There is a lot of turmoil in the music industry. The big publishers (usually dubbed “the majors”) are finally waking up to the fact that a decade of neglecting to come up with suitable business models for the web has bred a generation of consumers that have never paid for music. For them, music is free. It’s something you get from your friends via IM, through peer-to-peer applications or download directly from artist’s web sites or Myspace profiles.

This will never change back. From now on, basic access to music will be free – i.e. free to the consumers. As TechDirt’s Mike Masnik has rightfully pointed out, the most fundamental theories of economics state that in a market with infinite supply, the price will be zero. Infinite copies of digital music can be made with no cost, hence the ultimate price of a copy will be zero. Zip, nada, nix – nothing whatsoever.

This does not mean that music is dead. On the contrary. The likelihood of a musician being able to live from his art has probably never been greater, and being a music consumer has never been better. Its the roles of the middlemen that are changing, decreasing – and for those that don’t adapt – vanishing.

In my mind, there is an inevitable business model for music. This model consists of three layers.

1. Basic access for free: Basic access to music will be free to the consumer. Their ISPs, telcos, portals or other music providers will pay a small fee to the rights-holders – something like 2-4$ per active user per month. This will allow them to legally provide their users with the ultimate music services – every song ever recorded, discoverable in every possible way for free – yet with higher quality and in a more user friendly way than today’s illegal file sharing methods.

   These music providers will recoup this cost via other channels, such as advertising, bundling of music services with other products and services, such as telecommunications, and upsell of music related products (see layer 2).

   For some time we’ll probably see this limited to streaming music. The right-holders will struggle to try to sell copies of songs (full track downloads) but a stream can easily be turned into a copy and copies will still float around for free illegally. That, coupled with ever more ubiquitous internet access means that the imagined difference between a stream and a copy will eventually fade.

   At a great conference here in Reykjavik last week, we heard from “media futurist” Gerd Leonhard, that even at the peak of music industry’s revenues, music spending per household in the US never surpassed 5$. This obviously means that 2-4$ per user, sometimes even active on more than one such service in a given month is actually a great deal.

2. Merchandise and ads: While copies of songs are an infinite resource, most other things aren’t. Merchandise, such as T-shirts, baseball caps, autographed posters and images, special edition vinyl records, books, etc. are desirable items to devoted fans. These can be a great source of revenues both for the bands directly and for the music service providers.

   A captive and focused audience is also of great value to advertisers. Fans of a certain band or of a certain type of music, tend to be highly targetable consumer groups; sweet music to the ears of every ad network and advertiser and quickly worth more than the basic price paid to the rights-holders in layer 1.

3. Access to artist: The artists themselves, already making money from the activities in layer 1 and 2 are (rightfully) the kings of the future of music.

   The most valuable asset in the whole music value chain is access to the artists themselves in one way or another. Concert tickets and backstage passes are obvious examples. An online video chat with your star together with a group of fans is worth something, and merely a glimpse of an opportunity to get on a devoted phone call with your favorite pop star could be worth dying for!

   Other types of direct access include getting a band to write a new song for your movie or advertisement, or sponsoring the band’s latest tour – in both cases riding on the bands most valuable asset: their devoted audience.

   Finally: While economists may not understand tipping, human beings actually do part with their money even if they don’t have to, just to show their gratitude or affection for something provided to them. Note to hopeful bands: Make it easy for your fans to donate money to you directly – they will.

These layers feed of each other. Unlimited access to music (layer 1) captures bigger audiences. Bigger audiences mean more value to the music service providers (layer 2) which in turn leads to more interest in the direct access (layer 3).

All indications are that this is actually already happening: As revenues from music sales are going down, the revenues from concerts and gigs are at an all time high. What musicians DON’T need anymore is someone to handle the physical distribution of their music – there is no physical distribution. They DO need distributors (music service providers) and they DO need promoters that help them capture and grow their audience. These needs are spurring new types of music companies, but nobody will ever again have the kind of stronghold on the artists that the publishers have had for the past decades.

So it goes.