If optimism can be measured by the density of the cigar smoke in the bar of the Carlton Hotel in Cannes this week, then the mood of the music industry is finally improving.

After five years of losing sales to piracy and illegal downloads, record company executives, promoters and lobbyists gathered for the annual Midem conference in the south of France to celebrate rapid growth in legal sales of digital music, and sign the deals they hope will return the business to growth.

News that legal download revenues had tripled to $1.1bn in 2005 captured headlines in the past week, but the evidence from the conference and from the conversations in the seafront cafes of La Croisette, suggests the industry still faces many challenges to its business model.

John Kennedy, chairman and chief executive of the IFPI, the industry’s trade association, said the early figures for 2005 suggested global revenues would be down by about 2 per cent. Analysts at Merrill Lynch estimate that growth in 2006 will be only 2 per cent.

Despite expectations of further growth in new media revenues, executives from the music industry and from the mobile and online companies which see music as vital content, were evasive about the profit margins in this emerging industry.

As O2 announced a deal to offer its customers exclusive footage of live concerts. Grahame Riddell, the mobile operator’s head of content marketing, admitted, for example, that it was not charging for its early offerings, and it was unclear what consumers would be willing to pay for such a service.

Privately, several executives admitted that the investments they had made in digital distribution, copyright renegotiations and marketing new outlets meant that they were so far making little, if any, profit from digital music.

As internet service providers and mobile phone operators price bundles of music aggressively to build customer loyalty, further price deflation was likely, some warned. “Music has become a disposable item,” said Nicholas Firth, chairman and chief executive of BMG Music Publishing, part of Sony BMG. “For many people it’s a traffic builder.”

The appetite of mobile and new media companies for music was visible from the composition of the crowd in the Carlton, where few meetings took place without a laptop or a selection of handsets laid out for demonstration purposes.

Michael Bornhäusser, chief executive of Secure Digital Container and Digital World Services, two digital rights management companies, said the digital industry was at the beginning of a land-grab, where establishing market share was the priority.

“Nobody is able to make many revenues yet,” he said, but profits would follow. “If a consumer is paying £10 a month now for mobile entertainment, it will be £20 by 2008,” he predicted.

Patrick Parodi, chairman of the Mobile Entertainment Forum trade association, said other innovations would improve the mobile music model, such as the video clip equivalents of ringtones, “community” content or advertising-supported models.

Other innovations on display at Midem included a demonstration of Vodafone Radio DJ, a series of interactive, personalised radio channels for personal computers and mobile phones developed by the mobile operator with Sony NetServices.

RealNetworks, a media player software provider which also offers an online radio service, was one of several exhibitors to try to tap the market for “user generated-content”, offering customers the chance to load home-made music on to a site and make money by charging any fans that download it to their computer or mobile phone a small fee.

The data about which songs prove popular could be offered to music companies looking for new talent, said Gabriel Levy, RealNetworks’ head of music in Europe.

The 335 different legal music download services, and the hundreds of content aggregators serving them, would have to consolidate or agree on common standards, if they were not to alienate consumers, said Thor-Arne Pettersen, chairman of the24, which provides content to mobile devices.

“If you move from Vodafone to Orange, all your music is lost and you have to buy it again. That annoys kids and encourages piracy,” he said. Establishing clashing proprietary systems “is like peeing your pants to keep warm. It’s very short-sighted and you stink afterwards.”

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