(Business 2.0 Magazine) - The lights were dim. Scented white candles guttered and glowed, arrayed around a towering arrangement of white flowers that were themselves encircled by chairs draped in white linens. Madonna was in the house.

The house in this instance was a conference room at the New York headquarters of Warner Music Group (Research) last June, and despite the efforts to set the mood, the vibe was anything but relaxed. CEO Edgar Bronfman Jr. and a handful of top Warner executives had gathered to hear Madonna's as-yet-unreleased album, Confessions on a Dance Floor.

Warner Music Group CEO Edgar Bronfman Jr.

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Bronfman was particularly edgy; Madonna's last record had bombed, and the onetime undisputed diva, now 47 years old, seemed perilously poised between one last shot at clawing back into the limelight or sliding further into faded stardom -- and, more to the point for Warner, commercial oblivion.

Yet as he listened, Bronfman was relieved, then thrilled. Track after track sounded like classic Madonna, the kind of music that had made her a global superstar, selling roughly 200 million albums for Warner over her career. When the CD ended, Bronfman stood up, turned to Madonna, and said, "You are our queen."

The moment was more than the beginning of one pop luminary's comeback. It may ultimately be looked back on as the moment when the recording industry, so baffled for so long by all things digital, started to get its own act together. With Confessions, Bronfman and his lieutenants decided put an entirely new way of selling music to the test. It involved not just traditional marketing -- most notably a campaign with Motorola (Research) to promote the Rokr phone -- but also a string of digital firsts.

Warner teamed up with France Telecom and other carriers to release a ringtone of the single "Hung Up" a month before the song was released. The impact was swift: In France, for instance, so many fans downloaded the 20-second tune to their phones that DJs, unable to get their hands on the CD itself, began broadcasting the ringtone on radio. The ringtone release also helped draw in a younger audience.

Then, instead of releasing the entire album at once, Warner let France Telecom's Internet customers and iTunes users download the single if they preordered the album. It also sold the single along with a video and, with the official release of the album last November, offered a digital dance-mix version in which all the tracks blend together.

The upshot? All variations of Madonna's release jumped to the top of the charts -- in the physical world as well as the digital. Remarkably, this happened as Confessions got less than half as much radio play as releases from other top artists, according to Warner research. Even more encouraging for Warner was that many fans paid $3 extra to download the video from iTunes along with the album. Now, just four months after its release, Confessions has sold more than 7 million CDs worldwide, generating by analysts' estimates roughly $100 million for Warner-and that doesn't include the tens of millions in additional revenues from digital downloads.

Confessions wouldn't be such a smash if Madonna hadn't once again created something that connected with a global audience. But the clever ways in which Warner has exploited digital possibilities have established the company as a leader in aggressively rethinking the music industry and have laid out the beginnings of a blueprint for how the entire business may save itself from oblivion in the iPod age.

The industry's overall sales continue to sag as consumers abandon traditional CDs for the mix-and-burn digital world, and Warner is no exception: Its first-fiscal-quarter revenues were off 4 percent. But Warner has captured an outsize portion of the growing digital pie, commanding 17 percent of the CD market in the United States, but an almost 23 percent share of the sale of digital albums. EMI, with 10 percent of the U.S. digital-album market, is the only other major to have a greater digital presence than physical.

Moreover, while Warner's digital revenues are still modest -- $69 million in the first quarter -- digital is by far the fastest-growing aspect of its business, up 30 percent from the fourth quarter. By 2010, some analysts estimate, Warner's digital efforts should generate roughly $1.4 billion a year and make up about a third of the company's revenues.

"Edgar is willing to experiment and not to be tied to old rules," says longtime friend and former colleague Barry Diller, CEO of IAC/ Interactive (Research). "He took a company most people thought was going to lose its entire base and has rebuilt it brick by brick."

Warner's quest to conquer the digital world still faces any number of threats, from heavyweight rivals to quirks in consumer taste to music pirates. But, for the moment, Bronfman appears to have succeeded in infusing an encrusted organization with new entrepreneurial zeal and creativity, and his progress has the makings of an impressive corporate turnaround -- and an equally impressive personal one.

Bronfman has been a controversial figure in American business, and when he put together a group of investors to buy the business from Time Warner (Research) in 2003 for $2.6 billion, it was widely derided as a here-he-goes-again move. Bronfman was still stinging from his last big gamble when, at the height of the dotcom bubble, he sold the family business, Seagram, in exchange for a large stake of what became Vivendi Universal (Research). The deal quickly soured, the Vivendi stake lost billions in value, and Bronfman's efforts to buy back some of the assets, including his prized Universal Music, failed.

If he can transform Warner into a digital power, what he likes to call a "music-based content company," Bronfman, now 50, will have remade a checkered record as a strategist and manager.

The flip side, of course, is that if he fails, both Warner and Bronfman's reputation as a businessman will simply fade out.

This is an excerpt from a story in the April issue of Business 2.0. To read the complete story, click here.