Why record labels matter now more than ever

The Internet may help bands get their music out, but it's a crowded arena. That's why most acts still need a label behind them.

By Paul Sloan, Fortune senior writer

(Fortune) -- In the music business, promotion is paramount --- and that's why the bracelets are such a great idea.

Warner Music (Charts) and AT&T (Charts, Fortune 500) Mobility threw a swank, invite-only bash at a San Francisco nightspot recently, featuring a concert by the multi-platinum band Matchbox Twenty. Attendees received a black rubber bracelet that doubles as a USB device. Plug it in your computer and, voila, you get the band's latest album, Exile on Mainstream, plus a video and other digital goodies. Pretty cool.

Matchbox Twenty's Rob Thomas.

The bracelet itself, which includes 17 songs, plus video interviews and a digital booklet with album art, is now on sale for about $35 at Best Buy (Charts, Fortune 500) and other stores. It isn't about to resurrect the ailing music industry. But it does show the efforts that the labels are undertaking to get music out in this entirely disruptive digital age.

It's easy to think that these days musicians can go it alone, and the evidence seems ample. British rockers Radiohead recently eschewed the major labels and released their latest album, In Rainbows, on its Website, letting fans pay what they want to download it. Trent Reznor of Nine Inch Nails said he would follow suit. And Madonna just jumped from Warner Music after snagging a lucrative deal with Live Nation, a company that puts on concerts.

So who needs the labels? Well, major acts like Matchbox Twenty, for starters; and, for that matter, most any band that aspires to such heights.

Matchbox Twenty, which is fronted by Rob Thomas, has been with Warner Music Group's Atlantic Records for ten years. The band gets tons of radio play and has sold some 28 million albums. When I asked Livia Tortella, Atlantic's general manager and executive vice president of marketing and creative media, how her team is promoting Exile on Mainstream, she shot over a 41-page, "phase I" marketing plan.

It's packed with info that would have been found on such a plan a decade ago -- dates on Jay Leno and elsewhere, scheduled radio interviews and so on -- but it also sheds light on the complexity of today's chaotic marketplace.

Consider how Atlantic released the album -- rather, all 11 versions of it, if you include the bracelet. Fans who pre-ordered the entire album on Apple's (Charts, Fortune 500) iTunes got the single, "How Far We've Come," at the time of purchase, plus a bonus track. There were bundled offerings on iTunes that included extra songs if you chose the non a la carte option. Wal-Mart (Charts, Fortune 500) shoppers got exclusive video. A deal with Viacom's (Charts, Fortune 500) VH1.com gave that channel an exclusive stream of the album a week prior to the in-store release date. And this is just a sampling.

Atlantic also landed a featured spot for the band's video on Google's (Charts, Fortune 500) YouTube, and it premiered some content on News Corp.'s (Charts, Fortune 500) MySpace. Then there are mobile deals, such as the one with AT&T Mobility, where customers had access to exclusive live audio and streaming video as part of the launch of its over-the-air download store. Matchbox Twenty was featured on the screen that mobile users first see when hunting for music.

"That is as exciting as getting an MTV spin," says Tortella. And when Matchbox Twenty has news it wants to get out -- an upcoming TV appearance, for example -- the label blasts text messages to fans. "The scope of what we're doing is so much more diverse than it was even two years ago," says Tortella. "There are a lot of people touching this act, and we're hitting fans on all fronts."

Viewed this way, the opportunities for artists bigger and better than ever before. Yet for as much as the Internet helps bands get music out, in some ways it also makes it harder to get noticed -- at least on a grand scale. That's why most acts still need a big machine behind them, which for now means the labels.

"How else do you break through all the noise?" says Donald Passman, author of "All You Need to Know About the Music Business," and Radiohead's attorney. Even Radiohead, held out in the press as the rebels of the industry, is negotiating to once again sign with a label.

Of course, the trick for the labels is to figure out how to make more money off this ever-more laborious process of distributing and marketing bands. CD sales, still the bulk of the business for now, continue to slide, and no one has figured out how to replace that once-lucrative cash machine.

This is no easy task, and the transition is proving painful for investors. Warner Music Group's stock, for example, is trading around $9, down from about $25 just six months ago.

But for music lovers, the digital age is proving anything but painful. Who, after all, would want to return to a world with only CDs? I, for one, am hoping for more USB bracelets. Top of page