If any industry has felt the brunt of the internet as a disruptive
technology, it�s the music industry, which has been dealt a heavy blow
by the onset of digital music distribution. On the April 28, the RIAA
again confirmed this state of affairs when reporting

that CD sales, the mainstay of the business for the last 15 years, were
down a whopping 20.5% in 2007. Then on May 2, a Federal Court ordered
AOL (http://seekingalpha.com/symbol/twx' title='More opinion and analysis of TWX'>TWX), Real Networks (http://seekingalpha.com/symbol/rnwk' title='More opinion and analysis of RNWK'>RNWK) and Yahoo! (http://seekingalpha.com/symbol/yhoo' title='More opinion and analysis of YHOO'>YHOO) to pay $100M to music artists as back
payment for streaming their music online, proving that it�s not just
the Big Four labels who have been affected by this disruptive shift.

Apple (http://seekingalpha.com/symbol/aapl' title='More opinion and analysis of AAPL'>AAPL), a technology company, has
become the most powerful player, with sales of 2 billion songs last
year. The iPod/iTunes combo, the default of cool in our culture, has
freaked out the Big Four and sent traditional music retailers like
Wal-Mart (http://seekingalpha.com/symbol/wmt' title='More opinion and analysis of WMT'>WMT) and web 1.0 giants like Amazon

(http://seekingalpha.com/symbol/amzn' title='More opinion and analysis of AMZN'>AMZN) scrambling into digital music distribution. So far their nascent
incursions have not had a big impact, despite offering DRM-free music
and savings of a few pennies.

While Apple and other legal download options have somewhat offset
declining CD sales, the industry carries far too much overhead from 60
years of jacked up prices to make the digital transition smoothly.
Music buyers used to pay up to $18 for an album and rarely was every
song a keeper, now they pay 99 cents a drink.

Moreover, many consumers don�t pay for music at any price. The chart
below, based on Compete�s data on more than 1,000 music sites, shows
how the most popular options for listening to music online are free.

Despite lawsuits against illegal download sites, the fastest growing
category in online music last year was P2P downloads, which shot up
140%. Nearly ten years after Napster raged through college networks,
online music piracy continues to grow.

Meanwhile, the largest category in online music in March, 2008, was
streaming, which racked up 28M unique visitors. The portals have driven
the category�s dominance for many years by plugging into their massive
traffic bases. MySpace (http://seekingalpha.com/symbol/nws' title='More opinion and analysis of NWS'>NWS) joined the top ranks in 2005.

Then in 2007, a new breed of Web 2.0 sites with sleek, bright
graphics and deep search and social feature integration, began to
spread virally through social networks and heavily-linked music blogs.
The sites combine streaming music with community-based sharing (vs. the
anonymous exchange at P2P download sites) and in doing so can skirt
thorny legal download issues.

These social streaming communities have risen rapidly in popularity. iMeem recently overtook Yahoo! Music as the most popular streaming site on the web.

*The Hypem1500 presents aggregate traffic to the more than
1500 music blogs tracked by the Hype Machine, a popular blog
aggregator. The Hype Machine itself is ranked separately from its network at #16.

Collectively, the social streaming communities are flattening out
the curve of online music. Compared to a year ago, the distribution of
unique visitors at the Top 25 Streaming sites has a more gradual
drop-off and longer tail.

As the music industry seeks to reassemble itself in the wake of digital
distribution, it should recognize social streaming communities as the
fastest growing opportunity in its evolution.