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Social Media continues to emerge as a revolutionary and transformational tool for businesses everywhere. What is most interesting is how a failure to embrace these new changes and innovations can have a huge impact on your profits - nowhere is this more evident than the music industry.

There is no doubt the music industry was hyper-profitable. As pointed out by Seth Godin in his book Tribes, the music business built huge systems, with top-heavy organisations, dedicated superstores, a loss-leading touring industry, all of which experienced incredibly high profit margins. But the world has changed, and it seems from the outside that record executives are stuck clinging to their now defunct corporate lifestyles.

So lets look at the history. The music industry was traditionally built around specific pillars:

• Free radio promotion
• A limited number of competing music labels
• A high cost of production, requiring musicians to get finance from labels
• A Top 40 hits-based focus
• A high margin delivery medium in the form of CD LP’s

At its heart, the music label was the only means to be heard. The only way you could get music out was by physical distribution - having the network to print CD’s in bulk, ship them to stores, place them in stores, and then run the marketing juggernaut behind them by getting radio play.

Then something crazy happened. In 1999, Napster emerged and made it incredibly easy for people to share music online. Instead of embracing or having the foresight to invest in this new form of distribution, the record companies decided to form a mistake that continues, suing Napster for copyright infringement - a monumental technology blunder.

Cue today, and the music industry is still trying to push their old method, and are still trying to sue the massive amount of fragmenting “pirate” networks. At the heart of this is what Umair Haque calls the zombieconomy - when we don’t reward people for creating, growing, nurturing, or even remixing assets. We don’t foster innovation, but instead try and reward people for allocating the same old assets, which leads to failure.

Not content with trying to sue the pirate networks themselves, the Record Industry has now attempted to sue individuals involved in file sharing. The Recording Industry Association of America (RIAA) has spent the last 5 years doing just this, for the grand result of getting 30,000 individuals to settle for a few thousand dollars outside of court.

Now the strategy is to target ISP’s, getting them to remove individuals caught sharing music, or even filter out copyrighted material sailing through peer-to-peer protocols - regardless of fair use. A monumental task that could amount to censorship of the Internet and an attempt to control a supposed free ecosystem of information.

Again this is simply fighting a battle that cannot be won, and raising the ire of artists and fans alike, and doing little to improve their cause.

So what are the current Digital Music Trends, and what are smart innovators doing to actually use new technologies to their advantage? Social Media has now become a fantastic tool to help emerging or established artists make money while creating deeper connections with their fans.

At the highest end of the scale, Nine Inch Nails have continually utilised the Internet and new technologies in a way that has created a loyal ecosystem of rabid fans by providing the tools, technologies and means to interact with the band and each other. Their distribution model has sidestepped record labels altogether, and created practices that would make the current record establishment pull out their hair - by giving up control and placing it openly in the hands of their fans, a perfect lesson in good Social Media practice.

Check out the interview with Trent Reznor on Digg Dialogg, it is a fantastic insight into how artists can flourish in this new music environment, although the strategies can be applied to businesses outside of music - so brands, take note.

The other trend is harnessing fan involvement, which has mostly emerged in the form of remixing. Bands like NIN, Radiohead or Jay-Z have are early embracers of this, letting fans remix their songs to their delight, and providing the means to share these versions with the world. Tommy Lee has even opened this up one step further, allowing fans to collaborate on material for his new album, submitting their own stems to be part of the production process.

Now to the Social Media tools. With Twitter or Facebook, smart artists can harness the power of their fans by creating deeper relationships through personalised communication. Why would you want a faceless record label sending PR releases to music magazines and press when you can communicate directly with the members of a band through the Internet. And if you are an emerging or smaller artist, you can even utilise tools like Twitter to make money.

The other side to this are new Applications that make managing your band and connecting with your fans even easier. Mashable outline a few in point five of this Digital Music Trends article, but the list now is endless. From building a fan powered Social Media website for communicating, selling your music online so you keep the profits, or managing your bands day-to-day schedule, the Internet provides a range of free or paid apps to do so.

Is it any wonder why record labels are starting to get scared?

You may have noticed recently that new editing features on YouTube allow you to add notes or links to your videos. This has essentially opened the door up to a host of new ways of interacting with the video you are watching, and even allow you to utilise the interface to control the narrative.

A recent example of this is in the set of videos created by production company ChadMatt&Rob entitled The Time Machine. Remember those choose your own adventure books? This essentially takes that format, and places it in the video, allowing you to make decisions for the characters and have the story unfold the way you want it.

New interactive video looks like a big bonus for content delivery sites. It should offer a reason for people to hang around on a website longer as they navigate through the experience, and offer better engagement with what you are consuming. After all, television can only offer a linear experience, so this gives a new reason to open up your computer.

Who says an IT&T / B2B company can’t have some fun.

Watch A Special Valentines Gift From CISCO…

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