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Peter Jenner is a man who knows his "freak-outs" -- sixties terminology for an intense, drug-induced emotional experience. He was Pink Floyd's first manager, after all, and he has remained one of the industry's most forward-looking thinkers for forty years. So when he spoke to a room full of music executives in the fall of 2006 at the Future of Music Policy Summit in Montreal, his assessment of their business resonated.

"We are in the midst of a technological freak-out," he said. "The business is broken.... Digital technology is fundamentally changing our business in a way that no development of the last two hundred years equals, except the onset of electricity."

Jenner described a worst-case scenario for people who had made a lucrative living as middlemen in the twentieth-century music business, the conduits between musicmakers and consumers. The Internet was making them obsolete.

"We're trying to force a nineteenth- and twentieth-century business model into twenty-first-century technology," he said. "I'm not surprised we're in chaos."

Peer-to-peer file sharing had turned consumers into distributors. CD burners had turned them into manufacturers. This shift in responsibilities left the industry with only one role: as "policeman...hostile to consumers...[and] stopping progress."

In a report prepared that same year, Beyond the Soundbytes, Jenner expanded on his disdain for this shortsighted response: "The flagrant spread of 'Internet piracy' in developed countries is a reflection of the failure of the industry as a whole to develop an appropriate copyright response to the distribution and remuneration options made possible by the new technologies."

He mocked the industry's response to the new challenges posed by Internet distribution and peer-to-peer file sharing: hand-wringing, followed by litigation, in which "the endless predictions of victory reminds one of the Vietnam War."

We were back in the sixties again, when Rock 'n' Roll Inc. was still in its infancy. Now four decades later, it was looking like a relic. "When five percent of the artists are making ninety-five percent of the money, the system is broken," Daniel Levitin, a McGill University music professor, proclaimed.

Through the breach rushed a new generation of bands and fans empowered by personal computers and broadband Internet connections. Willy-nilly they forged a new world of music distribution that seized control from once all-powerful music and radio conglomerates.

In less than a decade, a new Internet-savvy music hierarchy had been created. Commercial radio, MTV, retail stores, and record companies lost their exclusive tastemaker status, while consumers morphed into de facto music programmers who shared information and music via message boards, Web pages, e-zines, and MP3 blogs.

In the process, more people than ever were creating and consuming music. Without a physical product to sell, costs sunk for recording and distributing music. At the same time, opportunities to be heard increased. In this world, the fringe players could more easily find and build a dedicated audience, and a musical ecosystem encompassing thousands of microcultures began to emerge.

"We're moving into an era of massive niche markets rather than a mass market," Jenner said. This was bad news for people awaiting the next Beatles or the new U2 -- a band that could unite the masses in a whirlwind of hits and hype. For everybody else, this was an opportunity for more music to flourish in more places than ever.

In this broader, more diversified world, bands such as Montreal's Arcade Fire, Seattle's Death Cab for Cutie, and Omaha's Bright Eyes rose to prominence. They were viral success stories, selling out shows around the world before they were selling albums in the kind of numbers that would make the majors take notice of them.

It was enough to make Death Cab for Cutie's Chris Walla proselytize like a digital evangelist: "This is the golden age of the Internet. The laptop kids have clued in everybody else to what's going on: radio, television, the record industry -- they're all following the Internet's lead. Because those kids know their laptop can make their cultural existence more fulfilling than any media corporation."

Who knew a laptop could be so empowering? The music industry sure didn't. But the Internet turned fans into gatekeepers. It also gave bands an independence they never had: the ability to communicate directly with their fans in ways their predecessors never could have imagined.

Consider that when the nineties roared to a close with CDs generating millions in profit, the industry consisted of six multinational record labels, and a single corporation (SFX, soon to be bought out by Clear Channel) that dominated the concert and commercial radio businesses. The primary decisions about what kind of music most of America would hear and how consumers would access that music (through radio, retail, and touring) were essentially being made by a few dozen key executives at a handful of companies.

But that power structure, the by-product of a century's worth of empire building, started to crumble the instant the first music file was ripped onto a computer hard drive and shared online. Metallica and the major labels took the rogue file-swapping service Napster to court in 2000 and held back the Internet tide for a few months. But as independent producer Steve Albini said, "It's like trying to hold back the ocean, like trying to keep the sun from rising every morning. It's a whole new era, except the music industry doesn't know it yet." It would find out soon enough.

In the fall of 2000, Radiohead's Kid A was a Napster-fueled hit on the Internet long before it arrived in record stores. The esoteric album barely registered on commercial radio; but it was in heavy rotation on the Net months before its release. The result was a number one album, an extraordinary confluence of underground taste and mass popularity.

The industry responded not with vigorous new ideas, but with strong-arm tactics and threats. It served fans not with digital innovation but with lawsuits -- more than twenty thousand in a span of four years, in an attempt to intimidate consumers away from file sharing.

Seven years after Kid A, Radiohead released In Rainbows through its website, without the aid of a record label.

The cost to fans? "It's up to you," Radiohead told them.

In contrast to the major labels, the band embraced one of the fundamental principles of good business: the customer is always right. It was a moment of clarity, a moment in which the future finally overtook the past. The following pages contain the story of that transformation.