As the music industry struggles to deal with the illegal downloading of tunes, there is a troubling pattern emerging where the business takes one step forward and one step back.

Actually, there were two noteworthy steps forward this week as retail music sales in Canada edged up 1% last year -- the first gain since 1999. As well, paid digital music downloads rose tenfold in 2004 to 200 million tracks as new services were established and selection improved.

This is good news for an industry stung financially by a peer-to-peer file-sharing networks such as Kazaa, and a new generation of consumers who do not believe in paying for music. The industry has attempted to fight back, using legal tactics to shut down P2P services, and suing individuals who illegally download music.

While the music industry can claim its high-profile legal action has been effective, it has also alienated many consumers. As a result, P2P services have not disappeared. People are still happily using Kazaa, eMule, Limewire and other P2P services.

At the same time, private P2P services also have emerged such as Q-Next Inc. and Grouper Networks Inc. which let small groups share music, video, photographs and other data. If you want to copy of a friend's Led Zeppelin collection, there is no need to burn CDs when it can be shared digitally.

Brad Friesen, Q-Next's director of marketing, said the key difference between P2P services such as Kazaa and private ones such as Q-Next is that the latter are not designed to steal music and movies. Instead, they are application platforms that free and fee-based services can use to reach consumers.

Mr. Friesen said the music industry needs to embrace P2P. Q-Next, for example, is developing a music-streaming service where one user can, with permission, listen to another user's music collection. A logical move for a music label, he said, is to work with Q-Next to introduce ways for consumers to buy what they listen to.

"The music industry needs to worry about fixing their business model more than fighting the technologies," he said. " There is a lot of upside that isn't being discussed. P2P is being demonized rather than being discussed to improve and make life better."

The music industry's response to private P2P networks is that they are just another way of illegally distributing songs. But one argument is that this activity is much like when friends taped LPs on to cassettes -- something the industry never seemed bothered about.

Another threat is the "got'em, need'em" approach -- whereby the owner of an MP3 player lends their unit to a friend, who then copies all the tracks they want. An activity that will only increase as lower prices get high-capacity MP3 players into the hands of more people.

To address the technology, the music industry has to figure out how to monetize P2P networks by co-operating with players such as Q-Next. It could make the paid download process, for example, far less cumbersome by letting consumers do more with the tracks they buy. And it could get off the 99 cents-a-track standard, giving consumers incentive to do the right thing.

The industry should look at P2P as an enormous revenue opportunity. "If services are interesting enough, people will pay for them," Mr. Friesen said.

© National Post 2005