The entire music world is abuzz with the launch of Radiohead’s “pay what you want” download of their new album, “In Rainbows”. Nine Inch Nails, Oasis, Jamiroquai and Madonna have also announced their own intentions to divorce themselves from the stranglehold of the major music labels. Clearly, the time when major artists simply complained about their indentured servitude to the labels has ended and their experiments in freeing themselves have begun.

In the pre-digital days, the music labels played a critical role in the industry. At a high level, the labels were responsible for identifying talent, financing production and marketing music, while retail outlets sold it to consumers. Artists were beholden to the labels and retailers, and consequently, earned only a few pennies for every album sold. Consumers were beholden to the retail outlets given that they controlled access to the physical media of LPs, cassettes and CDs. The digital world has changed all of these dynamics. Artists can choose to assume all of the responsibilities of the labels because the cost of production has decreased dramatically and cheap, digital distribution is available over the Internet. Consumers have ready access to inexpensive or free digital music at thousands of places on the web. As has happened in many other industries, the digital age has made it possible to remove the middleman from the relationship between the producer of the good and the consumer of the good.

Artists have long known that album sales are only one piece of the revenue puzzle. Merchandise, touring and publishing are critical ways in which to increase revenue and make music a potentially lucrative business. Consequently, the move away from the labels is about more than just capturing a larger share of album revenue. What’s most striking about the shift is that artists have come to the realization that being closer to their listeners gives them more control over their economic fates. Even if someone who downloads Radiohead’s new album chooses to pay nothing, what is it worth to Radiohead to have that listener’s mailing address, email address and mobile phone number? How many different ways can Radiohead touch me as a fan and encourage me to spend, now that they have that information? The most exciting part of what’s happening in the music industry is the ability for artists to have an ongoing dialogue with both their avid and casual fans.

And it’s not just possible for the big name artists to cut ties with the labels. Huge entities like MySpace and new upstart companies such as Sellaband, Amie Street and Magnatune are all making it possible for emerging and independent artists to make a business out of their passion for music. 

As a consumer and an investor (Battery is an investor in Ruckus), I’m thrilled to see the new experiments in music creation and distribution. However, it remains shocking that music industry’s only responses to the emergence of digital music and the Internet have been litigation and digital rights management. Isn’t it time that the music industry stopped swimming against the tide and embraced new business models before they are cut out of the value chain altogether? How is it possible that the labels haven’t learned anything from the prior transitions of vinyl to cassette to CD to Napster? The recent announcements from major artists have to be the final wake up calls for the labels, or else the final nails in their coffins.