It’s stating the bleeding obvious, I know, but EMI’s new owner has said the record industry needs to embrace digital or die. But there’s more to it than just selling downloads. The whole business model needs to be looked at.

In an email to staff, financier Guy Hands says:

“The recorded music industry… has for too long been dependent on how many CDs can be sold,” he wrote. “Rather than embracing digitalisation and the opportunities it brings for promotion of product and distribution through multiple channels, the industry has stuck its head in the sand.”

Which is true. But the really important bit is where he talks about big-name acts.

“Why should they subsidise their label’s new talent roster – or for that matter their record company’s excessive expenditures and advances?”

The music business is ultimately a high-stakes gambling system. The record companies spend huge sums of money on launching new acts, and 95% of those acts never recover the money spent – but the 5% who do break even include a handful of superstars, and the profits from those superstars finance the whole shebang.

That business is only sustainable when the record labels are the only way to reach music fans, and pre-digital they were. There were all kinds of barriers to entry: the cost of recording, the logistics of pressing and distributing records, the cost of marketing, the lack of space in the mainstream media, and so on. Digital is killing all of that.

Part of it is the relentless rise of technology. I can do stuff on my Mac that I couldn’t have done in a recording studio even 10 years ago. Part of it is the rise of alternative media, social networking and other ways to spread the word without paying for PR or praying for an NME review. And part of it is the long tail. The record industry is based on a model where a handful of acts make huge sums and everybody else makes nothing – but thanks to digital, there’s now a middle way where musicians might not become superstars, but they might not starve either.

And more than anything, digital means the big acts don’t need the record companies to get their music to their fans. All you need is a web server and a bit of bandwidth, and because you’re removing so many overheads – the general overhead of being a company, the cost of manufacturing, of marketing, of paying for all the bands who shouldn’t have been given record deals in the first place – you can make a profit while charging much less. Which in turn adds to the downward pressure on the price of music, which squeezes the labels’ margins even further.

Fundamentally, the record labels need the U2s, the Radioheads, the Foo Fighters et al. But U2, Radiohead and the Foo Fighters don’t need them. If the labels can’t address that, they need to find a new business model that doesn’t use a tiny number of successes to bankroll a catalogue of extremely expensive disasters.

And if they can’t do that, they’re doomed.