• BusinessWeek, Friday, March 6, 2009 11:31 AM

The music industry has a new Internet problem, writes BusinessWeek's Douglas MacMillan. Whereas online piracy was once the chief concern for the big record labels, now online music services like Imeem, Last.fm and MySpace Music are eating away at sales revenues. The irony about these services is that the major record labels are partners, receiving a cut of their fees and advertising revenues.

Ad-supported online music services were supposed to serve as a legal alternative to online piracy, while providing incremental revenue for the labels as consumers discovered new music. The reality, MacMillan says, is that these services have ended up as a substitute to buying digital music for many online users, rather than as a catalyst for more purchases. And the cut the music labels receive from these services is far less than they get from digital and offline sales.

Meanwhile, overall music sales continue to slide. Last year, total industry sales were about $10 billion, down from $14 billion in 2000, according to the Recording Industry Association of America. Even though digital sales growth through services like iTunes remains strong, it's not enough to cover the cost of falling CD sales. According to a recent report by Forrester Research, overall spending on music is slated to shrink 4% through 2013.

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