I knew the music business was losing its PR battle when, at a recent party, a lawyer told me that it was “no wonder” my industry was in decline, as “consumers know they are being ripped off, having to pay £15 for a CD that costs you 20p to manufacture”.

I was floored: a journalist with a short attention span could have said that, but a lawyer! I was alert enough to counter with the cinema argument (”It costs 1p to print a cinema ticket, and people do not complain about paying £8 to get in”), but the lawyer had already walked away. But more about that later; first, a business case study.

Mr Dim owns a fairground, where his main source of income comes from swings, which he keeps well-oiled, clean and secure. Mr Shady persuades the local council to finance a free playground next to Dim’s lot, which soon attracts youthful customers. Shady monetises his traffic flow by selling sex magazines and drug-laced sweets to the kids.

Mr Knowall, a journalist, regularly writes about this competition. His sympathy is clearly with Shady for providing a free service and he repeatedly berates Dim in writing, not only for being “a fat cat”, but also for not having “embraced the new business model”.

Knowall thinks Dim should give away all the rides on his swings and find other unspecified ways of making money. Dim doesn’t know how he would maintain his swings and pay his staff if he were to follow this unsolicited advice. But enough theory: how do music industry executives really see their current situation, and the future?

Here is what we do: we make musical recordings. We find and finance the artists, book the studio, advise in the choice of material, prepare the cover art, manufacture the CDs, deliver about 40,000 catalogue numbers to retailers at short notice, sell, market and promote new recordings and establish new, interesting artists as frequently as possible - and ideally are left with some profits.

In the physical world, our job was do-able. Now it is much harder, since some markets have declined by as much as half, due to peer-to-peer “sharing” (or, as we see it, stealing) of copyrighted material.

However, the internet also represents the greatest silver lining in our 100-year history, once legitimate delivery systems can make all the music in the world available to internet-connected consumers. That era is just around the corner, as exemplified by the recent European launches of Apple’s iTunes, Napster (the legitimate version), and T-Mobile’s EarPhones. Typical of these offerings is that they belong to technology and telephone companies and there is no cross-ownership by music companies.

This is how it should be, because the music industry makes music, and the rest is distribution. Criticism that we slept through the internet revolution is misplaced, because we are not in the IT, technology, cable or phone businesses. Our only core business is to build the strongest possible artist rosters and make incredibly good recordings that people want to buy and own in whichever form suits them the best.

The internet represents the greatest growth opportunity I have ever experienced, and I would expect the legitimate online music market to grow to (your guess!) thereby possibly leading to a doubling of the total music market, physical and online combined, over the next five years. However, during that time we will also continue to sell large numbers of CDs.

An equally exciting development is wireless, electronic downloading directly to one’s mobile (stereo) phone.

This is how music is becoming more portable and accessible, and we will see increased convergence, for example, between mobile phones and wireless Local Area Networks. Music services will move off the PC into personal devices as wireless proliferates.

Music’s liberation from a physical sound-carrier has implications for how it is made. Recordings were previously tailored to fit the constraints of a cylinder, 78, LP, cassette or CD. Artists adapted to, and explored, the opportunities of such evolution.

Consumers now are increasingly able to download individual tracks, but this doesn’t mean that they will not want to buy an artist’s body of work - they are buying albums online in significant volumes.

So, the concept of an album will probably change. And when a musician has greater freedom to create recordings of unlimited duration, unconstrained by a physical sound-carrier, that music can be priced accordingly.

The internet’s capacity to offer infinitely more recordings than any physical retail location is another great promise. In the short time that legal online music services have existed, people have been buying older recordings in a 70/30 ratio compared with new titles - an inversion of the ratio in physical sound-carrier sales. That may reflect the current demographics of online consumers: affluent, time-poor 25- to 40-year-olds.

Yet, how all consumers act when they have greater range, choice and convenience than before may surprise us. Of course, it takes money to offer that, to deliver value to the consumer and to return value to artists and record companies. We cannot compete with an inelastic supply of music at zero retail cost, which is what online piracy is. There should be more awareness of this conflict by governments, and more support for our efforts to combat the problem.

We are not the only victims of piracy: if music becomes “free”, it removes all the value-added opportunities for phone and tech companies which depend on the “content”.

So, we will make good music and have it distributed via physical sound-carriers, legitimate net portals and wireless distributors. The future looks good, and we will support legitimate distributors every step of the way.

And what of our case study? Shady was busted, Dim doubled the size of his business and changed his name to Bright, and Knowall was transferred to ad sales.

Why the groundhog? Well, the story does repeat itself: we continue to make music, but have graduated from piano rolls via six other carriers to electronic distribution. And we’re still standing.

www.umusic.co.uk

Jorgen Larsen is chairman and CEO of Universal Music International. This article is the last in the Next Wave series, which has been sponsored by Audi