The recording industry is in a panic as album sales continue to drop. Is this really a problem?

Technological change in the United States is continuing its good work of breaking down sclerotic institutions and businesses and instituting greater freedom in the marketplace by leveling the playing field between incumbents and startups and between big firms and smaller ones.

This a very good thing indeed, although those who benefit from the old ways tend to think otherwise.

A vivid example of this process is the music industry, as evidenced by a recent story in Business Week documenting the travails of the industry’s major players and the rise of the independents—a trend to which the development of the Internet has contributed greatly. Fact One, of course, is that sales are down overall:

The grievous state of selling music is well annotated, with total album sales falling 11% in the first half of ’08. Major labels struggle to keep platinum sellers (acts that sell a million units) from backsliding to gold (500,000 units) or worse. But some smaller labels—among them Sub Pop, Merge, and Matador—have hit a pocket of relative prosperity, with many of their top stars selling more records than ever.

The slide in album sales, however, does not mean that people can’t make a living from music. As Michael Arrington noted on TechCrunch earlier this year, it just means the business is changing as technology alters the marketplace: musicians will make more of their money from concerts, with recorded music serving as a way of getting potential audiences interested in attending.

Such natural changes in society and industry apparently terrify some of the wealthier musicians. One such is Trent Reznor of Nine Inch Nails, who has cast aside his rebellious reputation and decided to call for government help in the form of a music tax, as Arrington notes in his article. Whoa!

Yet no one should see this changing marketplace as some sort of weird, space-age invention. After all, musicians used to make their entire living off of performances, and some did very well indeed. Even today, that’s where the real money is.

In any case, we probably won’t be going back to the days in which wealthy members of the nobility supported composers and musicians out of a spirit of noblesse oblige, and the evidence is very clear that artists are no freer under the current system than they were back then. They’re free to be creative and starve, or to fit the marketers’ specifications and just possibly get a minute slice of the mountains of money the recording companies still take in despite the recent downturn in their fortunes.

What seems to be happening here is not an actual decrease in the amount of money going to the music industry but instead changes in the product mix for which that money is spent and a widening of the distribution of that money within the industry. That will benefit the smaller players and thus reward variety and creativity. The Business Week article mentioned previously provides important evidence supporting that conclusion:

Seattle’s Sub Pop, famed for signing a then-unknown trio called Nirvana in the late ’80s and long adept at minting a hit moments before the label’s lights went out, has recently notched three gold records. One of them, The Postal Service’s Give Up, is nearing platinum. Another, the Shins’ Wincing the Night Away, debuted at No. 2 on Billboard. This, for a label and milieu in which selling 50,000 records was once considered an ungodly feat.

According to Sub Pop, in 2007 it posted record revenues, which rose 79%, to around $20 million—14% from licensing its bands’ music to advertisers and entertainment properties. It also sold more records in ’07 than in any other year. (Sub Pop is private, so these figures cannot be independently confirmed. Some executives familiar with similar labels say that revenue level sounds high. And—disclosure—I play guitar on one Sub Pop release.)

In short, people who used to make a grotesque amount of money in the music business—the biggest artists, the stockholders and managers of the big music companies, and what Arrington aptly refers to as their "bloated bureaucracies"—are no longer getting as much of the geetus as they used to. Naturally, they’re steamed about it, so of course their first impulse is to run to the government and urge it to tax and jail the people who want to obtain their products.

The system they want to protect, however, is the one that grotesquely overcharges consumers, rampantly steals from all artists not powerful enough to fight back (which is all but a lucky few), and deliberately puts out the stupidest, least creative and innovative products it can, under the conviction that people don’t want to hear anything but crummy knockoffs of the crummy knockoffs of previous crummy knockoffs they bought just a week ago.

The system from which they benefit so luxuriously cannot last, however, as the rise of the indies noted in the Business Week article exemplifies the extent of the changes the industry is undergoing:

What explains the indies’ staying power? For starters, the Web’s flattening of distribution, and the growing appetite for licensing less mainstream music. The Shins have provided music for ads by McDonald’s (MCD), Microsoft (MSFT), and Gap (GAP). "Advertisers realize: ‘I don’t have to get the Beatles to have a successful commercial,’" says Ira Antelis, former music director for ad agency Leo Burnett—and indie bands come cheaper, to boot. Other aspects of the indie world—small staffs, modest expense structures, and strong relationships with an audience and its musicians—are built for a music environment that’s shrinking even as niches become more important.

The reality is that music companies will have to become leaner and meaner, and soon, and musicians will have to take greater responsibility for their own finances and pay serious attention to the business side of their careers.

That is not a disaster. On the contrary, it will benefit all parties, including the most important ones of all—the consumers.