You can make money off online music

(breakingviews.com) -- Free downloads nearly killed the record business. A generation of youthful customers got used to the idea that music should be given away. Compact disc sales fell around 15% annually year after year.

Yet the peak of this trend now appears to have passed. That leaves an unusually clear landscape for growth in paid-for music downloads.

These now account for 35% of all U.S. songs sold, according to market research firm NPD Group. What's more, they are growing at up to 20% per annum, while CD volumes are shrinking at about the same rate.

That means the number of online songs sold should surpass traditional formats by the end of next year. Of course, since downloaded songs are somewhat cheaper, it will take a few years before revenues will follow if current trends hold.

Moreover, downloaded music sales shouldn't be any less profitable. A CD costs $6.40 to manufacture, distribute and sell in a store according to research firm Almighty Institute of Music Retail. These costs disappear when music is distributed online. An album that costs $16 in a store is about as profitable as one downloaded for $10.

Unfortunately, this doesn't mean happy days are around the corner for companies like EMI and Warner Music (WMG). The industry may once again think about growth, but the spoils will have to be shared quite widely.

About 70% of all download sales occur on Apple's iTunes. The tech company demands a cut of the proceeds, and its dominant position means it has sway over music producers. Apple (AAPL, Fortune 500) has been largely able to resist pressure by record labels to increase the price at which it sells music.

Musicians also have increased bargaining power. Bands can more easily distribute music online themselves -- or threaten to and demand better terms from labels. And the big retailers aren't going down without a fight. Geriatric glam-rockers Kiss just signed an agreement with Wal-Mart (WMT, Fortune 500) that gives the retailer an exclusive album to sell while the band gets a bigger share of profits.

Music sales may once again grow. But that doesn't mean the big music companies will return their prosperous heydays.