both interesting. We should try them and see what the data says. Other options will be things like you can imagine supporting music through relevant targeted ads, the Google model. There is a dozen of other things...we should try them all. We should see what the data says and whatever it says, we should follow the data, and follow our users and let them help guide us. We should engage in a broad conversation about art."

He says he's leaving Google to follow one of his passions.

"I'm not running away from Google," Merrill said. "I'm running towards an opportunity to maybe help change the world."

Merrill is due to report to work at the old Capitol Records building in Los Angeles on April 28. That's the place in Hollywood designed to look like stack of albums. It's also the former workplace of Nat King Cole, Frank Sinatra, The Beach Boys and Bonnie Raitt.

Merrill and Guy Hands, CEO of EMI's parent company Terra Firma, were introduced not long ago by a mutual friend. Merrill said Hands began talking to him about moving over "very recently."

What did Eric Schmidt think of the move? The Google CEO told him, "I think it makes perfect sense for you," Merrill quoted Schmidt saying. "Eric has been a huge influence on me personally as well as professionally."

To be sure, Merrill is up against an enormous task. He's moving from one of the biggest success stories on the Web to an industry racked by plummeting revenue, layoffs, and customer dissatisfaction. It's also an industry facing labor issues.

Merrill is a fan of Nine Inch Nails so he is aware that the band's leader is the embodiment of artist dissatisfaction with music labels. Trent Reznor, who walked away from Universal Music Group last year, has helped spearhead experiments with self-distribution, mainly on the Web. Merrill doesn't appear worried about this.

"I think it's important to figure out where can record labels add value," Merrill said. "I don't know the answer. I think Nine Inch Nails' experiments have been really interesting and enlightening. We need to step back and say what is the process of artist creation and helping fans find what artists create.

"Given that as a system we need to understand how record labels fit in there," Merrill continued, "I think the Nine Inch Nails' release of Ghosts experiment was fascinating. What a great problem to have: people are trying different things. If everyone tries the same thing you'll never learn anything new. Instead we're in a situation where people are trying things. How cool is that? Some are going to work. Some aren't going to work. But we need to try them."

Nine Inch Nails' Ghosts I-IV has so far earned $1.6 million.

(Credit: NIN.com)

Radiohead's groundbreaking promotion for the album In Rainbows was "insincere" and smacked of a "bait and switch," according to Trent Reznor, leader of the group Nine Inch Nails.

Reznor made the comments during an interview with the Australia Broadcasting Corporation earlier this week.

"I think the way [Radiohead] parlayed it into a marketing gimmick has certainly been shrewd," Reznor said. "But if you look at what they did, it was very much a bait and switch, to get you to pay for a MySpace quality stream as a way to promote a very traditional record sale."

The In Rainbows promotion was distributed online, without backing from a major record company and allowed fans to pay whatever they thought the digital album was worth. Radiohead was widely praised for breaking from the label system.

But Radiohead's manager has also said that the band likely wouldn't try a similar promotion again. The British super group ended the offer and has begun selling the record through traditional sales channels.

"I don't see that as a big revolution [that] they're kind of getting credit for," Reznor told the Australia Broadcasting Corporation on Monday. "There's nothing wrong with that, but I don't see that as a big revolution [that] they're kind of getting credit for...to me that feels insincere. It relies upon the fact that it was quote-unquote 'first,' and it takes the headlines with it."

Reznor has a point. There's no arguing that Radiohead's music giveaway pioneered new territory, but when it comes to actually plowing ahead with a determined search for a new way to distribute music, Radiohead falls short.

The truth is that Reznor, who at times is volatile--and is always outspoken--is doing more for music fans and fellow musicians than anybody.

Earlier this month, Nine Inch Nails began distributing a digital album, Ghosts I-IV a 36-track instrumental, in a range of ways. The offer included free samples, a $5 digital version and premium packages that came with downloads, discs, and varying merchandise depending on the money one was willing to pay. In a little over a week, Reznor told The Chicago Tribune that he generated 781,917 transactions and earned $1.6 million.

Radiohead may have earned more and likely gathered information valuable to other artists who might be considering self-distribution. We don't know because, unlike Reznor, the band isn't sharing sales numbers.

What is so sad about these promotions by Nine Inch Nails and Radiohead is that, other than Reznor, few artists are tinkering with the Internet or looking for an alternative to the traditional business model in the music industry.

We're talking about rock 'n' roll here. It was once rumored to be the domain of rebels and rogues. How come more performers aren't bucking the status quo?

Trent Reznor

(Credit: Rob Sheridan)

Trent Reznor, the man behind the rock group Nine Inch Nails, continued his foray into self-distribution by releasing a 36-track instrumental album over the Internet.

The album, Ghosts I-IV, went on sale Sunday on NIN.com, the band's Web site, and was available in a varying range of price packages.

Reznor is giving away the first nine songs of the album for free. The entire album in a digital version is available for $5. Nine Inch Nails' fans can order separate disc-sets of the album (with varying bonus materials and merchandise) from $10 to $300.

With the album release, Nine Inch Nails is the latest to offer its own version of the online promotion made famous by British supergroup Radiohead. In October, Radiohead released In Rainbows over the Internet and stirred excitement throughout the music industry by allowing fans to pay whatever price they chose for the music.

Reznor, who split with his record label last year, applauded Radiohead's move. In October, shortly after In Rainbows came out, he helped little-known music artist Saul Williams release an online-only album in a similar way.

In keeping with Reznor's views that performers should embrace BitTorrent and other file-sharing technologies, Nine Inch Nails has uploaded some of its new songs on BitTorrent sites.

"Now that we're no longer constrained by a record label," the band said in a statement, "we've decided to personally upload Ghosts I, the first of the four volumes, to various torrent sites because we believe BitTorrent is a revolutionary digital distribution method."

Rocker Trent Reznor is angry with CNET News.com.

On Monday afternoon, the leader of the band Nine Inch Nails posted a blog at NIN.com and accused me of misquoting him in a question-and-answer interview titled: "Trent Reznor: Why won't people pay $5." He suggests in his post that he did not make statements supporting a music tax on ISPs that appeared in the January 10 article. He also implies that CNET had some kind of hidden agenda when he writes in his post that the story was "written before I was involved."

It's not uncommon for celebrities and politicians to accuse the press of misquoting them. Sometimes it's true. Not here.

Below is the recording of Reznor's comments in question.

Reznor gave me permission to tape the interview and the words in the story are as he said them. I've also included what was said immediately prior and following the comments about the ISP tax so you can hear the context in which he made them.

You'll notice that I didn't quote everything he said; that's common practice. (We spoke for an hour and the final transcription of the interview was more than 4,000 words long. Normally our stories are between 1,000 and 1,200 words. We wanted to give him as much room as possible to speak and made an exception by publishing his interview at more than 1,800 words, already longer than usual.)

Reznor is a fascinating interview. He is frank and always says something controversial. He certainly was in our interview. Click the button below and listen for yourself.

Musicians aren't merchants.

We certainly learned that through Radiohead and Trent Reznor's separate experiments with choose-your-price album promotions.

Trent Reznor of Nine Inch Nails

(Credit: Rob Sheridan)

In October, Reznor, the leader of the band Nine Inch Nails, and Radiohead attempted to promote and distribute albums online without the help of a major record label. Both offered fans the opportunity to obtain the music for free. Both saw some success.

But they also illustrated that the music business is probably better left in the hands of businessmen. Musicians are not the new labels. Artists need someone to provide financial support and business acumen. If we end up ridding the world of labels, we'll only have to re-create them--in some other, probably more nimble form.

Last week, I interviewed Reznor about the online promotion of rapper Saul William's album The Inevitable Rise and Liberation of NiggyTardust. In that interview, Reznor said he was disappointed that only 18 percent of the more than 150,000 people who downloaded the album paid for it. He and Williams offered two options: pay nothing or obtain a higher-quality audio version for $5.

By backing Williams with his money, name, and know-how, Reznor essentially thrust himself into the role of a music label. That is, a music label with a lot to learn. The first lesson was that you don't always back a winner. A music company's fortunes can often rest on its ability to discover superstars. Profits generated by a few marquee acts have always kept the companies going while all the other performers break even or lose money.

EMI said this week that only 5 percent of its acts are profitable. This kind of prospecting requires a huge investment.

Reznor said he didn't get involved with Williams to profit, but acknowledged that he spent too much making the album and said he hasn't yet recouped his money. A record company can afford to make bad bets once in a while, said Chris Castle, a music industry insider who has worked as a vice president for both Sony Music and A&M Records. Musicians, even successful ones like Reznor, probably can't.

... Read more

UPDATE (1-22-08) at 2:25 p.m.: More than a week after this story was published, Trent Reznor accused CNET News.com of misquoting him about the issue of a music tax on ISPs. We have posted an audio excerpt of the Reznor interview here. For the sake of full disclosure, we have also updated this story to include the text of what he said following his remarks about the ISP tax.

Very early in a discussion with Trent Reznor, the front man for the band Nine Inch Nails, it's obvious how highly he prizes his collaboration with musician Saul Williams on the album The Inevitable Rise and Liberation of NiggyTardust.

Reznor produced and helped bankroll the album, which debuted November 1. All the more reason why he was stunned when fewer than one in five people who downloaded the music were willing to pony up $5, roughly the cost of a McDonald's Quarter Pounder.

Saul Williams and Trent Reznor

(Credit: Atticus Ross)

Williams and Reznor were trying to follow the lead of Radiohead by distributing music online without the backing of a label. Like the British supergroup, Williams made the album available for free in one version but he also offered the option of buying a higher-quality digital download for $5. The promotions were groundbreaking and plenty of people predicted that a profitable outcome would convince many musicians to drop their labels and use the Internet to distribute their own artistic creations.

And then Reznor ended the hoopla last week when he reported on his blog that 154,449 people had downloaded NiggyTardust and 28,322 of them paid the $5 as of January 2. In the blog, Reznor suggested that he was "disheartened" by the results.

Now, in his first interview since releasing the sales data, Reznor on Wednesday talked about his rethinking of music in the digital age. (To see an interview with Williams, published Friday, click here: "Unlike Trent Reznor, Saul Williams isn't disheartened.")

Q: Trent, lots of fans were shocked and saddened by how disappointed you sounded with the sales results. Many piped up to tell you that the numbers may be misleading. Were the numbers that bad?
Reznor: I'm not disappointed with the numbers with Saul at all. I think, particularly looking at what he's done historically and in the climate of today's music scene, that's something to be proud of.

What disappointed me is that I had thought--and this is just based on how I experience music--given the opportunity (his voice trails off). Why do I end up stealing music? Usually because I can't get it easily somewhere else or the version I can get is an inferior one with DRM, perhaps, or I have to drive across town to get it to then put it on my computer or it's already out on the Internet and I can't pay for it yet.

If I think of it a month later walking through Amoeba (record store), hmm...do I want to just buy a piece of plastic and give most of the money to the record labels, who have to be thieves because my experience with them has always been that? And you have a lot of reasons why you didn't do it. So I thought if you take all those away and here's the record in as great a quality as you could ever want, it's available now and it's offered for an insulting low price, which I consider $5 to be, I thought that it would appeal to more people than it did. That's where my sense of disappointment is in general, that the idea was wrong in my head and for once I've given people too much credit.

Saul and I went at this thing with the right intentions. We wanted to put out the music that we believe in. We want to do it as unencumbered and as un-revenue-ad-generated and un-corporate-affiliated as possible. We wanted it without a string attached, without the hassle, without the bait and switch, or the "Now you can buy the s**** version if you buy..." No, no, we said: "Here it is. At the same time, it'd be nice if we can cover the costs and perhaps make a living doing it."

I'm not saying that this is a completely accurate test. Yes, there is a possibility that people downloaded it and the same people went back and downloaded it and paid for it and that can throw the numbers off. I get all that.

It kind of gets into the bigger picture that you've had to face as a musician over the last few years, which in my mind was a bitter pill to swallow, but it's pretty far down the hatch with me now: the way things are, I think music should be looked at as free. It basically is. The toothpaste is out of the tube and a whole generation of people is accustomed to music being that way. There's a perception that you don't pay for music when you hear it on the radio or MySpace.

There's a difficult transition in the mind of the musician and certainly in the mind of the record label. If that is the case, how does one adapt to that?

How are you going to adapt to that?
Reznor: For me, I choose the battles I can fight. In my mind, I think if there was an ISP tax of some sort, we can say to the consumer, "All music is now available and able to be downloaded and put in your car and put in your iPod and put up your a-- if you want, and it's $5 on your cable bill or ISP bill."

Someone asked me recently whether I've used 4-1-1 lately. I said 'Not really." They said do you know you're paying for that every month? 'I am?' Yeah, X-amount of your money goes to a service that you don't even use.'

Was everybody in the Williams camp happy that you disclosed the sales numbers?
Reznor: I didn't see the harm in not using this opportunity--and I'll name check Radiohead on this--they've done a pretty suave marketing plan on this new record.

I think generally it's been a pretty cool thing, but what they've done is used those (sales) numbers in a way that they can spin them anyway they want cause you don't know what they are. They can present themselves as the biggest band in the world. Someone leaks out a number of a million and someone says a number of visits and someone else says that must mean they made a million and someone else says the average price was $5 or $6 and that means they made $10 million.

I highly doubt that's what happened based on my own experience.

And I'm not saying that Radiohead and Saul Williams are in the same breath in terms of popularity by any means, but it felt to me like that, partially inspired by Radiohead, we tried this and here's the results we got and I assume there's a bunch of other bands that are intrigued by the idea that may want to follow down that path. I'm not saying it was a failure or a success. I think it was both. But it wasn't 90 percent of the people that showed up paid us what we asked for. Nor did I ever think it would be. I'm not sure what I did expect.

But I've found it entertaining reading different people's perspective on the Web, what they've thought of what I've said. There's been a wave of people that said, 'Oh, that's depressing. Only 18 percent chose to pay for it.' Another whole wave of people feel just the opposite. I don't really know. That was the point of it. I've heard people say, 'What was the point of that blog?' It was just to share information with you. It wasn't any kind of concrete analysis of anything.

I'm sure I didn't win any points with the aforementioned people by doing what I did. I questioned whether it was the right thing, but it felt morally like the right thing to do. I'm not ashamed of it. I find myself a bit defensive right now, like 'Did I f**k up? Should I not have said that?'

Talk about technology and your experience using the Web as a distribution method.
Reznor: When we started the idea, we liked the clean feel of the Radiohead experience. It didn't feel like we were a sidebar on the Snocap site. Somehow that kind of thing cheapened it in a sense for whatever reason. I'm not sure why. That's based on my own perception. I like the idea of feeling kind of homemade and simple. There is a beauty to the fact that everybody has got their own distribution network that is already set up. How simple and obvious to just do this. But the reality of that is building the infrastructure that has a store and accepts the right form of payment and fulfillment and all those boring kinds of things.

What did you learn from the experience?
If I could redo everything and start again, I think having a physical product is a good thing. I think that having some more coordination on our part--and I'll take the blame on that because there was an urgency to get this done and get it out that I was the ringleader for--I think if we could wave a magic wand and do it again I think being able to offer an inexpensive version in addition to a premium physical product that could be shipped out afterward.

On day one you can buy it online and it's also in the store. But the manufacturing (of CDs) is the leak (to file-sharing sites) for everything and the leak is important to get around. The leak blows momentum. It happens and it's going to happen on every release there is. It's a fact of life. But that leak happens once it leaves mastering and goes to manufacturing, if it hasn't by then, then it certainly does at that point. I like the energy of release day, the excitement of watching blogs light up and bulletin boards. I think that's an important spike in attention. And the only way I can see to accommodate a physical release if it goes to manufacturing after the thing is in the hands of people. But I do think there is a need for presence in physical retail.

Are you going to abandon this or will Nine Inch Nails offer a similar promotion as Williams?
If I had a record to put out today, I would do something very similar to what we just did cause I don't think there is a better option. I would include a physical piece as I just said and all of the components I would make sure had value.

Saul said he doesn't have any regrets about the way the album was released. He credits the Internet with setting him free from having to deal with the labels. Is this how you feel?
Reznor: I can't tell you how great it felt when Saul and I and his team said 'Let's do this. Let's go.'

There's not an army of people saying no for this reason. To feel in control of your own destiny for a change, that's an incredibly liberating feeling. Where it needs to be worked out and fine tuned is the right way to hopefully generate enough commerce from it to justify doing it and really working on the right way and right tone to get the word out to people that doesn't feel intrusive or old school.

But at the same time there is a little bit of an element with Saul's record of a tree falling in the woods...It hurt my feelings to see it not show up on everybody's Best Album Of The Year lists, because I think not enough people knew it was out there.

In a separate interview with Saul Williams, the rapper and spoken-word artist has a very different take on the sales performance of NiggyTardust than Reznor. That interview will appear on CNET News.com on Friday.

I've always preferred prognostication to nostalgia, so rather than replay the best of 2007, I'll use these late December doldrums to make 10 predictions for the coming year. Some editors will warn you that this kind of list is suicide--it's too easy for everybody to look back a year later and see where you were wrong--but it hasn't hurt Cringely, so here goes. In no particular order.

DRM will die. The trendline is clear--Apple's been selling DRM-free tunes on iTunes since May, Amazon's DRM-free MP3 store has three of the four majors signed up, and eMusic has become the second-most-popular music download service (after iTunes) thanks in part to its longstanding insistence on selling DRM-free MP3s. A year from now, DRM will be irrelevant and hardly used in digital music. All four labels will agree sell their songs without DRM on Amazon. Nearly every iTunes audio (but not video) file will be DRM-free, and Apple will get rid of the "Plus" designation. Some music subscription services like Rhapsody and Microsoft's Zune Pass might retain DRM so that users can't cancel their subscriptions and keep the songs they've downloaded, but they'll be the last holdouts--and some of them might try eMusic's approach of limiting monthly downloads rather than limiting compatibility and usage with DRM.

3G iPhone and iTunes. A 3G iPhone is a fairly safe prediction, given that AT&T CEO Randall Stephenson already let it slip, but I think there'll still be a small surprise embedded in the announcement: iTunes 3G, a service that will come with the phone and give users anytime-anywhere downloads of any audio content in the iTunes Music Store. Impulse buying will go through the roof.

No Zune phone. Microsoft won't release an iPhone competitor this year--at least not one with hardware designed by Microsoft. The company might release some sort of software update or client application that allows Windows Mobile users to play songs from the Zune Marketplace and transfer them from the Zune PC client software to their phones, but even that probably won't happen until 2009. And it'll sink like a lead balloon against v3 of the iPhone, at which point Microsoft will bend to the inevitable and start building its own phone from scratch.

GarageBand will win a Grammy. Not the program itself, but somebody will make a record using Apple's Garage Band--which comes included with every Macintosh sold--as their primary recording and mixing tool, and that record will win a Grammy award. There's already been a critically acclaimed movie, Tarnation, made exclusively with iMovie, so now it's time for all those bedroom musicians to get into the do-it-yourself spotlight.

Mashups will go mainstream. Have mashups already jumped the shark? The controversy about The Grey Album, in which DJ Danger Mouse combined lyrics from Jay-Z's Black Album and The Beatles' untitled white album, is almost four years old. There was a burst of experimentation from big-time artists like David Bowie and Beck around the same time, but not much since 2005. Nonetheless, I predict that artists and even some labels will begin re-releasing their back catalogs as standalone instrumental and vocal tracks, and fans will recombine like crazy using programs like Garage Band and Splice. At least one mashup will get significant radio play, with the complete approval of the original artists. (Although you might say that Puff Daddy accomplished this 10 years ago.) They might even be incorporated into video games like Rock Band--imagine the challenge of having to sing Abba while the rest of the band plays Judas Priest. By the end of 2008, putting a mere song on your social-networking profile will seem hopelessly old-fashioned.

The campaign--don't call it "marketing"--that preceded Nine Inch Nails' Year Zero release will become the gold standard for building audience engagement for tours, albums, or new artists.

Year Zero will become the precedent. On the plane trip home from visiting family over Christmas, I read Eric Davis's analysis of Led Zeppelin's fourth album, part of the 33 1/3 book series. While a lot of it seemed like a stretch--as is the case with any highly intellectualized deconstruction of rock music--it did remind me of a certain sensation created by certain artists and albums, a sense that the listener is more than a mere consumer, but is in fact an active member in a secret club that only other members fully understand, a sort of musical Masonic society. Think of that Zeppelin album, the Grateful Dead, the Residents, or Secret Chiefs 3. In 2007, Trent Reznor, working with 42 Entertainment, took this kind of mystical clubbishness and updated it for the digital era. USB drives with leaked tracks from the upcoming Year Zero record were surreptitiously placed in bathroom stalls at concert venues. Phone numbers with frightening secret messages were encoded in bursts of static or out-of-phase audio signals. Cell phones were distributed to fans who figured out some of the clues; a phone call placed to those phones summoned them to a secret concert. In 2008, we'll see more of these kinds of musical events that use digital technology to break down the wall between audience and artist.

The world's best offline record store will go online. There's nothing else like Amoeba Records. Its three locations in Berkeley, San Francisco, and Los Angeles offer unsurpassed selection--including cellophane-packaged vinyl I've never seen anywhere else--and seem to be curated by music fans with amazing depth and breadth of knowledge. In 2007, Amoeba took its first tentative steps into digital distribution, releasing exclusive recordings from Gram Parsons and Brandi Shearer in both MP3 and CD formats. In 2008, I predict Amoeba will finally go online in a huge way, offering an unsurpassed quantity of MP3 downloads from every imaginable source: major labels (like Amazon MP3 and the other high-profile stores), independent labels (like eMusic), and do-it-yourselfers (like CDBaby). Look for the nascent Amoeba label to offer distribution on terms never before seen in the recording industry--more of a non-exclusive commission model like CD Baby than a typical all-inclusive marketing-recording-publishing-distribution deal like most labels have favored--and for several high-profile artists who've recently quit their labels to sign on.

The loudness wars will end. It's been repeated so many times, it's become a cliche: today's recordings are mastered too loud, eliminating dynamic range and making it hard to listen to a complete album. In 2008, artists and producers will finally begin to demand a return to proper mastering, and radio stations and record execs will be in no position to contradict them.

The concert business will follow the recorded music business down. It's a bad time to be a big rock concert promoter like Live Nation. According to a recent story in Pollstar, the concert business actually declined in 2007, despite high-profile reunion tours by The Police and Van Halen and David Lee Roth--two acts with so much internal strife that nobody expected to see them on stage again. I say the 15 percent drop in ticket revenues from 2006 to 2007 will be followed by the same or greater drop next year. Music fans are fed up with exorbitant ticket prices, false scarcity, and quasi-legal scalpers, and there are only so many more nostalgia acts to trot out. Where are the young bands that can sell out 20,000-seat arenas for the next 5, 10, 20 years? (And before you call me out on the Arctic Monkeys, let me just counter with Oasis. Huge in the U.K., briefly popular in the U.S., and irrelevant to all but the die-hardest of fans 10 years later.) In other words, the concert business is about to suffer from the main problem that's hurting the recording industry--not MP3s, not piracy, but lack of interest and investment in artists with long-term (as opposed to instant) commercial potential.

Led Zeppelin will play again, but not tour. Speaking of nostalgia, it won't be 1973, but the reunited Led Zeppelin will play a handful of shows in the U.S., focusing on a multi-night stand at New York's Madison Square Garden timed around Robert Plant's 60th birthday on August 20.

Wall Street is taking record labels to task for lackluster Web sales, spiraling CD revenue, and the defections of marquee acts such as Madonna and Radiohead.

Nine Inch Nails' Trent Reznor

(Credit: Rob Sheridan)

Two analysts downgraded Warner Music Group last week, leading to a sharp drop in the company's stock price. One of the analysts, Richard Greenfield of Pali Research, penned a gloomy report about why he thinks the sector is headed for even greater losses.

"No matter how many people the RIAA sues, no matter how many times music executives point to the growth of digital music, we believe an increasing majority of worldwide consumers simply view recorded music as free," Greenfield wrote.

Proof of this was provided last month by Radiohead fans. The British supergroup offered the digital version of In Rainbows, the band's latest album, for whatever fans wanted to pay. According to research firm ComScore, which conducted a study of the groundbreaking promotion, 62 percent of those who downloaded the album paid nothing.

To Greenfield, what's more disturbing is that Radiohead and a growing number of top acts perceive the Internet as an attractive alternative to record labels. Nine Inch Nails front man Trent Reznor has indicated that he plans to distribute his music online. Madonna announced last month that she was leaving Warner Music for Live Nation, a music promotion company.

"The paradigm in the music business has shifted," Madonna said in a statement announcing the switch. "For the first time in my career, the way that my music can reach my fans is unlimited."

Like Greenfield, Merrill Lynch analyst Jessica Cohen downgraded Warner Music's stock from "neutral" to "sell." Both also reduced next year's earnings estimates for the company.

Following the reports, Warner Music's stock hit a 52-week low ($8.78) on Friday. The company's shares, which were trading above $27 a year ago, closed Tuesday at $9.50.

What could be unsettling to those in the music business is that Warner Music was supposed to be faring better than the other three majors--Universal Music Group, Sony BMG Music Entertainment and EMI Group--according to Greenfield. Earlier in the year, his view on the stock was slightly rosier.

"Over the past couple of years," Greenfield wrote in his report, "(Warner Music) has done an impressive job, outperforming the industry weakness."

The main cause for concern continues to be spiraling CD sales. Download revenues are growing--but not fast enough to ease the pain. Greenfield expects CD revenue to drop 22 percent in the fourth quarter of 2007. He said retailers such as Wal-Mart Stores, Target, and Best Buy are rapidly reducing the floor space dedicated to discs.

How vulnerable is the music industry?

Consider that the sector generated revenues of $14.3 billion in 2000, according to the Recording Industry Association of America, or RIAA. This year, it's expected to report revenue of $10.3 billion. Had sales growth only kept pace with the U.S. economy, it now would be worth $17 billion, Greenfield wrote.

This illustrates "how dramatically the music industry is continuing to underperform," Greenfield said in the report.

Greenfield urges music executives to embrace a new ad-supported business model, one that dramatically scales back the size of record companies and doesn't saddle songs with digital rights management. He doubts that this will happen any time soon.

The industry is "not ready to endorse such a move at this point" Greenfield wrote. "Even if it was, the...transition will be incredibly painful."

Trent Reznor of Nine Inch Nails

(Credit: Rob Sheridan)

Correction: Saul Williams' album debuts Thursday and is available for free or a $5 donation.

Rocker Trent Reznor doesn't pretend to know the answers to what ails the music industry.

But that hasn't stopped the iconoclastic front man for the band Nine Inch Nails from marching to the front lines--in lock step with British band Radiohead--in an assault on the traditional music business.

Reznor, who made news earlier this month when he left his record label, spoke Tuesday with CNET News.com about the decision. He also bashed the music industry, detailed how he persuaded performer Saul Williams to give away his latest album for free, praised Radiohead for distributing music directly to fans via the Web, and indicated that instead of fighting the so-called free culture--people who share music online--he plans to embrace it.

"Personally, I would like people to support artists," Reznor said. "After all, we as artists dedicate our lives to producing the best music we can. It's been a painful process for me personally (to see the changes in the music industry). But should I be angry at the audience that wants to hear music so much, an audience that is so passionate about hearing it they go online to get it two weeks before the music debuts? No, I want them to be that way."

Reznor has become a revolutionary figure to the file-sharing community. A video appeared recently at YouTube that showed him during a concert performance lamenting the high prices of CDs. Fans whooped it up when Reznor told them to go ahead and steal his music.

Since then, Nine Inch Nails and Radiohead have become symbols of a growing movement among performers who are trying to use the Web to cut out the traditional middlemen of distribution: record labels.

Musicians Saul Williams and Trent Reznor

(Credit: Atticus Ross)

Radiohead shook the industry earlier this month by releasing a digital version of their latest album and asking fans pay whatever price they believed the album was worth. It was unprecedented move largely because it appeared to address an issue that music industry has largely tried to ignore. Music fans, many of whom obtain songs for free through illegal file sharing, perceive the dollar value of songs as almost nothing. Unless something dramatic occurs, many believe there is a chance a large number of fans will never again be swayed to plunk down money for music.

Reznor, 42, said that the music industry is spinning its wheels trying to fight that perception. He said that in the future songs can be a way to entice fans to buy concert tickets and merchandise and he recognized that this may be how musicians make their living. He has recently produced an album for Williams, a rapper/filmmaker/spoken-word artist, called The Inevitable Rise and Liberation of NiggyTardust, which goes on sale Thursday on Williams' site.

Not coincidentally, the digital version of the album, which is free of copy-protection software, is priced for free or fans can make a $5 donation. It was Reznor's idea to give away Williams' music in a similar way as Radiohead.

"Radiohead is one of my favorite bands," Reznor said. "When they announced they were releasing that album for free, I got dozens of text messages. It gave me goose bumps. It's such an exciting way to sell a record."

Now, here's the rub. Reznor isn't the naïve artist who doesn't understand dollars and cents. He said that he knows giving away music may not make business sense. In addition, such a model could work for marquee bands like Radiohead but not for up-and-coming acts.

"Radiohead has a built-in audience and they have the luxury of being able to experiment with a new distribution model," Reznor said. "I think there were some serious flaws with how they executed but it was a good idea."

Reznor addressed some of the questions about whether artists are prepared to become merchants. Who is going to oversee sales, promotion, marketing, site supervision, and the countless other chores that record labels historically handled?

But Reznor isn't afraid to get his hands dirty. He said that he was part of the negotiations with Musicane,the company handling the online distribution of Williams' upcoming album. Musicane is overseeing fulfillment, payment processing, and customer service.

The beauty of Musicane, according to Reznor, is that it provides the backbone for distribution without requiring musicians to invest "hundreds of thousands of dollars."

"Look, we're looking for what works and this seemed like it made sense," Reznor said. "Ask me in a week about how it went and hopefully I'll be saying the same thing."

It's doubtful that even if problems crop up Reznor can be dissuaded from his belief that the Internet is good for artists. He thinks that the Web creates direct links between musicians and their fans. This is beneficial even if sometimes it's hard for performers to stand out among the countless acts trying to promote themselves online.

"The greatest thing about the Internet is that everybody is their own distributor," Reznor said. "Being your own distributor is power and the thing that labels once held over artists. The power of getting your message out to an audience is very empowering as an artist. These are exciting times and things are happening that I couldn't imagine just a few years ago."

As for the future, well, Reznor fully acknowledges that he--like everybody else in music--is unsure of how things will turn out. But he says he's sure of one thing: the old way of doing business is dead.

"I don't know what the future holds," he said. "I don't know what model is going to work. I do know relationships between music labels and artist like myself aren't going well. These days when digital elements come into play labels have dealt with them generally poorly. It has gotten to a place where it couldn't be worse. Their treatment of artists has less sympathy and it's more like 'What can we get out of you?' My only concern has always been that my audience is treated fairly."