Will Music Lovers Care When Record Labels Go Extinct?

And then there were three.

The bidding war for EMI -- the record label behind Katy Perry, Lady Antebellum, and Coldplay -- is over. A consortium headed by Sony (SNE) agreed to pay $2.1 billion for EMI's publishing business earlier this month, while Vivendi's Universal Music was the last suitor standing with its $1.9 billion bid for the label itself.

Breaking EMI in two was inevitable, but the meaty morsel here is that EMI's publishing arm sold for more than the label itself. In other words, EMI's past is more valuable than its present and future.

Need a Tissue?

There aren't too many people mourning the passing of the major labels. The labels and their thin artist rosters monopolize the already limited playlists of commercial radio. Then there's the negative publicity stirred up when the label-backed RIAA went after unemployed moms downloading tracks. Music piracy is a problem that needs to be addressed, but the labels didn't do themselves any favor by making it personal.

Even the fact that Universal will now control nearly 40% of the market -- leaving Sony at 30%, Warner Music Group at 19%, and a smattering of indies battling for the rest -- is unlikely to raise eyebrows with antitrust regulators. Prerecorded music has been a fading industry for years, and herding struggling labels together will only make it that much easier to identify the remains.

The Gradual Fadeout

CD sales peaked in 2000 when the labels sold 942 million units, raking in $13.2 billion in sales. It's been pretty much downhill the rest of the way.

Digital sales were supposed to save the day, but the label-backed MusicNet and pressplay initiatives were too restrictive. It didn't make sense that music lovers had to jump through more hoops to pay for music than the pirated options available on peer-to-peer file-sharing networks.

Apple (AAPL) finally got it right with the iTunes Music Store, which launched in 2003. Labels didn't like the $0.99 price point for singles. Artists didn't like the pricing either, since it found consumers cherry-picking the songs they actually liked instead of paying $9.99 for complete albums. However, Apple's storefront was far better for the industry than the piracy alternative.

Legal downloads should have been the industry's salvation. Record companies -- what were then five major labels and countless independents -- would benefit from the benefits of digital distribution. Labels wouldn't have to worry about pressing and packaging discs. There were no shipping or return hassles. Apple did all of the work, and labels got to keep roughly two-thirds of the sales. Unfortunately, it didn't play out that way. The growth in digital music -- which by 2008 found Apple replacing Wal-Mart (WMT) as the country's largest music retailer -- wasn't enough to offset the serious slide in CD sales.

Internet Killed the Radio Star

What went wrong? The labels will point back to Napster, LimeWire, Kazaa, and other disruptive peer-to-peer networks that swayed countless Web-savvy users to download and share pirated tracks. They're right, but there's a bigger picture that the major labels are missing.

The Internet made it easier to swap virtual mix tapes, but it also armed garage bands with the tools to get noticed. The playing field was leveled as artists set up MySpace music pages and uploaded tracks to the original MP3.com website.

Where would Justin Bieber or Susan Boyle be without YouTube? How many bands are scoring national attention through Facebook fan pages?

For better or regrettably worse, everyone's demo tape is now a click away.

Who says you need a major label for digital distribution? Getting your music on iTunes, Spotify, or any of the popular e-music stores and streaming sites will cost most artists less than a video game. TuneCore charges just $50 a year for an album -- or $10 a year for a single -- for digital distribution across more than a dozen well-trafficked sites. Artists keep all of the revenue. The same applies at SongCast, which works on a different fee schedule. Musicians who want CD and digital distribution can turn to CD Baby.

In terms of getting noticed, setting up pages on YouTube, MySpace, and Facebook are no-brainers, but music-dedicated sites including Bandcamp and SoundCloud are also there for promoting your digital presence.

The opportunities keep coming. Google (GOOG) introduced the Google Music Artist Hub last Wednesday, giving artists a free way to get their music available on what are now 200 million activated Android devices.

Last Round for the Music Moguls

The record companies aren't worthless, even in this scorched climate. Even if CDs go away, there are still promotional, radio, and touring benefits that are easier to secure under a major label. The problem for the prerecorded music industry is that the gap between the signed and unsigned has narrowed.

Even proven bands are finding it more lucrative to leave their labels and strike out on their own. As home recording equipment gets better and cheaper, record companies are no longer necessary to bankroll the once costly recording sessions.

Labels used to love signing artists with established followings, but now those same artists are wondering why they should be tied down to long-term deals when they have the digital distribution tools at their disposal to reach their growing audiences.

There's a new world out there, and its soundtrack is being scored by unsigned artists that you don't know -- yet.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article, but his band Paris By Air was signed to Columbia Records from 1987 to 1991. The Motley Fool owns shares of Wal-Mart Stores, Google, and Apple. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Apple, and Google. Motley Fool newsletter services have recommended creating a bull call spread position in Apple and creating a diagonal call position in Wal-Mart Stores.