For 39 of MP3.com’s roughly 150,000 artists, that’s translated into more than $20,000 they each made off of free downloads last year. And even artists making less dough say they’re satisfied with the rewards they’re reaping from this new phase of the music business.

“There’s quite a bit of money there,” said Eric Schierer, an analyst with Forrester Research.

Making Money With Music

Courtnee Papastathis, otherwise known as Not Applicable, says she doesn't want to sign to a major label (Handout)

Martin Lindhe dumped all of his music to MP3.com because he was moving, and didn’t have a CD burner. Courtnee Fallon Papastathis writes hers in her spare time, “to unload.” Emily Richards, a folk-rock pianist and singer, is qualified as a CPA.

Now Lindhe, as the electronic artist Bassic, makes more than $70,000 a year from MP3.com. Richards made more than $14,000 last year. Papastathis, as Not Applicable, has made $4,000 since November 1999 — and that’s not counting CD sales for any of them.

None of them is looking for a major label deal, though they’ve all had offers from large companies. And none thinks free downloads will be the end of CD sales — or of musicians making money.

In buying CDs, “what you pay for is ensuring the quality of the product,” Lindhe said. “If you really want to make sure that the songs are correct and that you get the right artwork and all that, people will pay for the experience.”

In MP3.com’s payback scheme, $1 million a month is doled out proportionately to the site’s artists based on the number of unique users who’ve listened to their music. Payments can range from zero — if you’ve had fewer than 15 listeners — to last year’s top earner, electronic band 303infinity, which made $165,392.92.

MP3.com has financial problems, mostly caused by a slew of lawsuits connected with its My.Mp3.com personal music-storage service: first a set of five copyright suits from major record labels, four of which were settled out of court and one of which, with Universal Music, cost the company $118 million. Rival Emusic.com has also sued the site for copyright infringement. That case is pending.

But Payback for Playback itself isn’t a bad business model, Schierer said. MP3.com gives artists $3 million of its roughly $20 million in quarterly revenues, he said. The site has permission to use all of its Payback artists’ music.

Michael Robertson, MP3.com’s CEO, said the site considers its payments to artists to be marketing expenses. Rather than advertising itself, the site gets thirsty artists to advertise their pages on MP3.com in a quest for hits, he said. MP3.com makes its money primarily from on-site advertising.

“This is an advertising-supported model for MP3.com’s artists,” Schierer said. “There’s lots of prospects for advertising to support music. It already happens on MTV and the radio.”

Paying at the Tip Jar

Artists are enthused about the payback scheme, but they’re a little more wary of Amazon’s tip jar. Introduced last Thursday as part of a major push by the uber-retailer into free downloads, the system lets listeners donate money from their credit cards via a Web form. As the money goes directly from users to artists, Amazon doesn’t spend a dime.

“We wanted to make sure it’s a business model that, long term, is viable for Amazon.com,” said Greg Hart, Amazon’s group manager for music.

Hart said voluntary payment has worked well recently with Stephen King’s online novel The Plant. Readers paid more than $700,000 to keep the story going. But musicians are more skeptical.

“If I am going to be paid at all, I would rather get paid a few cents a download every time and be able to sell CDs on the honor system than count on people to decide to pay me,” Papastathis said.

Scheirer agreed, noting that sites such as fairtunes.com have operated tip jars without much financial success for artists.

“I wouldn’t call it a business model,” he said.

Amazon’s system hasn’t gotten off the ground yet — because of last week’s Seattle quake, the introduction of the tip jars for new artists has been delayed. Robertson said MP3.com is looking at the tip jar as a supplementary way of paying artists.

The End of Labels?

Richards and Papasthatis both said they’ve spoken to labels. Papastathis doesn't want a deal; Richards is waiting until she can write her own ticket.

“I don’t need someone telling me how to sing, what to sing, when to sing … I’m not about to give up my right to what I’ve created,” Papastathis said.

But Richards and Lindhe feel that this new revenue model isn’t the end of record labels. Instead, it’s just shifting the balance of power toward artists a bit. Artists will still want to move up to the “major leagues” or fame and promotion, Richards said.

“I equate the Internet scene for music to be something like college basketball,” she said. “You can start making your living, and start really progressing to the next level” of a major label deal.