by Tyler Hamilton

Digital technology will fundamentally transform the music industry.

It's a simple message, one that techno-visionary Nicholas Negroponte shared with attendees of Canadian Music Week back in 1993, when most people had just heard of e-mail and when we used the term "Information Highway" to describe this new communications medium called the Internet.

For a crowd set in its ways, it was a difficult message to swallow.

"Negroponte said if you're not in the digital business in 10 years you had better polish up your resume," recalls Neill Dixon, president of Canadian Music Week, an annual industry event that kicks off another year on Wednesday in Toronto.

"Everybody was like, `It will never happen.' I remember all the grumbling and people shaking their heads and saying, `This guy is nuts.' "

It wasn't such a crazy prediction. In 1998, just five years after Negroponte's prophesy, college student Shawn Fanning created software called Napster that turned the industry on its head.

Techno-savvy consumers had already begun converting CD songs to digital MP3 files that could be played on computers. When Napster came along, it became simple for millions of people to share these files free across the Internet.

The rules had been rewritten ? almost overnight.

To complicate matters, people could now "burn" music onto recordable CDs, and portable MP3 players appeared that gave the revolution mobility.

"Technology has driven this whole seismic change," says Dixon.

It's difficult to find an area of the music industry in 2004 that hasn't been touched ? in some cases dramatically altered ? by this digital tsunami. Today's @Biz explores some of these areas, taking a closer look at our changing behaviour as music consumers and what the industry is doing to adapt to, and take advantage of, this new spin on music.

You'll read about music in the workplace, and how Web sites that stream songs are challenging the domain of radio and, maybe, boosting productivity. At home, the stereo "system" is being nudged aside by the computer as the entertainment control centre of choice.

Fresh out of the studio, new artists have embraced the Internet as a low-cost way to bypass the record labels and directly touch their audience. In clubs, DJs are spinning a new digital tune, but you may be surprised to find that vinyl is very much alive on the dance floor.

Less fortunate are the music retailers, forced to do deep soul-searching to stay relevant.

Perhaps the hardest hit have been record labels, considered by some to be the masters of their own demise by stubbornly charging a premium for CDs throughout this upheaval.

"The recording companies ignored the problem for a long time, fought the problem, and I suppose to some degree exacerbated the problem," says Dixon, who has been a musician, promoter, agent, manager, nightclub operator and independent record-label owner over his 35 years in the industry.

Sales of pre-recorded music in Canada fell to $881 million last year from a peak of $1.5 billion in 1998, the year Napster was launched. The Canadian Recording Industry Association pins the blame solely on digital music piracy.

"They wasted six years," adds Dixon. "If they had seen the writing on the wall when Napster appeared and realized this isn't a problem, it's an opportunity, they could have harnessed it."

The "problem" shows no sign of going away. Taking the place of the old Napster have been Kazaa, Grokster, Limeware, Morpheus and dozens of other file-swapping networks, all of which have proven nearly impossible to shut down. CD burners are now standard features in most desktop and laptop computers.

Meanwhile, portable audio devices that could only carry 20 songs five years ago can now store thousands of digital music files for the same price. Apple's popular iPod is now the company's hottest-selling product.

The band keeps playing, but it appears that technology has stolen the show.

"In the 21st century, radical advances in music technology threaten to overshadow the music itself," wrote Mark Coleman in his new book, Playback: From the Victrola to MP3, 100 Years of Music, Machines and Money.

The good news is that most people in the music industry, including the record labels, now realize this new world order is here to stay. There's less denial, defensiveness and foot-dragging, and more positive talk about the future.

At Canadian Music Week, the theme this year is "Reinventing the Business." Panels range from "Seizing the Digital Opportunity" to "Monetizing Anarchy" to "From Wireless to iPod, Alternative Compensations on the New Pipelines."

"I think a lot of the discussions and debates will focus on how to make sense of the new world order, of new revenue sources," says Kaan Yigit, president of Toronto-based Solutions Research Group Consultants Inc., which has researched the music industry in Canada for 10 years. Compared to the previous two years, he says the mood of the show will be positive. "There will be more of a can-do attitude."

"I think pretty much everybody has woken up," adds Dixon.

After years of half-hearted experiments with online music services, the industry is now offering serious alternatives to free music-swapping sites. Apple's iTunes site, expected to be available in Canada later this year, has enjoyed phenomenal success compared to its earlier, more restrictive cousins.

Since the opening of the iTunes music store last April there has been an explosion of interest in so-called a la carte download sites that charge $1, sometimes less, for individual tunes.

These sites include MusicMatch, the new Napster 2.0, Canada's Puretracks.com, and a host of retail-branded sites from big names like Wal-Mart.

Debate still rages over how much online songs should sell for ? the so-called pricing sweet spot. But the fact this debate is taking place shows the industry is adapting and moving forward.

"I think we're on the cusp of turning around and being more optimistic of where we are as an industry," Brian Robertson, president of the Canadian Recording Industry Association, recently told the Star.

Mind you, it hasn't stopped the lawsuits, a strategy that many inside and outside the industry criticize as self-defeating. The U.S. recording industry has sued hundreds of individuals for using free music-swapping sites, while the Canadian industry is currently trying to make an example of 29 suspected "egregious" uploaders. CRIA has tracked their online activities, and now wants the Internet providers to hand over their names.

The case resumes on March 12 in Toronto. It's unclear whether the Canadian labels are setting themselves up for a public backlash just as they're starting to make progress in other areas.

Beyond providing legal download alternatives, the recording industry is re-examining all aspects of its business. Whether the artists like it or not, labels want cozier relationships and are starting to redraft contracts for more equal sharing of concert and merchandise revenues.

They're also considering new revenue streams, such as polyphonic ringtones and "ringtunes" of actual songs for cellphones. The ringtone market, which appeared out of nowhere, has experienced explosive growth overseas and more recently in North America.

So not all has been doom and gloom. Music publishers made more money this year than ever, says Dixon, adding that live music had its biggest year in history. And even though music piracy has eaten into CD revenues, there's some upside to this phenomenon.

"The good news is music consumption is at an all-time high," says Steve Kane, senior-vice president of Warner Music Canada. "To me that's really heartening. We just have to think hard to figure out what role we can play."

This means rethinking target audiences, perhaps shifting more resources to artists that appeal to the growing population of aging boomers ? those who never used Kazaa and are less motivated to pirate music.

It also means reworking the system of music copyright and licensing, which, because of its regional structure, has slowed the development of global online download services.

Dixon says opportunities that could revive the industry are emerging as fast as the technologies that threatened to kill it.

"There was no iTunes last year, no Puretracks, and ringtones weren't there either," he says.

"It's amazing how these new revenue streams come along. I think you're going to find that people are a lot more open to ideas because so many things have progressed in such a short period of time."