And fans are left holding the bag -- paying more and more per unit for shipped units of music that don't necessarily reflect the units they want to buy in a broader media environment where consumer choice and control is increasingly important.

The Internet offers an opportunity for artists and consumers to make an end run around record companies. But it won't be an easy play to pull off. Like it or not, record companies, as middlemen, bring four things of value to the music supply chain. These can all be replaced by new elements of the Internet economy. But unless all four are replaced, the traditional record companies will maintain a crucial role now and in the future.

* Distribution. The first and most obvious value that record companies bring to the music chain is distribution. In the media industry of the industrial age, success or failure was almost entirely predicated on distribution -- if you couldn't get your products to market, you couldn't sell 'em. And if you could get preferred placement in-store, exclusivity, or other kinds of leg up through distribution, all the better.

The Internet threatens to lift the clamp on distribution. Sure to date, and for some time to come, music will principally be sold through traditional retail channels on traditional hard storage media. But when always-on, high-bandwidth connectivity is ubiquitous -- which will come within the next ten years -- the crucial position distribution holds today will utterly evaporate.

* Finance. In many ways, record companies are finance companies. They advance money to artists to develop masters, commit money to help promote products, and expect a return on investment when the products come to market. They are like venture capitalists for the creative community. But unlike VCs in the business world -- who wind up only owning a minority stake in entrepreneur-driven companies -- music companies wind up owning 100 percent of the "companies" they invest in and all the intellectual capital the "entrepreneur" creates during the tenure of the artists' label relationship.

For a new media entrepreneur, that kind of deal is usual an end game -- the final sale of a company after the value has been built. But artists are expected to sign those kinds of deals out of the box. As artists have become more business savvy, they've been less and less satisfied with this arrangement. Nowadays, there are plenty of other ways to finance master development. In the film industry, money is raised on a project by project basis -- a model which well-known musical artists or their management companies could adopt tomorrow. Other artists have taken to selling bonds secured against future income from songwriting royalties to finance their careers. We're at the beginning curve of the creation of new kinds of music financing structures that will undermine the role of record companies.

* Promotion. Perhaps the most crucial element that record companies bring to the music industry chain is promotion. Obviously anyone can pay for ad campaigns, but getting music played on radio and getting videos aired on MTV have been the crucial means of promotion for popular music in recent years. Will the Internet erode the power of these promotional vehicles? I say, yes. Although neither music video on television nor radio airplay will go away, independent artists like Ani DiFranco have provide that it is possible to build an audience using completely grassroots promotion.

Now couple that with a growing audience on the Internet and a growning number of Internet sites devoted to streaming music or providing musical information, or providing places where artists can post new music, and you'll realize that the Internet will shortly become a dramatically powerful vehicle for promoting music. That's why the race is on among the likes of Tunes.com, MTVi, Launch.Com, MP3.Com, and others to create category killer music destination sites -- MTV's of the Internet so to speak.

But there won't be a single Web destination with the kind of omnipotent marketing potential of MTV because the Net is inherently different than MTV. In large measure MTV is omnipotent because it is, in essence, a national radio station with a tightly controlled song rotation. In the world of cable television, where cable operators have geographically defined, statutorily protected monopolies, the battle is to get placement on cable outlets (and to build brand). Once MTV achieved this they became the gateway through which labels reach consumers.

The Net is a different place. Because the barrier to building a Website is virtually nil, there will be no single gateway controlling the flow of information between consumers and record companies. There will be dozens if not hundreds of destinations as well as thousands of others -- from professional sites to fan sites -- that will be just as crucial. It will be many years before the market penetration of the Internet will make the Net a more important platform for marketing music than traditional radio and cable television.

Today only a tiny fraction of the music buying public is online. And by the time that equation changes, it might be impossible to tell the difference because broadcast, cable and the Net since digital subscriber radio and selectable television programming will likely be delivered via TCP/IP. But the shift to the Net will occur one way or the other. And this change also threatens to shift the balance of power way from traditional record companies and towards new, online marketing companies that can manage e-mail mailing lists for artists, do direct merchandise sales for artists, sell tickets online, and the like.

* Artistic Development. This is perhaps the most misunderstood and most under-appreciated aspect of what a record company brings to the table. Not only are artists, quite often, not their own best critics; but the goal of selling a lot of records is often at odds with a creator's artistic goals. Anyone who has ever worked with a sympathetic and capable producer, artist & repertoire man, or editor knows that having an outsider intelligence help balance those goals can immeasurably improve the final product.

At their worst, record companies chew up artists and spit out product, or manufacture teen idols according to focus group responses. But at their best, record companies nurture artists and help them develop products that tread the fine line between creativity and commerce. Some artists -- the Grateful Dead, Frank Zappa, and others -- have successfully "productized" their output outside of the traditional production chain. Others, like Prince, have been less successful.

Although it's impossible to say what if anything would have been different creatively if Prince had created his most recent work in conjunction with a major label machine, it is likely that no major label would have let him release, as a commercial matter, a three-CD set followed by a five CD set. Prince -- who no longer uses the name but uses an unpronouncable symbol in its place -- has since inked a promotion and distribution deal with a major label for his latest album.

So, what will the successful Internet music company look like? It will include a number of destination brands designed to appeal to market segments from consumers of teen dance acts like Britney Spears to consumers of European concert music. It will offer a range of financing services to artists from outright cash investments to investment syndication to services for equity deals that will trade financial participation in the commercial exploitation of a master in return for services like A&R, direct marketing, and promotion. It will sell services like e-mail mailing list maintenance and the like to artists and artists' management for a cash fee. And it will develop new kind of music deliverables -- from subscription services to a given artists' output to new radio-like platforms.

So the $64 million question is: Can the traditional music companies adapt to this new environment? Maybe. Certainly some, like Sony, are trying. But to succeed in this environment they'll have to give up the kind of total ownership of intellectual property around which they've built the economics of their industry; and that's unlikely to happen. Just this month Sony has become embroiled in a controversy over a reported provision in its standard artists' contracts that would give the company lifetime ownership over an artist's name for use in URLs. Under the provision, if Bob Dylan should leave Columbia Records, Sony would still own the right to the URL bobdylan.com.

Furthermore, the history of the battle of old media v. new media to date suggests that it is almost always the nimble online-only start-up that wins, not the old line media behemoth. Of course the answer will be moot for some time to come as record companies find new ways to use the Internet to exploit the library of back catalog they already own, and as music continues to be sold, predominantly, in the bricks and mortar environment.

But if the question were such an inappropriate one we wouldn't be living in a world where artists like Tom Petty are battling with their record companies over online strategies, thousands of students are uploading and downloading compressed music files with the pace at which they can normally be seen swigging beers, and where a company like MP3.Com can have a $2.5 billion market cap.