Michael Arrington of TechCrunch had lunch with a record executive last week and probed him on why the labels are so anti-online.  The unnamed record executive said this in response...

It’s all part of a master plan. The labels fully understand that recorded music, streamed or downloaded, is going to be free in the future (we’ve argued this relentlessly). CD sales continue to decline by 20% per year, and the only thing that’ll stop that trend is when those sales reach zero. Nothing will replace those revenues.

They also understand that recorded music will largely be little more than marketing collateral, meaning that the Internet services being sued today for copyright infringement will be embraced in the future as ways to get the word out on hot new music. These services pay for the privilege today (either through high streaming rates or in court), but in the future they’ll be the ones getting paid by labels. Think radio payola at a whole new level, and there won’t be any more talk about social networks giving stock to labels and artists. Money will flow the other way, as it should.

By 2013 (maybe as early as 2011) it’ll make sense for the labels to finally reorganize their business models around the reality created by the Internet and person to person file sharing services. No longer will the labels be tied to revenue limited to sales of master recordings - by then most or all artists will be under 360 music contracts that give the labels a cut of virtually every revenue stream artists can tap into - fan sites, concerts, merchandise, endorsement deals, and everything else.

Now I don't doubt Mr. Arrington heard this from a record executive.  In fact, I strongly suspect I know who this executive is.  But even if it isn't who I'm thinking I'm almost sure it's someone relatively low level and who specifically works in a department that is tech related. 

Because this is exactly the type of thing you hear from tech people in record labels but it's something I've never heard from any executive that does anything else in a record label (I spent a large part of my life last year going to parties and interacting with these types of people)

But more important than my own anecdotal evidence when you really think about this "plan" it doesn't add up. 

First no industry in the history of mankind has given up their primary revenue stream willingly.  I doubt the recording industry will be the first.  Which means they'd only "go free"  if no one was willing to pay for music anymore.  But that's never going to happen (much of this is based on the idea that CD sales will eventually fall to zero which I consider unlikely).  So for music to go free the Record Labels would have to actually turn down money from people willing to pay.  Do you really see them doing that?

Second, this plan to give away music doesn't account for all the money that's made by acts that can't tour.  Just think about the money made off every Beatles album released and ask yourself if the record companies would willingly give that up.  There are thousands of classic albums that still make money 20 or 30 years after they were recorded and there's simply no way to duplicate that revenue.

Third, and related to my second point, this would represent a major drop in revenue for the record labels.  The entire touring industry grossed $4 billion last year while the music industry grossed roughly $5 billion in full album sales alone (not counting individual song downloads).  Those numbers might seem close but remember the labels are essentially making all the net profit off an album while tour money has traditionally gone to artists (meaning the labels would have to fight for a share).    

Finally, the biggest argument against giving away music is iTunes.  iTunes makes money.  The iTunes model works.  Even teenagers seem to have no problem buying from iTunes. 

On the topic of iTunes if this plan were true you have to ask yourself why record execs are so nervous about Steve Jobs.  What does Jobs and his power over the industry matter if record execs are planning to give away music by 2011 (and hence rob him of that power)?  More importantly, if there's some master plan in place to give away music and it's talked about so openly that someone would tell TechCrunch than why is Apple wasting so much time and money building iTunes up? 

Absolutely no offense to Michael Arrington but I'm pretty sure Steve Jobs is more "dialed-in" than his lunch mate is. 

So in closing, this supposed plan just doesn't make sense.  But it's exactly the kind of thing that an under appreciated tech exec working in a record label would think is inevitable.  Meaning it's exactly what that exec would say when questioned about his company's actions.  So I don't give it much credence.  

Addendum: I focused mostly on touring revenue above but the original quote does mention "fan sites, merchandise, endorsement deals, and everything else".  The truth is revenue from these is pretty negligible.  They are the bones that record labels throw to artists to keep them happy.  If they generated any significant revenue than the labels would have taken them over a long time  ago.