THE FIRST DECADE OF THE 21ST CENTURY

In the first decade of the 21st century, the rise of computers as the primary means to record, distribute, store, and play music caused widespread economic changes in the music industry, fundamentally changing the relationships between artists, record companies, promoters, retail music stores, the technology industry, and consumers. The rise of digital music consumption options contributed to a few fundamental changes in consumption. First the decline of album sales. With the A la carte sales models increasing in popularity, consumers no longer download entire albums but rather choose single songs.

The initial stage (from approximately 1998 to 2001) of the digital music revolution was the emergence of peer-to-peer (P2P) networks that allowed the free exchange of music files (such as Kazaa and Napster). By 2001, the cost of hard drive space had dropped to a level that allowed pocket-sized computers to store large libraries of music. The iPod and iTunes system for music storage and playback became immensely popular, and many consumers began to transfer their physical recording media (such as CDs) onto computer hard drives. The iTunes Music Store offered legal downloads beginning in 2003, and competitors soon followed, offering a variety of online music services, such as internet radio. Digital music distribution was aided by the widespread acceptance of broadband in the middle of the decade. At the same time, recording software (such as Avid's Pro Tools) began to be used almost exclusively to make records, rendering expensive multitrack tape machines (such as the 1967 Studer) almost obsolete.

The chief economic impact of these changes was a dramatic decline in revenues from recorded music. In the 21st century, consumers spent far less money on recorded music than they had in 1990s, in all formats. Total revenues for CDs, vinyl, cassettes and digital downloads in the U.S. dropped from a high of $14.6 billion in 1999 to $9 billion in 2008.

The popularity of internet music distribution has increased and by 2007 more units were sold over the internet than in any other form. However, as The Economist reported, "paid digital downloads grew rapidly, but did not begin to make up for the loss of revenue from CDs." The 2000s period stands in stark contrast from the "CD boom" of 1984-1995, when profit margins averaged above 30% and industry executives were notorious for their high profile, even frivolous spending.

The major record labels consistently failed to heed warnings or to support any measures that embraced the change in technology. In the early years of the decade, the industry fought illegal file sharing, successfully shutting down Napster in 2001 and threatening thousands of individuals with legal action. This failed to slow the decline in revenue and was a public relations disaster. Some academic studies have even suggested that downloads were not the true cause of the decline.

The turmoil in the industry changed the balance of power among all the various players. The major music-only stores such as Tower Records (which once wielded considerable influence in the industry) went bankrupt, replaced by box stores (such as Wal-Mart and Best Buy). Recording artists began to rely primarily on live performances and merchandise for their income, which in turn made them more dependent on music promoters such as Live Nation (which dominates tour promotion and owns a large number of music venues.) In order to benefit from all of an artist's income streams, record companies began to rely on the "360 deal", a new business relationship pioneered by Robbie Williams and EMI in 2007. At the other extreme, record companies also used simple manufacturing and distribution deals, which gives a higher percentage to the artist, but does not cover the expense of marketing and promotion. Many newer artists no longer see any kind of "record deal" as an integral part of their business plan at all. Inexpensive recording hardware and software made it possible to create high quality music in a bedroom and distribute it over the internet to a worldwide audience.This, in turn, caused problems for recording studios, record producers and audio engineers: the Los Angeles Times reported that, by 2009, as many as half of the recording facilities in that city had failed. Consumers benefited enormously from the ease with which music can be shared from computer to computer, whether over the internet or by the exchange of physical CDs. This has given consumers unparalleled choice in music consumption and has opened up performers to niche markets to which they previously had little access. According to a Nielsen and Billboard report, in 2012 digital music sales topped the physical sale of music.