In my opening statement at the Future of Music, Copy Rights or Wrongs panel I talked about the nature of the shift occurring in the music industry.

The music industry is shifting from being a business associated with CD sales to the virtual world of digital singles, consumers with multiple music devices, and a society that increasingly believes that recorded music should be free.

The shift to virtual music is so profound, that it is cracking the very foundations of the recording industry. The recording industry should be fighting for survival by adopting new, innovative ways to make money. And, it should be doing this as rapidly as possible. In reality, the recording industry can’t embrace the digital world fast enough. Instead, it is trying to slow the rate of change by changing copyrights into copy wrongs.

One of the examples I spoke of was how copyright law was being manipulated through proposed legislative changes as well as by RIAA lawsuits. The idea of “fair use” has been with us for many years and has been an integral component of property and copyright laws. It is now under attack. If the recording industry gets its way we may see fair use completely eliminated.

What does this mean? We may be forced to purchase separate copies of every song for every device we own. This would mean If your household owns five iPods, you would buy five copies of each song.

Only yesterday, at the RIIA lawsuit underway in Duluth, Sony BMG’s chief anti-piracy lawyer was asked if it was wrong for consumers to make copies of music which they have purchased, even just one copy. She replied, “When an individual makes a copy of a song for himself, I suppose we can say he stole a song.” Making “a copy” of a purchased song is just “a nice way of saying ’steals just one copy’,” she said.

I agree that the recording industry’s value proposition is under attack by the technology industry and in some cases has been completed hi-jacked. Current copyright laws may not be enough to protect “virtual” music. The answer, however, is not to change the laws or shackle technology innovation. There are still many more ways to make money from music.

We must start by incorporating technology into the business model itself. Instead of trying to maintain an existing business model through lawsuits and legislation, I propose the recording industry and the technology industry work as one in developing a new and successful business model. Until this happens we will continue to see a disenfranchised consumer, technology innovation that abuses copyright and plummeting record sales.

Today, I was talking to a collegue about how his 19 year old daughter gets her music. He told me about that a few weeks ago his daughter had 4 friends over to the house and they were on her computer using limewire to download their music and then sharing it with each other via usb flash drives. I asked him whether they understood that they were stealing the music. He told me they didn’t believe they were stealing - its coming from Limewire and it’s not as if it’s a real CD. He explained to me that he asked them the same question about movies and they all believed that downloading a movie was stealing – because they see it in a mini commercial on every DVD and whenever they go to see a movie at the theater.

I believe this is prevalent in the thinking of today’s youth. Removing a physical CD from a store is well understood as stealing, the same goes for removing a DVD from a store. Even with music download sites like iTunes, where you have to pay to download music, there is still a belief that downloading music is not stealing. The movie industry has gone a long way to educate people that downloading is stealing. The RIAA prefers to file lawsuits as its method to educate. Perhaps if it took the money made from settlements with consumers and invested it in ways that help educate consumers such as TV commercials, billboards, and other mass communications, there would be less people using peer-to-peer download sites and more people buying music from legitimate download sites.

Technology itself will not force the music industry into freakonomics, and legislation will not protect the music industry from ending up that way. However, people want to share music. It’s human nature. And, most people will obey the laws of their land, if they are able. That means, it’s in everyone’s interest to present people with options for sharing music within the boundaries of fair use. Otherwise, we are forcing them to use technologies for illegal purposes.

The same technologies that RIAA wishes to control can be used to foster more effective business models, with reduced costs or higher volumes. Technology enables the creation of entirely new business models when it is incorporated into the business model itself. In other words, technology becomes part of a business process. It’s time that the RIAA drop it’s lawsuits, stop it’s lobbying and spend its money on embracing technologies that can quickly help in the transition from industrial-age manufacturing economics to digital economics.

The music industry needs to rethink their approach and begin incorporating technology into the model itself. Apple understands this very well, and has even begun to overcome the problem of teenagers without credit cards through its gift card approach.

The music industry could create a super eCommerce and music sharing site containing far more than the 3,500,000 songs on iTunes. They could setup music purchasing accounts with banks so that teenagers without credit cards can easily purchase songs. They could implement loyalty programs where sharing music can be used to motivate the purchase of music among friends, these loyalty programs would reward the person sharing whenever an item they shared was purchased by their friends. They could implement a subscription model, similar to emusic, and at the same time offer a purchase model on a song by song basis. They could reward people for volume purchases, or for hitting and exceeding annual targets.

Last week, I asked my 15 year old son why he didn’t join the online fan club of a particular band he is fond of. He told me they wanted to charge $10 per year to join and maintain his membership and all he got was a newsletter and discounts on the band’s concerts, which he knew he wouldn’t be allowed to attend until he was older. He said it just wasn’t worth it. I asked him what if they were to charge $20 and he would also get a free song to download every month in additional to the newsletter and concert discounts. He said that would be a bargain and he would have asked me for a credit card to use. When you consider this, for $20 a year he gets 12 songs, more per song than the 99 cents paid at the iTunes music store, and up to date news about the band he really likes. He would then tell his friends who also like the band about how great the experience is and some of them may sign up too. Unfortunately, this particular band hasn’t embraced this approach. This is just an example of the kind of loyalty program that embraces technology and incorporates it into the business model.

These are but a few of the ways the music industry and the RIAA could quickly gain the respect of the consumer and illegal file sharers while managing its own destiny in its move to digital economics.

I’ve been following the RIAA and its lawsuits against mothers, teenagers and the elderly over copyright infringements. I’ve also been following the RIAA’s lobbying efforts in Washington over the Audio flag and the “Analog Hole”.

The discussion about technology and music business models is getting confused with entitlement. At one extreme, you have some consumers believing they are entitled to use any technology to consume and redistribute any content for free. At the other extreme, you have some music industry executives believing they are entitled to dictate the creation and use of technology in any manner they see fit. Technology has a tendency to settle in the middle of a market, where there is the largest number of users and greatest demand. This is true for products and for specific features.

The music industry is in the middle of a transition from industrial-age manufacturing economics to digital economics. Lawsuits focused on copyright and lobbying efforts to legislate against technology innovation are two ways the industry is using to slow down this transition.

What’s interesting is that technology has already transformed many parts of music industry business models — market research, recording, production, manufacturing, distribution, marketing, delivery, finance. There are only two areas where the industry is citing issues: technologies that play a role in music industry go-to-market strategies, and technologies that enable content sharing.

The music industry is not the first to go through a painful transition from industrial-age manufacturing economics to digital economics. Lessons are clear. The music industry needs to learn from others — banks, insurance, consumer goods, automotive, and the electronics industry to name a few. Right now, the software industry is going through a parallel shift — from proprietary to open source and from packaged software to metered use. In my previous position as head of the open source development network, I saw and participated in the early stages of this last transition first hand.

What’s clear is we cannot legislate innovation in consumer electronics, any more than we can legislate innovation in music.

More about this in Part 2.