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MICHELE NORRIS, host:

Midyear music sales figures are in and they are not good. CD sales from January to July have suffered a 19 percent drop compared to the same period last year according to Nielsen SoundScan. That follows a roughly seven percent drop for all of last year.

More people are legitimately buying music online, but ten times as many songs still get downloaded for free.

NPR's Neda Ulaby reports on the state of the music industry and the question facing musicians and their labels.

NEDA ULABY: The basic questions are both old and relatively new, says Michael Bracy. He's policy director of a group that works to help independent musicians. It's called the Future of Music Coalition.

Mr. MICHAEL BRACY (Policy Director, Future of Music Coalition): How does an artist become noticed? How do you, quote, unquote, "monetize" the digital music industry?

ULABY: There's a musician named Ne-Yo who's managed to answer those questions very successfully. He started the summer with a number one album, and he sold over two million tracks online.

(Soundbite of "Because of You")

NE-YO (Singer): (Singing) And it's all because of you.

Unidentified Group: (Singing) All because of you.

NE-YO: I don't look at this like, let me try to sell as many albums as I possibly can. I mean, of course, that's what everybody prays for. But at the same time, that's not what you think about when you're making the music. What you think is trying to create a piece of art, something that's going to outlive you and your kids, and your kids' kids.

ULABY: Ne-Yo's done very well. His latest CD has sold over half a million copies since it came out in May. Numbers like that give hope to the head of the Recording Industry Association of America.

Mr. MITCH BAINWOL (Chairman and CEO, Recording Industry Association of America): I expect that album sales will be a piece of our future.

ULABY: Mitch Bainwol predicts in 10 years, physical products will still make up 60 percent of music sales. He contends the industry and consumers are not yet ready to toss out shiny plastic discs.

Mr. BAINWOL: There's an appetite for physical product there. There's something when you can touch and feel and read and own that is still of value to people. But they'll going to be looking for products that are different than the traditional CD. And we'll see over the course of the next six months a range of these products come out.

ULABY: The music industry has for years tried to entice consumers back to physical goods. They tried high definition CDs. And remember dual discs? Music on one side, video on the other? The new big thing is supposed to be Music Video Interactive discs, loaded with extras like downloadable MP3s. But that's just an attachment to what some call an obsolete sales model.

Mr. BRACY: It's a generational divide, because you have many generations of people who are probably right now making decisions who belong to this old world.

ULABY: The Future of Music Coalition's Michael Bracy says there's now an entire generation of kids who grew up fully digital. And they don't care about CDs, dual discs or MVIs. Now, sales of digital songs have gone up 49 percent.

But according to Eric Garland, who runs a Web site called BigChampagne that tracks music online, digital hits, the ones with legs, tend to be purchased by older people, for themselves and their kids and grandkids.

Mr. ERIC GARLAND (Co-founder and Chief Executive Officer, BigChampagne): So you now have top sellers in a given year that are comprised of things like "High School Musical" and on the other hand standards recorded by Rod Stewart.

ULABY: Garland says kids who want to hear Ne-Yo's latest hit can just visit his MySpace page. It's streamed there for free with a few other songs.

Mr. GARLAND: More and more what we hear from young people is, I really have no need to buy that song from iTunes, or really, I can't even be bothered to steal it because I've listened to it on MySpace now a thousand times and if I ever hear it again it will be too soon.

(Soundbite of song "Because of You")

NE-YO: (Singing) It's all because of you, all becauseā€¦

ULABY: Younger people increasingly find new songs and artists by reading Internet music blogs and listening to Web radio. But, Michael Bracy warns the future of the music industry hinges on the unencumbered availability of music online and the issue of network neutrality.

Net neutrality is the idea that Internet providers must treat all content equally. It's a subject of pending legislation and it's opposed by cable and telecom companies that want to offer different tiers of service and get their content to you faster. Bracy says that would be bad news for independent musicians.

Mr. BRACY: It is absolutely vital for the future of the music community that we don't allow these two industries to basically lock down the Internet in the same way that Clear Channel and several other large corporations locked down commercial radio.

ULABY: Bracy is referring to the change heard on the airwaves after the 1996 Telecommunications Act allowed Clear Channel and other big broadcasters to buy up thousands of radio stations nationwide.

Recently, Clear Channel and three other major broadcasters reached a payola settlement with the Federal Communications Commission. It resulted in the four broadcasters volunteering to give airtime to independent musicians.

But only CBS Radio has been willing to give NPR examples of actually doing so. Among other things, stations owned by CBS have started entire shows that feature only independent musicians and air them when people actually listen.

Neda Ulaby, NPR News.

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