Sing When You're Winning

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EMI's publishing business also reaps rewards from the growing use of music in other media: advertising, films and TV soundtracks, electronic games and toys. EMI even has a contract with a pottery company that prints song lyrics onto coffee mugs.

Nicoli is particularly keen on the future of wireless sales of digital music. Noting that MP3-player penetration is only around 15%, but "that nearly everyone has a mobile phone," he's excited by the prospect that half of all mobiles will be music-enabled within two years, and that the technology for wireless downloads of music is nearly at hand. "The combination of scale and convenience makes mobile a huge opportunity." EMI, for instance, recently struck a deal with wireless service T-Mobile to make more than 200,000 songs and music videos available to T-Mobile's 60 million customers across Europe.

Of course, no record label can afford to rest easy. Yes, selling digital music involves no manufacturing and distribution costs, which should boost margins. But there are other new costs, including credit-card fees and IT equipment. EMI, for example, has invested over $130 million in technology to manage digital sales. And CD sales continue to plummet. Globally, retail sales sank about 8% last year, to just below $31 billion. Illegal downloading has not disappeared. ifpi says 885 million music files are available online for illegal downloading. In Britain and Germany, Europe's two biggest markets, 6% of Internet users buy legal music online, while 5% engage in illegal file sharing. But illegal downloads are double the rate of legal ones in France, Sweden and Spain.

And any technology as disruptive as digital music is bound to create some friction. Several labels, including EMI, want more flexible pricing online — oldies and tracks by emerging artists might sell at a discount, while big hits by established acts might be premium-priced. Apple, however, is reluctant to mess with what it sees as a winning formula. But Levy tells Time: "I don't know of any product that has only one price, or that has only one perceived value to the consumer."

Currently, downloads of single songs outpace those of albums, theoretically spelling doom for one of the industry's most lucrative formats. EMI Music vice chairman David Munns says that's O.K., and likens the change to the situation in days of yore when 45 r.p.m. records and LPs thrived simultaneously. "People go in and buy the single and a couple of other tracks, then they come back and buy the whole album. We're not frightened of any of that. I don't believe that the album unit will just disappear. Our job is to make albums people want."

In the brave new digital world, one truth of the industry's economics remains unchanged. Typically only 5 to 15% of a label's artists — the megastars — bring in the cash to pay for the rest. That's why artist development — finding the next Radiohead or Kanye West — is critical. Grooming a new or niche act into superstardom in the digital era requires the same marketing effort it always did. "Just putting it out on the Internet without marketing is like shooting it out into space," Kennedy says. And only the labels pay those marketing costs. EMI has a reputation for investing heavily in artist development. It's got high hopes for several new acts, including New York City rockers Morningwood and Corinne Bailey Rae, a jazzy chanteuse from Leeds, England. Her case is a perfect illustration of marketing in the age of downloads. Rae's single, the soulful Put Your Records On, was released on the Net earlier this month, and is already a radio favorite. A few weeks later, it's now also available on that old-fashioned, once-profitable format known as the compact disc.