Behind Grammy grins, an industry grimaces

At tonight's Gram-my awards, winners will gasp and smile, losers will grin and bear it. A worldwide TV audience will ogle the display of celebration and self-congratulation with both relish and disdain.

But just as the nominees in each category must swallow hard when another name is called, the evening will mask a growing litany of problems that challenge the very structure of the recording industry.

Socked from without by a generation of music fans who regularly forgo the purchase of CDs for free songs from the Internet, the industry is also shaken from within by lawsuits challenging the very nature of how artists are discovered, nurtured, and marketed. Two fresh stats light the sky like signal flares: sales of blank CDs in 2001 exceeded those of recorded CDs - for the first time in history - while album sales dropped 10 percent over the same year.

"The recording industry is in quite a bind because they have lost control of production and distribution," says Drew Borst, a music -industry analyst for Sanford C. Bernstein, a New York brokerage firm. That's because the largest segment of buyers - teens and young 20-somethings - now purchase technologies to "burn" and copy their own CDs.

The top five companies that have long dominated the recording industry are scrambling to figure how to recoup income losses and devise ways of ending illegal pirating of copyrighted music. Besides the prospect of electronic surveillance to nab scofflaws, the efforts include getting young music pirates to sign up for online subscription services instead, paying monthly fees to download music.

Another problem for record companies: getting their artists heard.

Increasingly, music listeners are using other outlets, such as Internet radio or the new XM satellite radio subscription service, where they have greater control of the music programming. Want a channel that just plays bluegrass music from Australia? The new mediums not only allow listeners to select niche music, but it also provides them with opportunities to explore music seldom heard on regular channels.

For record industry titans that have used the AM/FM dial as their principle marketing tool for decades, spending money to influence what DJs play no longer guarantees sales.

"There is a major kind of push/pull in the recording industry to get rid of the middle guy, which is radio, so as not to depend on their [disc jockey] airplay to generate distribution and sales any longer," says Cynthia King, author of "Entertainment and Society." "This will open up a whole new era of opportunity for all kinds of musicians to circumvent the old, traditional methods of outlet and distribution."

But the growing number of challenges to the industry may also have an upside. The only way for the large corporations to compete, some say, may be to focus on winning back consumers with better quality music.

"The same forces that are undermining the way record companies currently do business may unwittingly force them to do the things critics have long wanted them to do - focus more on developing the quality and diversity of music the public has complained is missing," says Mr. Borst.

If creating new outlets for musicians is one way of altering the current musical landscape, rewriting the rules for how they are signed and nurtured is another.

Several top recording stars are protesting what they see as recording contracts requiring artists to become "indentured servants." They are currently lobbying to change a 1987 California state law that requires artists to make albums still "owed" to their labels, even after contracts expire.

The group, led by some of the top recording artists from several eras - including the Eagles' Don Henley, Joni Mitchell, Billy Joel, Cheryl Crow, the Dixie Chicks and Courtney Love - is trying to bring attention to what the artists call overlylong, and unfair contracts imposed on musicians by record labels. The group took its case to the public yesterday in a Los Angeles concert for artists' rights.

But others say that artists complaining about restrictive contracts are not typical of most musicians in the business - most of them can't afford homes in Beverly Hills, for starters. Record companies, they say, set up long-term contracts to minimize their own risks for developing untested talent.

For an industry that relies on sales of established artists to offset losses made by the newer acts, there are challenges here, too. Big names such as Mariah Carey, Tori Amos and Rod Stewart were recently dropped after poor retail turnover.

"The greatest issue the recording industry faces right now is coming to terms with developing artists," says Don Gorder, chair of the music/business department at Berklee College of Music, Boston. "It goes to the heart of why record sales are down and why record stores all over are in trouble. Artists say there is not a lot of good music out there because large corporations are calling too many shots. Record labels say it's because everyone is stealing our music."